Annual Financial Report

RNS Number : 0666A

BAE SYSTEMS PLC

26 March 2012

BAE Systems plc

Annual Report 2011

BAE Systems plc has today published its Annual Report and Accounts for the year ended 31 December 2011 ('Annual Report 2011'). The full document can be viewed on the Company's website at:

www.baesystems.com/investors

Copies of the Annual Report 2011 will be posted to those shareholders who have requested to receive communications from the Company in printed form on 29 March 2012.

In compliance with section 9.6.1 of the Listing Rules, a copy of the Annual Report 2011 has also been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do

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 2011 in unedited full text. Page and chart references within the text of this announcement are references to pages and charts in the Annual Report 2011 that can be viewed as detailed above.

The financial information for the year ended 31 December 2011 contained in this announcement was approved by the Board on 15 February 2012. This announcement does not constitute statutory accounts of the Company within the meaning of section 435 of the Companies Act 2006, but is derived from those accounts.

Statutory accounts for the year ended 31 December 2010 have been delivered to the Registrar of Companies. Statutory accounts for the year ended 31 December 2011 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

The auditors have reported on those accounts. Their reports were not qualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The Annual Report 2011 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	President and Chief Executive Officer of BAE Systems, Inc.
Peter Lynas	Group Finance Director
Paul Anderson	Non-executive director
Harriet Green	Non-executive director
Michael Hartnall	Non-executive director
Lee McIntire	Non-executive director
Sir Peter Mason	Non-executive director
Paula Rosput Reynolds	Non-executive director
Nick Rose	Non-executive director
Carl Symon	Non-executive director

On behalf of the Board

Dick Olver

Chairman

15 February 2012

CHIEF EXECUTIVE'S REVIEW

"BAE Systems has moved quickly to take strategic actions it believes necessary to sustain and position the business for the future."

BAE Systems is operating in a difficult business environment as defence spending reduces in its largest markets, the US and UK. These market pressures have been apparent for some time. BAE Systems has moved quickly to take strategic actions it believes necessary to sustain and position the business for the future.

BAE Systems has been driving down its cost base and improving efficiencies. At the same time, the Group is developing its Services positions, investing in growth streams of business and developing international markets. The high number of export campaigns in the Group is at a level unprecedented in recent years.

In October 2011, the Group announced changes to its external reporting segments. The changes provide improved visibility of the performance of its Electronic Systems and Cyber & Intelligence businesses, and align with the Group's strategic direction.

Services-related activities represented approximately 49% of sales in 2011. These activities include the provision of Cyber & Intelligence and Military & Technical Services, the latter delivering enhanced capabilities, whilst reducing costs for its customers in the air, land and maritime defence domains.

During the year, the Group has invested in cyber and intelligence through both organic development and through a series of small, high quality acquisitions. These acquisitions included, in February 2011, L-1 Identity Solutions, Inc.'s Intelligence Services Group, a leading provider of security and counter threat capabilities to the US government, and Norkom Group plc, a market-leading provider of innovative anti-money laundering solutions to counter financial crime to the global financial services industry. ETI A/S, a recognised provider of advanced security products and services to government and commercial clients worldwide, was acquired in March 2011, and stratsec.net Pty Limited, an information security company with offices in Australia, Malaysia and Singapore, was acquired in January 2011.

Growth opportunities in the cyber domain arise from both the increasing priority of governments addressing cyber threats and the rapid increase in requirements within the commercial sector.

BAE Systems also identifies and prioritises fast growth lanes within the electronics market. The Group is an industry leader in key areas of high technology electronics for both defence and commercial aerospace activities. It continues to see growth opportunities in both its commercial avionics activities and parts of its defence product portfolio. In April 2011, BAE Systems acquired the 91.3% of outstanding equity of Fairchild Imaging, Inc. not already held by the Group. Fairchild is a provider of solid-state electronic imaging components, cameras and systems.

The Group has continued to review its business portfolio and has undertaken a number of non-core business disposals. In January 2011, the Group sold its Swiss-Photonics AG group. In June 2011, the Group sold its remaining shareholding in Saab AB. In July 2011, BAE Systems sold its Regional Aircraft Asset Management and US-based Composite Structures businesses. In September 2011, the Advanced Ceramics business in California was sold. In December 2011, the Group announced an agreement for the sale of its Safety Products businesses, which is expected to complete in the first quarter of 2012.

In aggregate, approximately £0.3bn was invested in business acquisitions, net of disposals, during the year.

BAE Systems is well positioned on a number of key platforms programmes, such as Typhoon and F-35 combat aircraft, as well as in the areas of naval ships and fighting vehicles. These programmes form a large core of business with good, multi-year order book visibility. Additionally, such programmes can generate substantial Services business throughout the in-service life of the product.

The development of business across a broad international base of operations provides a robust portfolio of activity and contributes to the resilience of the business at a time when defence spending is under pressure in the US and UK markets.

The Group has also moved to capture business in non-defence markets, including commercial aerospace electronics. BAE Systems' strategy to grow its presence in the cyber and intelligence markets is proving successful, with around 7% of its business now generated in this area of activity.

BAE Systems has been quick to recognise that affordability is a priority for customers and has cut costs and improved efficiency to address reducing demand in some activities and to ensure continued value for customers. Cost reduction and efficiency actions have been underway since 2009 and, as part of these actions, there has been a need to reduce workforce across the Group. Excluding M&A activity, there has been a net headcount reduction of approximately 22,000 (including contractors) in the past three years. These cost reduction programmes will assist the Group in winning new business, managing workloads and delivering value for customers, and be of sustained benefit to the Group's performance.

The Group's customers in its home markets of the US, UK, Saudi Arabia, Australia and India have a significant and sustained commitment to defence and security budgets across multiple domains, welcome foreign investment, and sustain a domestic industrial capability.

BAE Systems' US-led businesses contributed 47% of the Group's sales in 2011.

As anticipated, vehicle production and reset activity reduced significantly in the US land vehicles business reflecting the drawdown of US overseas military operations.

Delays in approving Department of Defense budgets resulted in the Group's US defence businesses operating under Continuing Resolution limitations for seven months of 2011. BAE Systems' business remained resilient through this period, with only a modest amount of sales lost or deferred as a consequence.

The Group's US-based electronics business was impacted by serious flood damage at its Johnson City facility resulting in some sales deferral to 2012.

The Group had success in winning new business in 2011, but several large contract starts were delayed due to bid protests by competitors. A contract, worth approximately $850m (£547m) over ten years, to manage, operate and maintain the Radford Army Ammunition Plant in the US was awarded to the Group in May 2011, but the programme start was delayed into early 2012 with the US Army confirming the award in January 2012. Similarly, in August 2011, the Group was one of two successful teams selected to participate in the 24-month technology development phase of the US Army's Ground Combat Vehicle programme. BAE Systems, together with Northrop Grumman, was awarded a $450m (£290m) contract, but the programme start was delayed until December 2011 while a protest by SAIC was evaluated and rejected by the General Accounting Office.

Whilst the near-term US budgetary and procurement issues have had only modest impacts on the business, there remains significant uncertainty as to the impact of both planned and potential additional deficit reduction actions on US defence budgets over coming years.

Pressure on UK budgets remains, but following publication of the Strategic Defence and Security Review (SDSR) in October 2010 and resulting actions, there is now greater programme stability and alignment of funding with government defence programme commitments. The post-SDSR programme changes have reduced the Group's annual sales by some £500m. Actions were taken to mitigate the impact of these changes, including workforce reductions, facility rationalisation and contract settlement agreements.

The Group continues to work with its UK customer to help to identify further efficiency improvements.

Other home markets

In addition to its US and UK operations, BAE Systems has established leading market positions in Saudi Arabia and Australia. In addition, the Group is pursuing its strategy, establishing India as a home market.

In the Kingdom of Saudi Arabia, where defence spending remains a high priority and is growing, the Group is working to deliver a broad range of capabilities. The established core business, including support to Tornado aircraft in service with the Royal Saudi Air Force under the Saudi British Defence Co-operation Programme (SBDCP), continues to deliver good performance, and 24 Typhoon aircraft have been successfully introduced into service under the first phase of the Salam programme.

BAE Systems has been in discussions with its customer regarding changes to the Salam programme. The proposed changes relate to final assembly of the last 48 of the 72 Typhoon aircraft, the creation of a maintenance and upgrade facility in the Kingdom of Saudi Arabia, initial provisioning for subsequent insertion of Tranche 3 capability in respect of the last 24 aircraft of this order and formalisation of price escalation.

Good progress on these discussions has been made in 2011, with budgets approved in the Kingdom in December on all items other than the price escalation where negotiations will now continue into 2012. Budgets have also been established for the next five years of support on the core SBDCP, including an upgrade of the training environment. Formal contracts under these budgets are being progressed.

These budget approvals underpin both the Salam and SBDCP programmes.

In Australia, the Group has continued to build on its position as the leading in-country provider of equipment and support to the Australian armed forces, working with the Australian government to deliver against a clearly laid out multi-year defence and security plan.

Defence spending in India is also expected to grow substantially. The supply of Hawk aircraft continues with local assembly by Hindustan Aeronautics. A land systems joint venture with Mahindra & Mahindra has been established with significant armoured vehicle and artillery opportunities being pursued. In January 2012, the Group was notified that Typhoon had not been selected as the lowest priced compliant bid to meet the requirement for a Medium Multi-Role Combat Aircraft. The programme has a long way to go before a contract is awarded and we continue to actively support the bid.

Pension funding

In April 2011, the trustees of the Group's two largest UK pension schemes, the BAE Systems Pension Scheme and the BAE Systems 2000 Pension Plan, commenced triennial funding valuations. These have been concluded and revised funding profiles agreed.

Balance sheet and capital allocation

Pension funding is a significant obligation for BAE Systems, but it remains only a part of the allocation of capital. In addition to meeting its pension obligations, the Group expects to continue organic investment in its businesses, plans to continue to pay dividends in line with its policy of a long-term sustainable cover of around two times earnings and to make accelerated returns to shareholders when the balance sheet allows. Investment in value enhancing acquisitions will continue to be considered where market conditions are right and where they deliver on the Group's strategy.

The Group's balance sheet will continue to be managed conservatively, in line with the Group's policy to retain its investment grade credit rating, and to ensure operating flexibility.

Total Performance

Total Performance is not just about what the Group does, but also about how it does it. Building a culture of Total Performance means focusing on delivering shareholder value, on meeting the needs of the Group's customers and acting responsibly at all times.

Embedding the importance of non-financial performance measures in the culture of the Group, through the drive for a more integrated, Total Performance, approach, is an important part of the Group's development.

BAE Systems is committed to becoming recognised as a leader in business conduct. The Group continues to reinforce a culture of Responsible Behaviour across the business. Mandated policies and processes within the Operational Framework are reviewed and, where appropriate, updated to ensure they best reflect the Group's Responsible Trading Principles. Employees in all markets receive training to help them apply the Group's global Code of Conduct. The Group-wide rollout of this training was completed as scheduled in May 2011 and refresher training continues.

BAE Systems continues to drive high standards of safety across the business. This year, the Group achieved an 11% improvement against its targeted metric and progressed the implementation of the safety maturity programme. Looking forward, the Group will be focusing on a broader set of metrics, whilst ensuring that safety remains a priority.

Maintaining and developing the skills and capabilities of its employees is a key factor in the sustained success of the Group. As well as Total Performance Leadership programmes, the Group provides appropriately tailored leadership and competency frameworks in each of its principal markets. The Group's 'Developing You' programme continued to deliver training across a number of functional specialities, and a diversity and inclusion strategy was adopted to better support the recruitment, retention and engagement of talented employees from all backgrounds.

Although we are operating in a challenging business environment, BAE Systems' continued focus on cost efficiency, together with its broad geographic base, and strong positions in defence, aerospace and security markets, are expected to sustain this resilient business.

Ian King

Chief Executive

Extract from
CHAIRMAN'S LETTER

Directors and management

George Rose, Group Finance Director, retired from the Board on 31 March 2011 after 19 years with the Group. Peter Lynas, previously Director, Financial Control, Reporting and Treasury, was appointed Group Finance Director with effect from 1 April 2011, and joined the Board and Executive Committee on that date.

Also with effect from 1 April 2011, Ravi Uppal, a non-executive director, stood down from the Board and Paula Rosput Reynolds was appointed a non-executive director of the Company. On 1 June 2011, Lee McIntire was appointed a non-executive director. Having completed a second term of three years as a non-executive director, Roberto Quarta stood down from the Board at the end of 2011. Also, after nearly nine years on the Board, Michael Hartnall will stand down at the Annual General Meeting on 2 May 2012. I would like to record my thanks and appreciation for the contributions that both Roberto and Michael have made to the working of the Board and its committees.

REPORTING SEGMENT PERFORMANCE REVIEWS

Electronic Systems

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

KEY CHARACTERISTICS

‑ Broad base of programmes, with more than 5,000 active contracts

‑ No programme greater than 5% of sales

‑ Over 65% of 2011 sales were fixed price-based

‑ Cutting edge technology and capabilities, with significant Group-funded research and development invested in the business

‑ 14% of total sales are to commercial customers

OPERATIONAL KEY POINTS

‑ Sustained a leadership position in the electronic warfare market

‑ Increasing position in high growth commercial aircraft electronics market

‑ Winning key development contracts in the airborne persistent surveillance market

‑ Integration of the acquired Fairchild Imaging and OASYS businesses

‑ Continued focus on increasing productivity and efficiency

‑ Business recovery in process following disruption due to flood damage at the Johnson City facility

Financial key Points

‑ Order backlog^1,4 slightly increased in challenging business environment

‑ Sales¹ performance impacted by programme award delays due to the extended period of Continuing Resolution and Johnson City flood

‑ Return on sales reduced on completion of certain production programmes

‑ Cash flow³ conversion of underlying EBITA² at 80%, before pension deficit funding

		2011	2010	2009
Order intake¹	KPI	£2,620m	£2,894m	£2,811m
Order book¹		£3.2bn	£3.2bn	£3.1bn
Order backlog^1,4		£3.6bn	£3.5bn	n/a
Sales¹	KPI	£2,645m	£2,969m	£2,899m
Underlying EBITA²	KPI	£386m	£455m	£348m
Return on sales		14.6%	15.3%	12.0%
Cash inflow³	KPI	£268m	£367m	£226m

Order backlog^1,4 increased to £3.6bn (2010 £3.5bn) despite some impact of contracting delays as the US administration operated federal budgets under Continuing Resolution limitations for seven months of 2011.

On a like-for-like basis, sales¹ reduced by 10% on 2010 reflecting the completed F-22 and Advanced Threat Infrared Countermeasures (ATIRCM) production programmes, the impact of the delayed programme awards, and the disruption caused by the Johnson City flood.

Underlying EBITA² was £386m (2010 £455m). Return on sales reduced to 14.6% (2010 15.3%) reflecting risk retirement on completion of the F-22 and ATIRCM programmes.

Operating cash inflow³ was £268m (2010 £367m) reflecting a conversion of underlying EBITA² to cash flow³ of 80%, before pension deficit funding.

In July 2011, the US-headquartered Electronic Systems business was created by combining the Electronic Solutions and Platform Solutions businesses. The new reporting segment spans the commercial and defence electronics markets, and brings together a strong portfolio of products, technology and know-how to serve its customers.

In April 2011, BAE Systems completed the acquisition of Fairchild Imaging, a company that designs and manufactures solid-state electronic imaging components, cameras and systems. The components have potential uses across diverse aerospace, industrial, medical and scientific imaging applications, including night vision systems, aerial mapping, electron microscopy and DNA mapping.

During the year, operations at two US sites were consolidated into larger facilities in order to maximise efficiencies and performance. Work at the affected sites, in Ontario, California, and Irving, Texas, is being transitioned to other locations.

Electronic Combat The business maintains its leadership position in electronic warfare primarily through its involvement in the F-35 Joint Strike Fighter programme as the provider of the electronic warfare suite. The F-35 programme has been aligned to support the US Defense Secretary's programme restructuring announcement in January 2011. In 2011, the business met its key milestones on the Systems Design and Development programme and was awarded a contract for Low-Rate Initial Production (LRIP) Lot 6 on the F-35 Production programme.

The US Navy has requested a proposal to extend the current technology maturation contract for the Next Generation Jammer (NGJ) until 2012. BAE Systems is one of four competitors bidding for the technology development contract to be awarded later in 2012. The NGJ will replace the ageing ALQ-99 jammer currently on certain US Navy aircraft.

In December, the Kingdom of Saudi Arabia reached agreement with the US government to purchase 84 new F-15SA aircraft and upgrade its existing fleet of 70 aircraft. Good progress has been made in the development of the Group's digital electronic warfare system for the aircraft.

Survivability & Targeting Using its Boldstroke^® system technology, the business provided the US Army with a proposal for the Common Infrared Countermeasures (CIRCM) programme. The Boldstroke^® system is an integrated aircraft survivability system for protecting aircraft from infrared-guided missiles and other threats. It provides increased system capability in a smaller and more energy efficient package. In early 2012, the US Army awarded the business one of two contracts to develop the CIRCM capability. The contract is worth $38m (£24m) over two years. The award is under protest and the Group is awaiting further direction from the US government.

BAE Systems, as a subcontractor to Alliant Techsystems, is supporting a $109m (£70m) US Navy contract for the engineering and manufacturing development of the Joint and Allied Threat Awareness System (JATAS), the next-generation warning system designed to enhance aircraft survivability against man-portable air-defence systems, small-calibre weapons and rocket-propelled grenades.

In 2011, Electronic Systems was awarded a $17m (£11m) US Navy follow-on LRIP contract for an additional 600 Advanced Precision Kill Weapon Systems, bringing the total to 925 units under contract. Deliveries continue in 2012.

The 100,000th Thermal Weapon Sight was delivered to the US Army in support of military operations in Iraq and Afghanistan. Orders received in 2011 exceeded $60m (£39m). The business has been producing the sights since 2004 under contracts valued at more than $1bn (£0.6bn). The technology enables soldiers to see deep into the battlefield, and enhances their situational awareness by allowing them to see in darkness, and through smoke and fog.

The business delivered 4,000 units of the StalkIR^® night vision product, a clip-on or hand-held thermal viewer device featuring a dual-band aiming laser, module rail interface and one-touch menu options. The product was developed by the OASYS Technology business acquired in 2010.

Communications & Control In defence avionics, Lockheed Martin has selected the Group's Fighter Helmet-Mounted Display, using BAE Systems' Q-Sight waveguide technology, for the F-35's Night Vision Goggle Helmet programme. This initial award continues the Group's success in helmet-mounted displays.

The contract awarded in 2010 to provide the Slovak Ministry of Defence with a mobile military communications system (MOKYS) that enables secure voice, data and internet protocol communication is nearing successful completion.

The business continues to pursue significant opportunities in the tactical radios and networking markets to meet the need for the modernisation of battlefield communication systems.

Intelligence, Surveillance & Reconnaissance The business has been selected to provide Wide Area Airborne Surveillance capability on several key development programmes for multiple US Air Force and US Army airframes, based on two wide-area, high-resolution imaging sensor systems. The Autonomous Real-time Ground Ubiquitous Surveillance - Imaging System (ARGUS-IS) was recognised by Aviation Week and Space Technology as one of the top ten new technologies for 2011. The Airborne Wide Area Persistent Surveillance System (AWAPSS) received an Army Research and Development Award in 2010. These systems provide the war fighter with the ability to observe very wide areas of interest with sufficient imagery resolution to meet intelligence and surveillance needs.

Commercial Aircraft avionics Key wins have been secured on new programmes, including high integrity flight controls for regional and transport aircraft, such as the Bombardier CSeries and Embraer KC-390. The business is well positioned to support the growth in demand for commercial aircraft.

In the year, the business has successfully renewed long-term supplier agreements with aftermarket airline customers.

General Electric has signed a memorandum of understanding with the business's joint venture, FADEC International, to develop and produce the Full-Authority Digital Electronic Control (FADEC) for CFM International's next generation engine, the LEAP-X. The fuel-efficient LEAP-X turbofan engine is designed to power future narrow body commercial aircraft. The engine has been selected for the Boeing 737 MAX, Airbus A320neo and Comac C919 aircraft.

HybriDrive^® Buses powered by the HybriDrive^® Series hybrid electric propulsion system have recently driven their one millionth mile of clean, reliable revenue service. Since the first of these vehicles entered service in late 2008, the environmentally friendly propulsion provided by BAE Systems has saved operators well over 126 million litres of diesel fuel and prevented the release of more than 420 tonnes of CO₂.

In September 2011, the electronics facility at Johnson City, New York, experienced severe flood damage to offices, laboratories and equipment. Whilst critical business operations have been re-established, some sales have been deferred and recovery efforts continue in 2012.

Looking forward

Efforts to reduce the US government's budget deficit are likely to require reductions across all areas of government spend. Whilst likely funding reductions and the resultant slow-down or cancellation of ongoing and new programmes could impact the business, Electronic Systems remains well positioned with a balanced electronics portfolio that will enable it to respond to changing customer priorities.

The business expects to benefit from its incumbent positions on core platforms and from positions in areas that are forecast to grow faster than the overall market, such as Intelligence, Surveillance and Reconnaissance, commercial avionics, and electronic warfare.

The business is well positioned to benefit from the growth in commercial aviation through its engine and flight controls activities.

Cyber & Intelligence

Cyber & Intelligence comprises the Group's cyber, secure government, and commercial and financial security activities within the US-based Intelligence & Security business, and the UK-headquartered BAE Systems Detica business.

KEY characteristics

‑ Multiple, fast-execution contracts

‑ Excellent customer intimacy

‑ Building strong positions in cyber capabilities and network protection

‑ Large and diverse US customer base

‑ Detica repositioning towards solutions integration and managed services

‑ Detica expanding into growing commercial markets

Operational key Points

‑ The US-based business continues to perform well on legacy programmes while securing strategic contract awards with existing customers

‑ The US-based business continues to invest in differentiating technologies, such as activity-based intelligence and cybersecurity, including a leading edge network, operations and security centre environment, to maintain the relevance of its service offerings

‑ Successful integration of acquired L-1 Intelligence Services Group, Norkom and ETI businesses

‑ Growth of commercial sales in Detica offsetting lower UK government volume

‑ Investment in UK Security Operations Centre

Financial key Points

‑ Order backlog^1,4 grown

‑ Increase in sales¹ of 16%

‑ Margin increased to 9.7%

‑ US sales¹ growth of 13%

‑ Detica decline in government business largely offset by growth in commercial

‑ Cash flow³ conversion of underlying EBITA² at 90%

		2011	2010	2009
Order intake¹	KPI	£1,443m	£1,300m	£1,286m
Order book¹		£0.8bn	£0.6bn	£0.6bn
Order backlog^1,4		£1.1bn	£0.9bn	n/a
Sales¹	KPI	£1,399m	£1,201m	£1,302m
Underlying EBITA²	KPI	£136m	£108m	£107m
Return on sales		9.7%	9.0%	8.2%
Cash inflow³	KPI	£123m	£89m	£74m

Order backlog^1,4 increased to £1.1bn (2010 £0.9bn) mainly reflecting the impact of business acquisitions during the year.

Like-for-like sales¹ increased by 4% primarily reflecting higher volumes on legacy programmes in the US Global Analysis business.

Underlying EBITA² was £136m (2010 £108m). Return on sales increased to 9.7% (2010 9.0%), after expensing costs of integrating acquired businesses and Security Operations Centre investment.

Operating cash inflow³ increased to £123m (2010 £89m).

Intelligence & Security

The US-based Intelligence & Security business is structured into four key business areas that each provide specific domain expertise, whilst working closely together to provide enterprise-wide support to a range of customers, and key agencies in the intelligence, defence, homeland security and civilian markets. This enables the business to provide products, people and expertise to meet customers' needs in a cost-effective way.

Information Technology & Cybersecurity Solutions develops, deploys and maintains mission applications focused on information sharing, knowledge management and enhanced enterprise mission IT solutions for the federal, civilian and defence intelligence communities. The business also provides analytics, cyber analysis and real-time network forensics.

In 2011, the business was awarded three competitive task orders under the Solutions for the Information Technology Enterprise programme Indefinite Delivery, Indefinite Quantity (IDIQ) contract worth $466m (£300m) over a five-year period. These task orders for the US Defense Intelligence Agency address requirements to transform IT service delivery worldwide. Orders totalling $122m (£78m) were received in the year under these contracts.

The business was awarded an initial task order over 18 months under the Next Generation Desktop Environment Programme IDIQ contract. This task order for the US Defense Intelligence Agency is to deploy over 12,000 analyst workstations across the intelligence community, with over 6,000 workstations successfully installed at 31 December 2011.

GEOINT-ISR develops and supports software platforms and mission applications for geospatial tasking, collection, processing, exploitation and dissemination, as well as mission planning, Intelligence Surveillance and Reconnaissance (ISR), precision targeting, and command and control for the defence and intelligence communities.

The business was awarded several key task orders under the Total Application Services for Enterprise Requirements IDIQ contract with the US National Geospatial Agency. These task orders have an awarded value of $123m (£79m) for the provision of engineering services. Programme performance is meeting the customer's expectations.

Other sensitive programmes with the National Geospatial Agency continue to provide value to this important customer.

Global Analysis provides mission-enabling analytic solutions and support to operations across the homeland security, law enforcement, defence, intelligence and counterintelligence communities.

The business has experienced significant sales growth driven by the Counter Improvised Explosive Device (C-IED) programme awarded in 2010. The C-IED programme provides mission analytical support to forward deployed defence personnel. Performance on this programme has exceeded customer criteria, with a highly skilled team of approximately 450 analysts deployed in Afghanistan. A follow-on option award on the C-IED programme for approximately $200m (£129m) was secured during the year.

In 2011, the business was awarded two US government IDIQ contracts for full-motion video and geospatial imagery analysis. Multiple task orders under these contracts have been awarded for a total contract value, including options, of $391m (£252m) over various performance periods, the longest being for five years. In 2011, funding of $48m (£31m) was received for these task orders.

SpecTal provides government customers with specialised security and intelligence mission support, including intelligence analysis, engineering, operations support, training and information technology development.

SpecTal was a business unit within L-1 Identity Solutions, Inc.'s Intelligence Services Group (L-1 ISG), which was acquired in February 2011.

The acquisition of L-1 ISG expands and complements the business's existing presence in the US intelligence community, and provides a greater capability base to secure upcoming re-competed contracts, whilst providing a broader, more attractive offering to meet the needs of customer missions.

The business continues to invest in capability development to ensure a market-focused evolution of its portfolio of offerings, and is advancing several core and discriminating capabilities, including:

Activity-based intelligence: Capability within GEOINT-ISR which focuses on developing solutions to predict when and where threats will strike with a high degree of probability.

Cybersecurity: A leading edge network, operations and security centre environment deployed at the gateway of BAE Systems' own 50,000 node North American network. This offers a real-time forensics toolset that places current and historical information at an analyst's fingertips, providing clarity regarding what is happening in the network.

These initiatives have contributed towards strengthening the bid pipeline and potential level of future contract awards.

BAE Systems Detica

The business continues to develop and deliver information intelligence solutions to government and commercial customers, and grow its business in the areas of cybersecurity, information assurance and information intelligence products.

The acquisitions of Norkom and ETI have strengthened the product portfolio for tackling fraud and delivering intelligence. The integration of these businesses has progressed well. Detica now has primary operations in the UK, Denmark and Ireland, and has an international reach.

Financial Crime and Compliance The Detica NetReveal® business, which has been combined with Norkom's market-leading anti-money laundering products, provides solutions used globally to reduce financial loss, fight crime, and manage risk and compliance, and received orders of £69m during the year.

Global Communications Solutions Detica has established a Global Communications Solutions business, combining ETI software products with existing products, to provide a range of communications monitoring and intercept solutions for the law enforcement communities. During the year, orders of £42m were received from customers in 22 countries for these products and services.

Cybersecurity Detica continues to build a portfolio of offerings, including specialist cybersecurity and secure communications solutions. Detica's cyber business is growing rapidly across both government and commercial sectors with a range of new clients and contracts in 2011. Detica is also investing in a state-of-the-art Security Operations Centre, building on Detica Treidan®, that can detect and remediate advanced cyber attacks for both government and business. Orders were received from two customers in the UK for this service during 2011.

UK Core Mission The UK business continues to be repositioned. As the volume of consulting activity with the UK government customer declines, so growth is being generated in commercial sales from systems integration and managed services, and security solutions to the financial services, retail, energy and telecommunications sectors.

The business is investing in a new Delivery Centre to provide customers with a highly secure environment to deliver their critical business services more effectively and economically.

International Secure Government Detica has continued to develop an international consultancy, system integration and managed services business, initially focusing on the Middle East region. Detica has seen a positive response, winning its first orders in two countries.

Looking forward

Intelligence & Security

Whilst efforts to reduce the US government's budget deficit are likely to require reductions across all areas of government spend, cybersecurity is expected to remain a priority.

Growth opportunities remain, particularly in critical, mission-focused areas, such as Full Motion Video, Multi-INT fusion (the seamless synthesis of the individual intelligence disciplines to enable more complete situational awareness), enterprise solutions for big data problems and cybersecurity.

The business seeks to grow market share in 2012 with fewer new programmes expected through its positioning to compete as a result of the structural, cost and investment actions previously taken. The Intelligence & Security market is experiencing delays in procurement awards and de-scoping of existing contracts as US government agencies look for cuts in their IT budgets. The business expects a competitive and price-sensitive market. Based on its customer intimacy, increased innovation and the ability to offer a competitive price, the business is well positioned in this challenging environment.

BAE Systems Detica

Detica expects continued demand for its intelligence and cybersecurity capabilities. In particular, Detica targets opportunities to grow in commercial markets through its cross selling of software and capability to its expanded customer base following the Norkom and ETI acquisitions.

Platforms & Services (US)

Platforms & Services (US) comprises the US-headquartered Land & Armaments business, with operations in the US, UK, Sweden and South Africa, together with US-based services and sustainment activities, including ship repair and modernisation services.

KEY characteristics

Support Solutions combines positions in:

‑ US naval ship repair and modernisation

‑ Operations support

‑ Complex infrastructure services

‑ Fixed and rotary wing military aircraft modification

Land & Armaments combines positions in:

‑ Tracked combat vehicles

‑ Tactical wheeled vehicles

‑ Artillery, ammunition and naval armaments

‑ Soldier survivability products

Operational key Points

‑ Increases in orders and sales in the Support Solutions business

‑ Support business awarded a ten-year contract to manage, operate and maintain the US Army's Radford Army Ammunition Plant

‑ Sales reduction in the land business due to lower Bradley reset/remanufacturing activity and completed Family of Medium Tactical Vehicles programme

‑ Continued restructuring and efficiency activity in the land business

‑ Participating in the technology development phase of the US Army's Ground Combat Vehicle programme

‑ Business disposals of Swiss-Photonics, Advanced Ceramics and Composite Structures complete, and Safety Products disposal announced

Financial key Points

‑ Sales¹ in:

‑ Land & Armaments business decreased 40% to £3.5bn

‑ Support Solutions business increased 1% to £1.8bn

‑ Return on sales in:

‑ Land & Armaments business reduced to 9.3%

‑ Support Solutions business increased to 8.4%

‑ Support business delivered an increase in order backlog^1,4 and strong operating cash flow³

		2011	2010	2009
Order intake¹	KPI	£5,077m	£5,605m	£5,493m
Order book¹		£6.5bn	£7.0bn	£8.7bn
Order backlog^1,4		£8.9bn	£9.1bn	n/a
Sales¹	KPI	£5,305m	£7,671m	£8,414m
Underlying EBITA²	KPI	£478m	£728m	£747m
Return on sales		9.0%	9.5%	8.9%
Cash inflow³	KPI	£410m	£967m	£566m

Like-for-like sales¹ reduced by 30%. At Land & Armaments, sales¹ reduced to £3.5bn ($5.7bn), primarily reflecting the anticipated lower level of Bradley reset/remanufacturing activity on a reduced level of military operations, and the completed Family of Medium Tactical Vehicles (FMTV) programme. Sales¹ at Support Solutions increased by 1%.

Underlying EBITA² was £478m (2010 £728m). Return on sales reduced to 9.0% (2010 9.5%). Return on sales at Land & Armaments was 9.3% (2010 10.2%) reflecting self-funding of the costs on the Ground Combat Vehicle (GCV) team during the award protest, and a short-term under-recovery of overheads from the delayed placement of Caiman and GCV contracts. The rationalisation programme in Land & Armaments, which commenced in 2009, has reduced net headcount (including contractors) by some 47% to date. Efforts to align the cost base to the reduced activity at Land & Armaments continue. Return on sales at the Support Solutions business increased from 7.1% to 8.4%.

Cash flow³ conversion of underlying EBITA² at Land & Armaments was 84%. Conversion of underlying EBITA² at Support Solutions was 91%.

Support Solutions

In the maritime environment, the US Navy awarded the business $1.5bn (£1.0bn) in follow-on Multi-Ship, Multi-Option (MSMO) contracts for the planning, modernisation, maintenance and repair of vessels at Norfolk, Virginia and San Diego, California. These contracts bring the total value to approximately $3bn (£1.9bn) over five years and represent a 100% re-compete MSMO win rate for the ship repair business.

The business was selected by the US Navy under a contract valued at $148m (£95m) to provide the external communications systems for ten additional Littoral Combat Ships to be built by an Austal US-led team. The fleet will be a new generation of high-speed warships, designed to carry out a range of operations in shallow waters close to shore. The win further demonstrates the Group's position as an industry leader in systems development and integration for US Navy ships.

In April 2011, the Mobile, Alabama shipyard was contracted to finish the construction of the American Phoenix, a product chemical tanker and, in August 2011, Weeks Marine, Inc. selected BAE Systems to build an 8,500 cubic-yard capacity twin screw trailing suction hopper dredge at the shipyard.

Building on C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance) work that BAE Systems has been performing for more than 25 years, often deploying with military units overseas to ensure their readiness, the US Navy awarded the business a $132m (£85m) task order to provide C4ISR technical services for military operations around the world. This order covers the provision of maintenance, upgrades, logistics and other services for military structures, vehicles, ships and small boats.

The US Army awarded the business the contract to manage, operate and maintain the Radford Army Ammunition Plant in southwest Virginia. Valued at approximately $850m (£547m) over ten years, with an additional three five-year options, the contract represents a significant win. Following an unsuccessful protest, the US Army confirmed its award to BAE Systems in January 2012.

The Group has been selected by the US Department of Defense's Joint Improvised Explosive Device Defeat Organization to compete for task orders worth a total of $900m (£579m) for all awardees over five years on a new Indefinite Delivery, Indefinite Quantity contract for research, analysis, training, operations support and sustainment of information technology to aid its efforts to counter the use of improvised explosive devices.

Land & Armaments

In August 2011, the business was awarded a $450m (£290m) contract to participate in the 24-month technology development phase of the US Army's Ground Combat Vehicle programme. An award protest by competitor SAIC, w3hich was subsequently rejected by the US government, resulted in a temporary funded work stoppage in 2011. The programme is now moving forward.

The business advanced its Heavy Brigade Combat Team positions, supporting customer requirements across the Bradley and Paladin Integrated Management (PIM) programmes. In 2011, the business received several contracts worth $677m (£436m) to provide vehicle and survivability upgrades, and field support for the Bradley family of vehicles. The business delivered seven test vehicles on or ahead of schedule for the PIM programme and, in January 2012, received a $313m (£201m) contract modification for additional engineering design, logistics development and test evaluation support to complete the engineering and manufacturing development phase.

The business is continuing to prepare its response to a US Marine Corps Assault Amphibious Vehicle upgrade request for proposal. Submission is expected in the last quarter of 2012, with contract award in the first quarter of 2013.

In May 2011, the business's two teams completed the technology development phase of the US Army's Joint Light Tactical Vehicle programme. Both teams plan to compete for the engineering and manufacturing development phase.

The upgrade of 1,700 Caiman Multi-Terrain Vehicles under the $629m (£405m) contract awarded in 2010 continues.

The business completed its last chassis under the US Army FMTV contract in May 2011.

The business was awarded a $42m (£27m) contract to work with its Brazilian Army customer to upgrade 150 M113 armoured personnel carriers.

The business is progressing a major competitive pursuit in Canada, the Tactical Armoured Patrol Vehicle. Testing on this vehicle is complete and contract award is expected in 2012.

In naval armaments, the business received a one-year, $32m (£21m) contract to deliver 40 Mk 38 Mod 2 gun systems as part of a larger effort to secure a four-year contract, worth over $176m (£113m) for mounts, spares, and technical and professional services. The US Navy awarded four additional contracts for over $63m (£41m) to upgrade seven Mk 45 gun systems.

During the year, the business sold its Swiss-Photonics, Advanced Ceramics and Composite Structures businesses for an aggregate consideration of £30m.

A new high-technology production facility was opened in Washington, UK, and the first 150 105mm forgings were successfully produced during September. In March, a new laboratory complex opened at Glascoed and a new small arms ammunition facility was completed at Radway Green in September. The business continued to perform well under its 15-year partnership with the UK Ministry of Defence (MoD) to deliver small arms ammunition.

An amendment to the Terrier armoured engineer vehicle contract was agreed with the UK MoD in March, and deliveries of production vehicles commenced in late 2011.

The US Army placed two additional M777 howitzer orders for 116 guns, bringing the total orders since product launch to 1,071 systems, worth in excess of £1.2bn.

Other markets and joint ventures

The business won a competitive selection to provide the Swedish Defence Materiel Administration, FMV, with armoured all-terrain vehicles. The initial £65m contract for 48 BvS10 vehicles and support, together with options for additional vehicles and enhanced support, was awarded in January 2012.

The contract for the supply of new and upgraded CV90 vehicles to Norway was delayed from 2011 to 2012.

The business is progressing a Canadian combat competitive pursuit, the Close Combat Vehicle. Testing is complete and contract awards are expected in 2012.

The development of the Archer 155mm self-propelled artillery gun systems for the Swedish and Norwegian armed forces has progressed through qualification testing, with production commencing in 2012.

The Sweden-based weapons business was selected to supply 57mm Mk 110 naval gun systems for the US Navy Littoral Combat Ships programme. Further options are expected through to 2015.

In South Africa, the business received mobility upgrade contracts for a total value of $193m (£124m) in support of the RG31 Mine Resistant Ambush Protected vehicle programme. The business received several contracts for RG31 and RG32M vehicles for customers in Spain, Sweden, Finland and the United Arab Emirates for a total value of $200m (£129m).

In June 2011, FNSS, a 49% owned joint venture with Nurol Group of Turkey, received and signed a $559m (£360m) agreement with DEFTECH of Malaysia for the design, development and manufacture of 257 wheeled armoured vehicles and integrated logistics support for the Malaysian armed forces.

Looking forward

Efforts to reduce the US government's budget deficit are likely to require reductions across all areas of government spend.

In the near term, the Land & Armaments business faces a challenging market environment and a further decline in sales, specifically for completing FMTV and Caiman contracts, and lower Bradley volume. It is expected that pressures on defence budgets and shifting national priorities, combined with a reduction in military operations, will continue.

In order to offset these pressures, increased focus is placed on capturing export opportunities and key new domestic programmes. Simultaneously, the business continues to drive rationalisation, efficiencies and cost reductions in order to adapt and remain competitive.

Although budget cutbacks continue to exert downward pressure on the services market as a whole, the increasing age of US and allied government equipment is expected to lead to opportunities in the near term for lifecycle support services.

Platforms & Services (UK)

Platforms & Services (UK) comprises the Group's UK-based air and maritime activities, and certain shared services activities, including the UK-based Advanced Technology Centre.

KEY characteristics

‑ Multi-year prime contracting and support programmes

‑ Full spectrum of military aircraft capabilities, including:

‑ Design, development, manufacture and support

‑ Combat aircraft

‑ Trainer aircraft

‑ Unmanned Aircraft Systems

‑ Full spectrum of maritime systems capabilities, including:

‑ Naval ships

‑ Submarines

‑ Radar and combat management systems

‑ Underwater systems

Operational key Points

‑ Settlements reached on terminated Nimrod and Harrier programmes

‑ Rationalisation and efficiency activity ongoing within Military Air & Information

‑ 45 Typhoon Tranche 2 aircraft delivered to partner nations and first F-35 production aircraft accepted by the US Air Force

‑ Block construction continued on the first aircraft carrier and first steel cut on the second

‑ Fourth Type 45 destroyer accepted off contract

‑ Brazilian Navy to acquire the three cancelled Trinidad and Tobago Offshore Patrol Vessels (OPVs)

‑ Higher than planned costs to complete the Omani OPVs

‑ Ambush, the second Astute-class submarine, undertaking commissioning

Financial key Points

‑ Order book¹ reduced reflecting the continuing high level of trading on Typhoon against orders received in prior years

‑ 4% like-for-like reduction in sales¹ reflects the impact of the terminated Nimrod MRA4 and Harrier programmes

‑ Return on sales improved to 10.5%

‑ Cash inflow³ of £69m in 2011 includes the anticipated utilisation of programme advances

		2011	2010	2009
Order intake¹	KPI	£4,355m	£3,968m	£8,633m
Order book¹		£18.7bn	£21.0bn	£24.3bn
Sales¹	KPI	£6,258m	£6,529m	£6,153m
Underlying EBITA²	KPI	£658m	£522m	£661m
Return on sales		10.5%	8.0%	10.7%
Cash inflow³	KPI	£69m	£191m	£251m

Order intake¹ in the year of £4.4bn (2010 £4.0bn) includes a £0.9bn contract amendment on the aircraft carrier contract.

Sales¹ in 2011 were £6.3bn, which, on a like-for-like basis, were 4% below 2010 reflecting the impact of the terminated Nimrod MRA4 and Harrier programmes following the Strategic Defence and Security Review (SDSR).

Underlying EBITA² of £658m (2010 £522m) includes:

- a £160m charge in the first half on the Omani Offshore Patrol Vessel (OPV) programme;

- a £125m benefit from a UK Ministry of Defence (MoD) settlement agreement; and

- a £60m benefit from the increase in the carrying value of the Trinidad and Tobago OPVs upon signature of a contract for sale of these vessels to the Brazilian Navy.

Underlying EBITA² in the prior year included a charge of £100m taken in respect of the terminated Trinidad and Tobago OPV contract.

There was an operating cash inflow³ of £69m (2010 £191m), which includes the anticipated utilisation of programme advances.

Military Air & Information

Settlement agreements with the UK MoD were completed following changes to the programmes impacted by the SDSR in 2010, including those for the terminated Nimrod MRA4 and Harrier programmes, and recovery of rationalisation costs charged to the income statement in prior years.

In line with the continuing focus on cost reduction and efficiency, there was a net headcount reduction of 2,400 during the year. In addition, as part of these efficiency improvements, and to address programme changes, including a planned reduction in the Typhoon production rate, the business announced in September 2011 approximately 2,700 further potential job losses.

Deliveries of Typhoon Tranche 2 aircraft to the four partner nations totalled 45. The global Typhoon fleet achieved the significant milestone of 100,000 flying hours during the year.

The Group continues to support its UK customer's Typhoon aircraft and their operational commitments through the Typhoon Availability Service contract with £89m of sales in the year.

The business continued to support the operational requirements of the UK Tornado fleet under an availability-based support contract. Flying hours across the Tornado fleet are expected to reduce as additional Typhoon aircraft enter service.

During the year, Typhoon and Tornado GR4 aircraft conducted in excess of 1,000 sorties as part of Operation Ellamy in support of UNSCR 1973 authorising the use of military force to protect civilians in Libya.

Lockheed Martin, the Group's customer, delivered the first production standard F-35 aircraft to the US Air Force. The Group has delivered 21 development and production aircraft fuselage assemblies to Lockheed Martin. Funding of £162m for the fourth Low-Rate Initial Production (LRIP) contract was secured in the year and negotiations with the customer continue in respect of funding for the fifth LRIP contract.

Support continues to be provided to users of Hawk aircraft across the world and orders for Indian Hawk packages worth £133m were received in the year. The contract to supply products and services to enable 57 Hawk aircraft to be built under licence in India awarded in 2010 is now fully mobilised, with material deliveries commencing in December 2011. Initial discussions have now commenced on the technical requirements for an additional 20 aircraft.

In March, a Memorandum of Understanding was signed with Dassault Aviation to bid jointly for new Unmanned Aircraft Systems (UAS) for the UK and French Ministries of Defence in response to the UK-French Defence Co-operation Treaty announced in 2010. Negotiations are anticipated in 2012 regarding the initial technology requirements for a Medium-Altitude Long-Endurance UAS.

In December, the Group signed a four-year, £40m Future Combat Air System research contract with the MoD to sustain and develop the UK's critical technology and skills in UAS.

In the defence information domain, the Group was one of three companies down selected to bid for the UK's Joint Military Air Traffic Services contract and, in December, the FALCON secure deployable communication system programme for the British Army and RAF achieved an important milestone by concluding a network build-up over a planned number of customer sites.

Maritime

The construction of the Royal Navy's new aircraft carriers continued. A number of blocks for the first ship, Queen Elizabeth, arrived at the Rosyth dockyard, and the first steel was cut in May for the second ship, Prince of Wales. A £0.9bn contract amendment was received reflecting the revised programme schedule and final pricing arrangements.

The fourth Type 45 destroyer, HMS Dragon, was accepted off contract by the Royal Navy in August and the support contract is delivering availability of the four ships now in service.

Cumulative savings to March 2011 of £194m have been reported to the MoD against commitments made under the Terms of Business Agreement (ToBA).

The arbitration process between the Group and the Government of the Republic of Trinidad and Tobago, in respect of the cancelled OPV programme, continues and the tribunal hearing is scheduled for the first half of 2012. In December 2011, the Brazilian Navy signed a contract worth £120m with BAE Systems to purchase the three OPVs. The contract also contains a Manufacturing Licence to enable further vessels of the same class to be constructed in Brazil.

Following sea trials, engineering reviews and customer discussions, the Group expects to incur significantly higher than planned costs to complete the Omani OPV programme, and took a pre-tax charge of £160m in the first half of the year. Progress is being made on the re-baselined schedule, and deliveries to the customer are expected in 2012 and 2013.

The Maritime Composite Training System (MCTS), a shore-based warfare operator training solution, was opened by the Royal Navy in August.

HMS Astute, the first of class attack submarine for the Royal Navy, continues to undertake sea trials and is making good progress, including the demonstration of Tomahawk Land Attack Missile capability. Ambush, the second of class, was launched in January 2011 and is progressing through the commissioning phase. Construction continues on the third and fourth boats, and construction of the fifth boat is now underway. Long lead procurement has commenced on the sixth boat in the anticipated seven boat programme.

The UK government has formally announced the approval to develop the Vanguard class replacement submarine. The business has agreed a contract with the UK MoD for the design and development phase.

The Advanced Radar Target Indication Situational Awareness Navigation (ARTISAN) 3D radar successfully achieved the demonstration of antenna technology progression milestone. The programme continues towards full production.

A number of combat system support contracts have been secured in the year, including a £46m long-term contract to provide in-service support to the Sampson multi-function radar. The major long-term in-service support contracts for ships, radar, torpedoes and combat mission systems continue to meet or exceed contracted performance.

The Sting Ray lightweight torpedo delivery contract for the Norwegian government is ahead of schedule with three of five batches delivered. The remaining two batches are to be delivered in 2012.

Looking forward

Platforms & Services (UK) has a strong order book of long-term committed programmes, an enduring support business and cost reduction programmes in place.

In Military Air & Information, sales are underpinned by combat aircraft production on Typhoon and F-35, and in-service support in the UK and on export programmes for existing and legacy combat and Hawk trainer aircraft. There are a number of significant opportunities to secure future Typhoon export sales, including to Oman and Saudi Arabia.

In Maritime, sales are underpinned by the Type 45 destroyer, Queen Elizabeth class carrier and Astute class submarine manufacturing programmes, the 15-year ToBA, and the design of the Vanguard class successor submarine and Type 26 global combat ship. Additionally, such programmes can generate Services business throughout the in-service life.

Platforms & Services (International)

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

KEY characteristics

Saudi Arabia:

‑ Royal Saudi Air Force equipment, training and support

‑ Support for Royal Saudi Navy minehunter

‑ Land vehicles

Australia:

‑ Shipbuilding and electronics capability

‑ Land, sea and air support, and defence logistics provision

‑ Cyber and security

India:

‑ Long-standing military aircraft programme relationships

‑ Recently established land joint venture with Mahindra & Mahindra

MBDA:

‑ Pan-European guided weapons joint venture

Oman:

‑ Strong in-service base across air and land products

Operational key Points

‑ Additional budgets approved on the Salam Typhoon programme

‑ Salam price escalation negotiations continue into 2012

‑ Customer budgets established for the next five years of support on the Saudi British Defence Co-operation Programme

‑ First Saudi Typhoon squadron operational

‑ First Royal Australian Navy Landing Helicopter Dock hull launched

‑ New UK missile development order received by MBDA

‑ Typhoon not selected as lowest priced compliant bid for India

‑ Request for proposal from Oman for Typhoon and associated support

Financial key Points

‑ Order book¹ reduced pending multi-year awards in 2012

‑ Sales¹ reduced by 12% on maturing Tornado upgrade and core support programmes, and completed contract for Tactica vehicles

‑ Return on sales increased to 11.8%

‑ Low cash inflow³ pending contract amendment for Salam Typhoon price escalation

		2011	2010	2009
Order intake¹	KPI	£3,319m	£2,694m	£4,395m
Order book¹		£8.3bn	£9.1bn	£11.0bn
Sales¹	KPI	£3,794m	£4,325m	£3,658m
Underlying EBITA²	KPI	£449m	£449m	£402m
Return on sales		11.8%	10.4%	11.0%
Cash inflow³	KPI	£80m	£190m	£812m

Order book¹ reduced to £8.3bn (2010 £9.1bn) pending award of contracts for changes to the Salam Typhoon programme, including price escalation, and the next phase of support on the Saudi British Defence Co-operation Programme (SBDCP).

Sales¹ in 2011 were £3.8bn, which, on a like-for-like basis, were 14% lower reflecting the maturing Tornado upgrade and core support programmes, and the completed contract for Tactica vehicles.

Underlying EBITA² was £449m (2010 £449m). Return on sales increased to 11.8% (2010 10.4%) on strong performance and risk reduction on the Tornado upgrade and core support programmes.

Operating cash inflow³ of £80m (2010 £190m) includes the anticipated utilisation of programme advances. A significant cash receipt expected on the Salam Typhoon programme has been deferred until ongoing negotiations regarding price escalation have been concluded.

Saudi Arabia

The business continues to develop its presence in Saudi Arabia and remains committed to developing a greater indigenous capability in the Kingdom. This strategy is being enhanced by the entry into service of Typhoon aircraft and the subsequent development of the Typhoon in-country industrial base.

Of the 72 Typhoon aircraft contracted under the Salam programme, the first squadron of 24 aircraft has now been delivered to the Royal Saudi Air Force (RSAF), including six twin-seat aircraft to allow the RSAF to conduct their own training missions. The three-year Typhoon support contract is providing increased levels of capability to the RSAF.

Good progress on these discussions has been made in 2011 with budgets approved in the Kingdom in December on all items other than the price escalation where negotiations will now continue into 2012. Customer budgets have also been established for the next five years of support on the core SBDCP, including an upgrade of the training environment. Formal contracts under these budgets are being progressed.

These budget approvals underpin both the Salam and SBDCP programmes. Salam trading performance, originally planned for 2011, relating to the formalisation of price escalation, including significant cash payment, has been deferred until ongoing negotiations have been concluded.

The upgrade of the RSAF Tornado fleet under the Tornado Sustainment Programme is currently performing ahead of schedule. A total of 61 of the contracted 81 aircraft had been delivered back into the fleet at 31 December 2011. The delivery of weapons capability under the programme, including associated storage facilities, is performing in line with expectations.

The first of the Royal Saudi Navy Al Jawf class ships entered the Naval Minehunter Mid-Life Update programme for re-fit as planned during the year.

All 200 Tactica vehicles have been accepted by the Saudi Arabia National Guard. The separate support contract for these vehicles continues to perform to plan.

As at the end of 2011, the customer had instructed BAE Systems to stop implementing work under the existing C4i (Command, Control, Communications, Computers and Intelligence) programme. Discussions to agree a mutually acceptable way forward are ongoing.

Australia

Construction of the superstructure blocks for the first of two Landing Helicopter Docks is now well advanced at the Williamstown shipyard, with subcontractor Navantia launching the first completed hull in Spain ahead of schedule. During the year, the business was awarded a A$115m (£76m) capability training contract.

On the Air Warfare Destroyer programme, the business has reached agreement in principle with the prime contractor for a reduction in the Group's work share of hull block construction and orders have been received for construction work on the second ship.

In November, it was announced that the business was to be awarded a A$267m (£176m) contract to upgrade seven Royal Australian Navy ANZAC class frigates with anti-ship missile defence capability. The contract was signed in January 2012.

During the year, the business was awarded contract extensions for A$116m (£77m) on the Over-The-Horizon Radar system for five years and A$135m (£89m) for Hawk Lead-In Fighter support for two years. The business was also selected to provide interim basic flying training for a further six years under an A$87m (£57m) contract. These awards demonstrate the Group's success in identifying efficiencies in response to the Australian Strategic Reform Programme (SRP). The Over-The-Horizon Radar system contract was the first new performance-based contract negotiated under the SRP.

In adjacent markets, the business successfully secured a position as one of the Department of Defense Chief Information Officer's Group (CIOG) Preferred Industry Partners on the Applications Managed Services Partnership Arrangement (AMSPA) panel. The business will act as lead for the Warfighter and Intelligence domain. The AMSPA arrangement is for at least five years, with potential extensions to 15 years, and represents a key change in the way CIOG will engage with industry to fast track the delivery of Information Communications Technology projects.

The business has successfully integrated stratsec.net, which was acquired to expand the Group's cybersecurity capabilities in the Asia Pacific region.

MBDA

Order intake with domestic customers was strong with new development orders received, including for the Future Local Area Air Defence System in the UK air defence sector and for the Milan successor programme in the combat surface sector. However, there was disappointment on the MEADS air-defence programme with the decision in the US not to pursue the development order beyond the Memorandum of Understanding ending in 2014. In the export market, a significant order was received from India in early 2012 for MICA air-to-air missiles as part of their Mirage 2000 upgrade.

Key deliveries during the year included Aster surface-to-air missiles, Mistral short-range ground-to-air missiles, Eryx anti-armour missiles, Exocet anti-ship missiles, Dual-Mode Brimstone air-to-ground missiles and Spada air defence systems.

Development programmes continue to progress well, with key milestones being passed on the MEADS air-defence programme, MdCN-Scalp naval stand-off missile programme, Meteor beyond visual range air-to-air missile and Aster air-defence programme, with six successful firings on the Aster programme, including one against a ballistic missile target.

India

Typhoon was down selected in 2011 by the Indian government as one of two remaining competitors for the Medium Multi-Role Combat Aircraft programme. Subsequently, the Group's competitor has been advised that it is the lowest priced compliant bidder and, on this basis, it is expected that contract negotiations will be initiated with that bidder. The Group is continuing to support the Indian customer and its evaluation process which is expected to take some time to complete.

In Defence Land Systems India, the Group's 26% joint venture with Mahindra & Mahindra, sales of the first new vehicle, the Mine Protected Vehicle India, commenced in 2011. The joint venture awaits the results of the competition to be one of the design authorities for the Future Infantry Combat Vehicle programme.

The Group continues to pursue an opportunity to supply M777 howitzers to the Indian Army.

During the year, the Group commenced the establishment of homeland security and technology operations in India to expand local capability, and support indigenous research and development activity. These operations are expected to develop during 2012.

Oman

Activity continues towards securing a contract award for the supply of Typhoon aircraft and associated support to the Royal Air Force of Oman. A request for proposal was received in January 2012 and contract award is expected during 2012.

Looking forward

In the Kingdom of Saudi Arabia, the Group seeks to sustain its long-term presence through delivering current programmes and industrialisation, and developing new business in support of the Saudi military and paramilitary forces. The budgets approved in the Kingdom in December 2011 underpin both the SBDCP and Salam programmes.

In Australia, the Group will continue to support the Department of Defense in its efforts to achieve its Strategic Reform Programme by delivering cost and service improvements across all contracts as well as targeting further growth opportunities in the security services market. It is also exploring expansion into adjacent maritime markets, including commercial sustainment, and offshore oil and gas industry support and fabrication services.

In India, significant armoured vehicle and artillery opportunities are being pursued.

In Oman, the Group is making good progress towards capturing significant opportunities to address the future requirements of customers, in new product and support activities.

In MBDA, whilst domestic budgetary pressures continue, export markets are anticipated to grow, potentially benefiting from significant platform procurements.

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 page 47).

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

4 Order backlog comprises both the order book, which includes unexecuted, funded customer orders only, and unfunded customer orders (see page 23).

Note and page references used above refer to the Annual Report 2011 that can be viewed on the Company's website.

FINANCIAL REVIEW

FINANCIAL HIGHLIGHTS

‑ Headline sales² reduced by 14%

‑ Underlying EBITA³ of £2,025m (2010 £2,179m) impacted by:

‑ a £160m charge in the first half on the Omani Offshore Patrol Vessel (OPV) programme

‑ a £125m benefit from a UK Ministry of Defence settlement agreement

‑ a £60m benefit from the increase in the carrying value of the Trinidad and Tobago OPVs upon agreement of a sale to the Brazilian Navy

‑ deferred recognition of sales and profit relating to the formalisation of price escalation on the Salam Typhoon programme

‑ Benefit of 5.9p per share from an agreement with the UK tax authorities

‑ Underlying earnings⁴ per share broadly in line with 2010, excluding the tax agreement benefit

‑ Total dividend increased by 7.4% to 18.8p

‑ £500m market purchase of shares completed

‑ $1.25bn (£0.8bn) debt financing completed

INCOME STATEMENT - CONTINUING OPERATIONS

		2011 £m	Restated¹ 2010 £m
Sales²	KPI	19,154	22,275

Underlying EBITA³	KPI	2,025	2,179
Return on sales		10.6%	9.8%
(Loss)/profit on disposal of businesses		(29)	1
Pension accounting gains		-	2
Regulatory penalties		(49)	(18)
EBITA		1,947	2,164
Amortisation of intangible assets		(239)	(392)
Impairment of intangible assets		(109)	(125)
Finance costs²		(106)	(194)
Taxation expense²		(233)	(462)
Profit for the year		1,260	991

Exchange rates - average
£/$	1.604	1.545
£/€	1.153	1.166
£/A$	1.553	1.682

The results of the Regional Aircraft line of business and the Group's share of the results of Saab AB to the date of disposal of half of its 20.5% shareholding in June 2010 are shown within discontinued operations (see note 7 to the Group accounts).

Sales² reduced by 15% on a like-for-like basis primarily driven by the lower level of Bradley reset/remanufacturing activity and completed Family of Medium Tactical Vehicles (FMTV) programme in the Land & Armaments business, the impacts of the SDSR on the UK business and delay in securing some of the contract changes to the Saudi Typhoon programme. The Group's sales² performance is illustrated in the bridge chart above.

Underlying EBITA³ Management uses an underlying profit measure to monitor the year-on-year profitability of the Group defined as earnings before amortisation and impairment of intangible assets, finance costs and taxation expense (EBITA) excluding non-recurring items.

Underlying EBITA³, which has reduced by 6% on a like-for-like basis, includes:

- a £160m charge in the first half on the Omani Offshore Patrol Vessel (OPV) programme;

- a £125m benefit from a UK Ministry of Defence settlement agreement; and

- a £60m benefit from the increase in the carrying value of the Trinidad and Tobago OPVs upon agreement of a sale to the Brazilian Navy.

Underlying EBITA³ in the prior year included a charge of £100m taken in respect of the terminated Trinidad and Tobago OPV contract.

The reduction in underlying EBITA³ is illustrated in the bridge chart above.

Non-recurring items are defined as items that are relevant to an understanding of the Group's performance with reference to their materiality and nature. The non-recurring items, which are unchanged from the prior year, are as follows:

Loss on disposal of businesses of £29m mainly comprises losses on the disposals of the Advanced Ceramics and Swiss-Photonics businesses.

Regulatory penalties of £49m reflect the US Department of State fine. The prior year charge reflects the exchange rate movement on payment of the global settlement with the US Department of Justice.

Amortisation of intangible assets is £153m lower at £239m mainly reflecting the alignment of amortisation to the profile of vehicle deliveries under the completed FMTV contract.

Impairment of intangible assets of £109m includes charges taken for goodwill impairment on the Safety Products business within Land & Armaments (£60m) and the Surface Ships business within Platforms & Services (UK) (£34m).

Finance costs² were £106m (2010 £194m). The underlying interest charge, excluding pension accounting, marked-to-market revaluation of financial instruments and foreign currency movements, was £212m (2010 £191m). In 2011, the underlying interest charge includes £41m relating to the early redemption of debt in June in connection with the disposal of the Regional Aircraft Asset Management business, £28m of which would have been incurred in future years.

Taxation expense² reflects an effective tax rate of 14%. Excluding the benefit of an agreement with the UK tax authorities addressing a number of items, including the interpretation of the complex tax rules relating to research and development tax credits, the effective tax rate for 2011 is 26%, which is lower than the prior year rate of 30%. The calculation of the effective tax rate is shown below.

Calculation of the effective tax rate
	2011 £m	Restated¹ 2010 £m
Profit before taxation	1,493	1,453
Add back/(deduct):
Loss/(profit) on disposal of businesses	29	(1)
Regulatory penalties	49	18
Goodwill impairment	94	84
	1,665	1,554

Taxation expense² (excluding UK tax agreement)	430	462
UK tax agreement	(197)	-
Taxation expense²	233	462

Effective tax rate	14%	30%

The underlying tax rate for 2012 is expected to be between 26% and 28%, with the final number dependent on the mix of profits between the UK and US.

EARNINGS PER SHARE - CONTINUING OPERATIONS

Reconciliation from underlying EBITA³ to underlying earnings⁴ - continuing operations
		2011 £m	Restated¹ 2010 £m
Underlying EBITA³	KPI	2,025	2,179
Finance costs excluding non-cash finance movements on pensions and financial derivatives (see note 5 to the Group accounts)		(212)	(191)
Add back: Finance charges relating to early redemption of debt		13	-
		1,826	1,988
Taxation		(472)	(588)
UK tax agreement		197	-
Non-controlling interests		(16)	(29)
Underlying earnings⁴		1,535	1,371

Weighted average number of shares		3,365m	3,451m

Underlying earnings⁴ per share	KPI	45.6p	39.8p

Underlying earnings⁴ per share was 45.6p (2010 39.8p), an increase of 15% (see underlying earnings⁴ per share KPI on page 15). The increase in underlying earnings⁴ per share, which is illustrated in the bridge chart below, includes a 5.9p benefit relating to the tax agreement referred to above. Excluding the tax agreement benefit, underlying earnings⁴ per share was 39.7p.

Basic earnings per share, in accordance with International Accounting Standard (IAS) 33, Earnings per Share, increased to 37.0p compared with 27.9p in 2010.

Dividends

The Board is recommending a final dividend of 11.3p per share (2010 10.5p), bringing the total dividend for the year to 18.8p per share (2010 17.5p), an increase of 7.4%.

The total dividend for the year is covered 2.1 times by underlying earnings⁴ from continuing operations excluding the R&D tax benefit (2010 2.3 times).

CASH FLOW

Reconciliation of cash inflow from operating activities to net debt (as defined by the Group)⁵
		2011 £m	2010 £m
Cash inflow from operating activities		951	1,535
Capital expenditure (net) and financial investment		(268)	(364)
Dividends received from equity accounted investments		88	71
Assets contributed to Trust		(137)	(25)
Cash held for charitable contribution to Tanzania		-	(30)
Operating business cash flow⁶	KPI	634	1,187
Interest		(180)	(173)
Income from financial assets at fair value through profit or loss		4	-
Taxation		(257)	(352)
Free cash flow		201	662
Acquisitions and disposals		(256)	(88)
Purchase of equity shares (net)		(509)	(520)
Equity dividends paid		(606)	(574)
Dividends paid to non-controlling interests		(22)	(32)
Cash flow from matured derivative financial instruments		(34)	(123)
Movement in cash collateral		-	11
Movement in cash received on customers' account⁷		13	7
Foreign exchange translation		(20)	(20)
Other non-cash movements		36	32
Total cash outflow		(1,197)	(645)
Opening net (debt)/cash (as defined by the Group)⁵		(242)	403
Closing net debt (as defined by the Group)⁵		(1,439)	(242)

Components of net debt (as defined by the Group)⁵
	2011 £m	2010 £m
Debt-related derivative financial assets	56	45
Other investments - current	-	260
Cash and cash equivalents	2,141	2,813
Loans - non-current	(2,682)	(2,133)
Loans and overdrafts - current	(518)	(920)
Less: Cash received on customers' account⁷	(3)	(16)
Less: Assets held in Trust	(403)	(261)
Less: Cash held for charitable contribution to Tanzania	(30)	(30)
Net debt (as defined by the Group)⁵	(1,439)	(242)

Cash inflow from operating activities was £951m (2010 £1,535m), which includes contributions in excess of service costs for the UK and US pension schemes totalling £375m (2010 £554m).

The outflow from net capital expenditure and financial investment reduced to £268m (2010 £364m) mainly reflecting the proceeds from a number of investment property disposals.

Dividends received from equity accounted investments, primarily MBDA, Panavia and Air Astana, totalled £88m (2010 £71m).

Assets contributed to Trust comprise payments made for the benefit of the Group's main pension scheme totalling £137m (2010 £25m), including £112m following the £500m share buyback programme completed in December 2011.

Cash held for charitable contribution to Tanzania The £29.5m charitable contribution for the benefit of the people of Tanzania in connection with the global settlement of regulatory investigations with the UK's Serious Fraud Office was deducted from the Group's net debt at 31 December 2010. The amount (including interest) will be applied by the Company for the benefit of the people of Tanzania in accordance with applicable Company policies.

Taxation payments were £257m (2010 £352m). The reduction primarily reflects timing differences on US tax payments in the prior year.

Net cash outflow in respect of acquisitions and disposals of £256m mainly comprises the acquisition of L-1 Identity Solutions, Inc.'s Intelligence Services Group, Norkom Group plc, ETI A/S, Fairchild Imaging, Inc. and stratsec.net Pty Limited (£524m), less the net proceeds from the disposal of the Regional Aircraft Asset Management business (£98m) and the Group's residual shareholding in Saab AB (£152m). The prior year outflow of £88m mainly comprises the acquisition of Atlantic Marine and OASYS Technology (£260m), less the disposal of half of the Group's 20.5% Saab AB shareholding (£92m) and an initial payment from the former owners of the Tenix Defence business relating to the resolution of outstanding issues from the 2008 acquisition (£65m).

The net purchase of equity shares of £509m (2010 £520m) includes 184 million shares purchased under the buyback programme at a cost of £500m (excluding transaction costs of £3m).

As a consequence of movements in the US dollar and Euro exchange rates during the year, there has been a cash outflow from matured derivative financial instruments of £34m (2010 £123m) from rolling hedges on balances with the Group's subsidiaries and equity accounted investments.

Foreign exchange translation primarily arises in respect of the Group's US dollar-denominated borrowing.

In October 2011, the Group raised $1.25bn (£0.8bn) in the US bond market. A $1bn (£0.6bn) 6.4% bond was repaid in December 2011.

The maturity profile of the borrowings component of net debt (as defined by the Group)⁵ is illustrated in the chart below. Details on the Group's objectives and policies regarding net debt (as defined by the Group)⁵ are provided on page 52.

BALANCE SHEET

Summary balance sheet
	2011 £m	2010 £m
Intangible assets	11,465	11,216
Property, plant and equipment, and investment property	2,626	2,848
Equity accounted investments and other investments	788	798
Other financial assets and liabilities (net)	(219)	(10)
Tax assets and liabilities (net)	975	580
Pension deficit (as defined by the Group)	(4,217)	(3,146)
Working capital	(5,677)	(6,641)
Net debt (as defined by the Group)⁵	(1,439)	(242)
Net liabilities of disposal group held for sale	(3)	-
Net assets	4,299	5,403

Exchange rates - year end
£/$	1.554	1.565
£/€	1.197	1.166
£/A$	1.516	1.526

The £249m increase in intangible assets to £11.5bn (2010 £11.2bn) mainly reflects acquisitions (£561m), partly offset by amortisation and impairments (£348m).

The movement in the pension deficit (as defined by the Group) during the year was as follows:

Movement in the pension deficit (as defined by the Group)
	£m
Total IAS 19 deficit at 1 January 2011	(4,103)
Actual return on assets below expected return	(422)
Increase in liabilities due to changes in assumptions	(1,405)
Contributions in excess of service cost	375
Past service cost	(47)
Net financing credit	22
Exchange translation	(10)
Movement in US healthcare plans	5
Total IAS 19 deficit at 31 December 2011	(5,585)
Allocated to equity accounted investments and other participating employers	965
Group's share of IAS 19 deficit at 31 December 2011	(4,620)
Assets held in Trust	403
Pension deficit (as defined by the Group)	(4,217)

The increase in liabilities due to changes in assumptions of £1.4bn mainly reflects a 0.2 percentage point reduction in real UK discount rates and updated mortality assumptions in respect of the UK schemes.

A net deferred tax asset of £1.2bn (2010 £1.0bn) relating to the Group's pension deficit is included within net tax assets and liabilities, and disclosed in note 18 to the Group accounts.

The Group's pension schemes are discussed in more detail overleaf.

There was a £1.0bn increase in working capital mainly reflecting the utilisation of advance contract funding.

Note and page references used above refer to the Annual Report 2011 that can be viewed on the Company's website.

1 Restated following the classification of the Regional Aircraft line of business as a discontinued operation (see note 7 to the Group accounts).

2 Including share of equity accounted investments.

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

4 Earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, and non-recurring items (see note 8 to the Group accounts).

5 See note 10 to the Group accounts.

6 See note 9 to the Group accounts.

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

PRINCIPAL RISKS

Defence spending

The Group is dependent on defence spending.

Description

The Group's core businesses are primarily defence-related, selling products and services directly and indirectly, mainly to the US, UK, Saudi Arabian, and other national governments. Defence spending depends on a complex mix of political considerations, budgetary constraints, and the ability of the armed forces to meet specific threats and perform certain missions, and, as such, may be subject to significant fluctuations from year to year. With constraints on government expenditure in a number of the Group's markets and countries in the Eurozone area currently experiencing serious financial difficulties, affordability continues to be a key focus for customers.

Impact

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

Mitigation

The Group's business is geographically spread across five home markets, and its products are marketed across a range of defence markets. The Group has a highly sustainable Services business, which is an area for growth as customers' operations and maintenance budgets come under pressure. Significant cost reductions have already been made to address increased budgetary pressures in the US and UK. The Group continues to use realistic assumptions to underpin its financial and operational planning.

Despite significant budgetary pressures, the US government remains committed to protecting the size, reach and fighting strength of its military, and has committed to substantial investments in high priority capabilities and programmes.

In the UK, the 2010 Strategic Defence and Security Review defined the areas of future spend in defence and confirmed that the Group's strategy is focused on the appropriate areas.

In Saudi Arabia, regional tensions continue to dictate that defence remains a high priority.

11 For more information on the Group's five home markets

Government customers

The Group's largest customers are governments.

Description

Companies engaged in the supply of defence and security related equipment and services to government agencies are subject to certain business risks particular to the defence and security industries. These governments could modify contracts or terminate them at short notice and at their convenience. For example, long-term US government contracts are normally funded annually and are subject to cancellation or delay if funding appropriations for subsequent performance periods are not made. Terms and risk sharing agreements can also be amended. In addition, the Group, as a government contractor, is subject to financial audits and other reviews by some of its governmental customers with respect to the performance of, and the accounting and general practices relating to, government contracts. As a result of these audits and reviews, costs and prices under these contracts may be subject to adjustment.

Impact

The termination of one or more of the contracts for the Group's programmes by governments; the failure of the relevant agencies to obtain expected funding appropriations for the Group's programmes; or a deterioration in the Group's relationship with any of its key government customers and corresponding reduction in contract awards, could have a material adverse effect on the Group's future results and financial condition.

Mitigation

The Board regularly reviews the Group's performance in its markets, and the Executive Committee continues to work closely with the government customers in these markets to ensure the Group's strategy is aligned with theirs. In the event of a customer termination for convenience, the Group would typically be paid for work done and commitments made at the time of termination. Having sovereign governments as major customers offers the benefits of dealing with mature procurement organisations with which the Group can have long-standing business relationships, and well established and understood terms of trade.

6 For more information on the Group's strategy

Global market

The Group operates in a global market.

Description

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

Impact

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

Mitigation

The Group has a balanced portfolio of businesses across its markets.

11 For more information on the Group's five home markets

Contract award timing

The Group is dependent on the timing of award of defence contracts.

Description

The Group's profits and cash flows are dependent, to a significant extent, on the timing of award of defence contracts.

Impact

Amounts receivable under the Group's defence contracts can be substantial and, therefore, the timing of awards, or failure to receive anticipated awards, could materially affect the Group's profits and cash flows for the periods affected.

In 2011, the Group's financial performance was impacted by a delay in the award of a contract from the Kingdom of Saudi Arabia relating to price escalation on the Salam Typhoon programme. Negotiations on the contract continue in 2012.

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.

105 For more information on Lifecycle Management (LCM) which mandates project management processes

Large contracts

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

Description

A significant proportion of the Group's revenue comes from a small number of large contracts. Each of these contracts, which are primarily in the Platforms & Services (UK) and Platforms & Services (International) reporting segments, is typically worth or potentially worth over £1bn.

Impact

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

Mitigation

The Group has a well-balanced spread of programmes and a large forward order book, which provides long-term visibility. The Board regularly reviews the Group's performance on these large contracts, and the Executive Committee continues to work closely with these customers to ensure the Group's strategy is aligned with theirs.

23 For more information on the Group's order book by major programme and reporting segment

Fixed-price contracts

The Group has fixed-price contracts.

Description

A significant portion of the Group's revenue is derived from fixed-price contracts. An inherent risk in these fixed-price contracts is that actual performance costs may exceed the projected costs on which the fixed prices for such contracts are agreed. These contracts can extend over many years and it can be difficult to predict the ultimate outturn costs associated with the terms on which they are based.

Impact

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

Mitigation

The Group has reduced its exposure to fixed-price design and development activity which is in general more risk intensive than fixed-price production activity. To manage contract-related risks and uncertainties, contracts are managed under LCM at the operational level. Robust bid preparation and approvals processes are well established throughout the Group, with decisions required to be taken at the appropriate level in line with clear delegations of authority. The consistent application of metrics is used to support the review of individual contract performance.

16 For KPIs relating to schedule adherence and programme margin variation

Component availability, subcontractor performance and key suppliers

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

Description

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

Impact

Some of the Group's suppliers or subcontractors may be impacted by the economic environment and constraints on available financing, which could impair their ability to meet their obligations to the Group. In addition, some products require relatively scarce raw materials. The Group is generally subject to specific procurement requirements which may, in effect, limit the suppliers and subcontractors it may utilise. In some instances, the Group is dependent on one or a limited number of suppliers. If any of these suppliers or subcontractors fails to meet the Group's needs, the Group may not, in the short term, have readily available alternatives, thereby impacting its ability to complete its customer obligations satisfactorily and in a timely manner, which could have a negative impact on the Group's future results and financial condition.

Mitigation

The Group's procurement function, which is led by a member of the Executive Committee, is responsible for establishing and managing end-to-end integrated supplier arrangements. The Executive Committee continues to monitor this risk and the Group has experienced no material negative impact to date. The Group reviews the financial health of strategically important suppliers globally on an ongoing basis.

56 For more information on suppliers

Laws and regulations

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

Description

The Group has contracts and operations in many parts of the world, operates in a highly regulated environment, and is subject to applicable laws and regulations of many jurisdictions. These include, without limitation, regulations relating to import-export controls, money laundering, false accounting, anti-bribery and anti-boycott provisions. Non-compliance could expose the Group to fines, penalties, suspension or debarment, which could have a material adverse effect on the Group. From time to time, the Group is subject to government investigations relating to its operations.

Impact

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

Mitigation

During the year, the Group has continued to add resources dedicated to legal and regulatory compliance in order to enhance further its capability to identify and manage the risk of compliance failure. Internal and external market risk assessments form an important element of the ongoing corporate development and training processes. A uniform global policy and process for the appointment of advisers engaged in business development is in effect.

Pursuant to its commitments concerning ongoing regulatory compliance made in the course of the 2010 settlement with the US Department of Justice and the consequent 2011 settlement with the US Department of State, the Group appointed, respectively, an independent monitor in 2010 and a Special Compliance Official in 2011, in each case for a period of up to three years, to monitor the Group's compliance with its respective commitments under those settlements and its compliance obligations going forward.

56 For more information on the Group's approach to business conduct

Competition

The Group's business is subject to significant competition.

Description

The Group's businesses are subject to competition from national and multi-national firms with substantial resources and capital, and many contracts are obtained through a competitive bidding process.

The Group's ability to compete for contracts depends to a large extent on the strength of its intellectual property rights and technical know-how, together with the effectiveness and innovation of its research and development programmes, its ability to offer better programme performance than its competitors at a lower cost to its customers, and the readiness of its facilities, equipment and personnel to undertake the programmes for which it competes.

In some instances, governments direct to a single supplier all work for a particular programme, commonly known as sole-source programmes. Although governments have historically awarded certain programmes to the Group on a sole-source basis, they may in the future determine to open such programmes to a competitive bidding process. Government contracts for defence-related products can, in certain countries, be awarded on the basis of home country preference.

Impact

In the event that the Group is unable adequately to compete in the markets in which it operates, the Group's business and future results may be adversely impacted.

Mitigation

The Group's global, multi-market presence, balanced portfolio of businesses, leading capabilities and performance continue to address this risk. In particular, the Group invests in research and development, and innovation, and continues to reduce its cost base and improve efficiencies.

11 For more information on the Group's five home markets

Pension funding

The Group has an aggregate funding deficit in its defined benefit pension schemes.

Description

The Group operates certain defined benefit pension schemes. At present, in aggregate, there is an actuarial deficit between the value of the projected liabilities of these schemes and the assets they hold.

Impact

The amount of the deficits may be adversely affected by changes in a number of factors, including investment returns, long-term interest rate and price inflation expectations, and anticipated members' longevity. Further increases in pension scheme deficits may require the Group to increase the amount of cash contributions payable to these schemes, thereby reducing cash available to meet the Group's other operating, investing and financing requirements.

Mitigation

Following triennial funding valuations of the Group's two largest UK pension schemes in 2011, revised deficit recovery plans have been agreed. The performance of the Group's pension schemes and deficit recovery plans are regularly reviewed by both the Group and the trustees of the schemes taking actuarial and investment advice as appropriate. The results of these reviews are discussed with the Board and appropriate action taken.

In future, the growth of the defined benefit liabilities is expected to be curtailed as new employees in the UK will be offered membership of a defined contribution pension scheme with effect from 1 April 2012, rather than the current defined benefit/defined contribution hybrid scheme. Current members of the Group's legacy plans will be unaffected by this change.

50 For more information on the Group's pension accounting and funding valuations, and deficit recovery plans

Export controls and other restrictions

The Group is subject to export controls and other restrictions.

Description

A portion of the Group's sales is derived from the export of its products. The export of defence and security products outside the jurisdictions in which they are produced is subject to licensing and export controls, and other restrictions. No assurance can be given that the export controls to which the Group is subject will not become more restrictive, that new generations of the Group's products will not also be subject to similar or more stringent controls, or that political factors or changing international circumstances will not result in the Group being unable to obtain necessary export licences.

Impact

Reduced access to export markets could have a material adverse effect on the Group's future results and financial condition. Failure to comply with export controls and wider regulations could expose the Group to fines, penalties, suspension or debarment, which could have a material adverse effect on the Group.

Mitigation

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

13 For more information on exports

Acquisitions

The anticipated benefits of acquisitions may not be achieved.

Description

The Group has experienced growth through acquisitions and continues to pursue acquisitions in order to meet its strategic objectives. Whether the Group realises the anticipated benefits from these transactions depends upon the successful integration of the acquired businesses, as well as their performance.

Impact

The diversion of management attention to integration efforts and the performance of the acquired businesses below expectations could adversely affect the Group's business, and create the risk of impairments arising on goodwill and other intangible assets.

Mitigation

The Group has established policies in place to manage the acquisition process, monitor the integration and performance of acquired businesses, and identify potential impairments.

10 For more information on the Group's M&A activity during the year

Consortia and joint ventures

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

Description

The Group participates in various consortia, joint ventures and equity holdings, exercising varying degrees of control. The risk of failure or the risk of disagreement, particularly in those that require the unanimous consent of all members with regard to major decisions, is inherent in any jointly controlled entity.

Impact

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

Mitigation

The Group seeks to participate only in ventures in which its interests are complementary to those of its partners, and has formal systems and procedures in place to monitor the performance of such business arrangements.

141 For more information on the Group's principal joint ventures

Exchange rates

The Group is exposed to volatility in currency exchange rates.

Description

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

Impact

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

Mitigation

In order to protect itself against currency fluctuations, the Group's policy is to hedge all material firm transactional exposures, unless otherwise approved as exceptions by the Treasury Review Management Committee. The Group does not hedge the translation effect of exchange rate movements on the income statement or balance sheet of foreign 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.

52 For more information on the Group's treasury policies

Cybersecurity

The Group could be negatively impacted by information technology security threats.

Description

As a defence, aerospace and security company, the security threats faced by the Group include threats to its information technology infrastructure, unlawful attempts to gain access to its proprietary or classified information and the potential for business disruptions associated with information technology failures.

Impact

Failure to combat these risks effectively could negatively impact the Group's reputation among its customers and the public, cause disruption to its business operations, and could result in a negative impact on the Group's future results and financial condition.

Mitigation

The Group has a broad range of measures in place, including appropriate tools and techniques, to monitor and mitigate this risk.

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

Page references used above refer to the Annual Report 2011 that can be viewed on the Company's website.

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December

		2011		Restated¹ 2010
	Notes	£m	Total £m	£m	Total £m
Continuing operations
Combined sales of Group and share of equity accounted investments	1		19,154		22,275
Less: share of sales of equity accounted investments	1		(1,384)		(1,295)
Revenue	1		17,770		20,980
Operating costs	2		(16,478)		(19,662)
Other income	4		157		152
Group operating profit			1,449		1,470
Share of results of equity accounted investments	1		131		131

Underlying EBITA²		2,025		2,179
Non-recurring items³		(78)		(15)
EBITA		1,947		2,164
Amortisation		(239)		(392)
Impairment		(109)		(125)
Financial income/(expense) of equity accounted investments	5	8		(2)
Taxation expense of equity accounted investments		(27)		(44)
Operating profit	1		1,580		1,601

Financial income		1,294		1,355
Financial expense		(1,408)		(1,547)
Finance costs	5		(114)		(192)
Profit before taxation			1,466		1,409
Taxation expense	6		(206)		(418)
Profit for the year - continuing operations			1,260		991
(Loss)/profit for the year - discontinued operations	7		(4)		90
Profit for the year			1,256		1,081

Attributable to:
Equity shareholders			1,240		1,052
Non-controlling interests			16		29
			1,256		1,081

Earnings per share	8
Basic earnings per share			36.9p		30.5p
Diluted earnings per share			36.7p		30.3p

Earnings per share - continuing operations
Basic earnings per share			37.0p		27.9p
Diluted earnings per share			36.8p		27.7p

1 Restated following the classification of the Regional Aircraft line of business as a discontinued operation (see note 7).

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

3 Non-recurring items comprises loss on disposal of businesses £29m (2010 profit £1m), pension curtailment gains £nil (2010 £2m) and regulatory penalties £49m (2010 £18m).

Note references used above are references to notes to the Group accounts in the Annual Report 2011 that can be viewed on the Company's website.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December

		2011			2010
	Notes	Other reserves¹ £m	Retained earnings £m	Total £m	Other reserves¹ £m	Retained earnings £m	Total £m
Profit for the year		-	1,256	1,256	-	1,081	1,081
Other comprehensive income
Net actuarial (losses)/gains on defined benefit pension schemes		-	(1,522)	(1,522)	-	874	874
Currency translation on foreign currency net investments		(19)	-	(19)	160	-	160
Recycling of cumulative currency translation reserve on disposal	7	(14)	-	(14)	(17)	-	(17)
Amounts charged to hedging reserve		(56)	-	(56)	(84)	-	(84)
Recycling of cumulative net hedging reserve on disposal		-	-	-	(4)	-	(4)
Fair value movements on available-for-sale investments	15	-	5	5	-	14	14
Recycling of fair value movements on available-for-sale investments	5	-	(21)	(21)	-	-	-
Share of other comprehensive income of equity accounted investments	25	(17)	(45)	(62)	(6)	40	34
Tax on other comprehensive income	6	17	387	404	22	(274)	(252)
Total other comprehensive income for the year (net of tax)		(89)	(1,196)	(1,285)	71	654	725
Total comprehensive income for the year		(89)	60	(29)	71	1,735	1,806

Attributable to:
Equity shareholders		(89)	44	(45)	71	1,706	1,777
Non-controlling interests		-	16	16	-	29	29
		(89)	60	(29)	71	1,735	1,806

1 An analysis of other reserves is provided in note 25.

Note references used above are references to notes to the Group accounts in the Annual Report 2011 that can be viewed on the Company's website.

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December

	Notes	2011 £m	2010 £m
Profit for the year		1,256	1,081
Taxation expense		211	417
Share of results of equity accounted investments	1, 7	(131)	(133)
Net finance costs		117	192
Depreciation, amortisation and impairment		751	899
Profit on disposal of property, plant and equipment	2, 4, 7	(17)	(13)
Profit on disposal of investment property	4	(21)	-
Loss/(profit) on disposal of businesses	2, 4, 7	15	(53)
Cost of equity-settled employee share schemes		68	58
Movements in provisions		(148)	101
Decrease in liabilities for retirement benefit obligations		(287)	(452)
(Increase)/decrease in working capital:
Inventories		(85)	318
Trade and other receivables		191	183
Trade and other payables		(969)	(1,063)
Cash inflow from operating activities		951	1,535
Interest paid		(212)	(221)
Taxation paid		(257)	(352)
Net cash inflow from operating activities		482	962
Dividends received from equity accounted investments	14	88	71
Interest received		32	48
Income from financial assets at fair value through profit or loss		4	-
Purchases of property, plant and equipment, and investment property		(359)	(408)
Purchases of intangible assets		(24)	(19)
Proceeds from sale of property, plant and equipment, and investment property		115	70
Purchase of subsidiary undertakings (net of cash acquired)	26	(532)	(179)
Purchase of equity accounted investments	14	-	(2)
Equity accounted investment funding	14	(1)	(7)
Proceeds from sale of subsidiary undertakings (net of cash disposed)	9	124	-
Proceeds from sale of equity accounted investments		-	93
Proceeds from sale of financial assets at fair value through profit or loss		152	-
Proceeds from sale of other investments		1	-
Net proceeds from sale/(purchase) of other deposits/securities	15	265	(40)
Net cash outflow from investing activities		(135)	(373)
Capital element of finance lease rental payments		-	(7)
Proceeds from issue of share capital		-	6
Purchase of treasury shares		(503)	(503)
Purchase of own shares		(6)	(23)
Equity dividends paid	25	(606)	(574)
Dividends paid to non-controlling interests		(22)	(32)
Cash outflow from matured derivative financial instruments		(34)	(123)
Cash inflow from movement in cash collateral		-	11
Cash inflow from loans		2,693	1,317
Cash outflow from repayment of loans		(2,541)	(1,576)
Net cash outflow from financing activities		(1,019)	(1,504)
Net decrease in cash and cash equivalents		(672)	(915)
Cash and cash equivalents at 1 January		2,802	3,678
Effect of foreign exchange rate changes on cash and cash equivalents		6	39
Cash and cash equivalents at 31 December		2,136	2,802
Comprising:
Cash and cash equivalents¹		2,141	2,813
Overdrafts		(5)	(11)
Cash and cash equivalents at 31 December		2,136	2,802

1 Includes £403m (2010 £1m) of cash held in Trust for the benefit of the Group's main pension scheme (see note 23).

Note references used above are references to notes to the Group accounts in the Annual Report 2011 that can be viewed on the Company's website.

CONSOLIDATED BALANCE SHEET

as at 31 December

	Notes	2011 £m	2010 £m
Non-current assets
Intangible assets	11	11,465	11,216
Property, plant and equipment	12	2,496	2,714
Investment property	13	130	134
Equity accounted investments	14	783	787
Other investments	15	5	11
Other receivables	16	314	282
Other financial assets	17	118	110
Deferred tax assets	18	1,409	1,160
		16,720	16,414
Current assets
Inventories	19	716	644
Trade and other receivables including amounts due from customers for contract work	16	3,369	3,559
Current tax		60	51
Other investments	15	-	260
Other financial assets	17	77	289
Cash and cash equivalents		2,141	2,813
Assets of disposal group held for sale		18	-
		6,381	7,616
Total assets	20	23,101	24,030
Non-current liabilities
Loans	21	(2,682)	(2,133)
Trade and other payables	22	(571)	(694)
Retirement benefit obligations	23	(4,673)	(3,456)
Other financial liabilities	17	(74)	(255)
Deferred tax liabilities	18	(26)	(6)
Provisions	24	(501)	(425)
		(8,527)	(6,969)
Current liabilities
Loans and overdrafts	21	(518)	(920)
Trade and other payables	22	(8,531)	(9,352)
Other financial liabilities	17	(284)	(109)
Current tax		(468)	(625)
Provisions	24	(453)	(652)
Liabilities of disposal group held for sale		(21)	-
		(10,275)	(11,658)
Total liabilities		(18,802)	(18,627)
Net assets		4,299	5,403

Capital and reserves
Issued share capital	25	90	90
Share premium		1,249	1,249
Other reserves	25	5,381	5,470
Accumulated losses		(2,480)	(1,477)
Total equity attributable to equity holders of the parent		4,240	5,332
Non-controlling interests		59	71
Total equity		4,299	5,403

Approved by the Board on 15 February 2012 and signed on its behalf by:

I G King	P J Lynas
Chief Executive	Group Finance Director

Note references used above are references to notes to the Group accounts in the Annual Report 2011 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	Non-controlling interests £m	Total equity £m
At 1 January 2011	90	1,249	5,470	(1,477)	5,332	71	5,403
Profit for the year	-	-	-	1,240	1,240	16	1,256
Total other comprehensive income for the year	-	-	(89)	(1,196)	(1,285)	-	(1,285)
Share-based payments	-	-	-	68	68	-	68
Share options:
Purchase of own shares	-	-	-	(6)	(6)	-	(6)
Purchase of treasury shares	-	-	-	(503)	(503)	-	(503)
Ordinary share dividends	-	-	-	(606)	(606)	(22)	(628)
Other	-	-	-	-	-	(6)	(6)
At 31 December 2011	90	1,249	5,381	(2,480)	4,240	59	4,299

At 1 January 2010	90	1,243	5,399	(2,141)	4,591	72	4,663
Profit for the year	-	-	-	1,052	1,052	29	1,081
Total other comprehensive income for the year	-	-	71	654	725	-	725
Share-based payments	-	-	-	58	58	-	58
Share options:
Proceeds from shares issued	-	6	-	-	6	-	6
Purchase of own shares	-	-	-	(23)	(23)	-	(23)
Purchase of treasury shares	-	-	-	(503)	(503)	-	(503)
Ordinary share dividends	-	-	-	(574)	(574)	(32)	(606)
Other	-	-	-	-	-	2	2
At 31 December 2010	90	1,249	5,470	(1,477)	5,332	71	5,403

1 An analysis of other reserves is provided in note 25.

Note references used above are references to notes to the Group accounts in the Annual Report 2011 that can be viewed on the Company's website.

29. RELATED PARTY TRANSACTIONS

The Group has a related party relationship with its directors and key management personnel (see below), equity accounted investments (note 14) and pension plans (note 23).

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

	Sales to related party		Purchases from related party		Amounts owed by related party		Amounts owed to related party		Management recharges
Related party	2011 £m	2010 £m	2011 £m	2010 £m	2011 £m	2010 £m	2011 £m	2010 £m	2011 £m	2010 £m
Advanced Electronics Company Limited	-	-	153	149	1	1	-	-	-	-
CTA International SAS	2	-	-	-	2	-	-	-	-	-
Eurofighter Jagdflugzeug GmbH	1,353	1,313	-	-	206	283	142²	143²	-	-
FADEC International LLC	49	49	-	-	-	-	-	-	-	-
Gripen International KB	-	1	-	1	10	11	68²	67²	-	-
MBDA SAS	24	36	65	162	9	10	951²	1,010²	17²	14²
Panavia Aircraft GmbH	34	40	98	92	4	1	-	12	-	-
Saab AB¹	-	3	-	20	-	-	-	-	-	-
Other	-	2	1	-	2	1	-	-	-	-
	1,462	1,444	317	424	234	307	1,161	1,232	17	14

1 To date of sale of half of the Group's 20.5% shareholding (3 June 2010).

2 Also relates to disclosures under Financial Reporting Standard 8, Related Party Disclosures, for the parent company, BAE Systems plc. At 31 December 2011, £1,158m (2010 £1,220m) was owed by BAE Systems plc and £3m (2010 £nil) by other Group subsidiaries.

The Group considers key management personnel as defined under IAS 24, Related Party Disclosures, to be the members of the Group's Executive Committee and the Company's non-executive directors. Fuller disclosures on directors' remuneration are set out in the Remuneration report on pages 81 to 100. Total emoluments for directors and key management personnel were:

	2011 £'000	2010 £'000
Short-term employee benefits	14,807	15,131
Post-employment benefits	1,310	1,300
Share-based payments	5,534	4,033
	21,651	20,464

Note and page references used above refer to the Annual Report 2011 that can be viewed on the Company's website.

Cautionary statement: All statements other than statements of historical fact included in this document, including, without limitation, those regarding the financial condition, results, operations and businesses of BAE Systems and its strategy, plans and objectives and the markets and economies in which it operates, are forward-looking statements. Such forward-looking statements which reflect management's assumptions made on the basis of information available to it at this time, involve known and unknown risks, uncertainties and other important factors which could cause the actual results, performance or achievements of BAE Systems or the markets and economies in which BAE Systems operates to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. BAE Systems plc and its directors accept no liability to third parties in respect of this report save as would arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with schedule 10A of the Financial Services and Markets Act 2000. It should be noted that schedule 10A and section 463 Companies Act 2006 contain limits on the liability of the directors of BAE Systems plc so that their liability is solely to BAE Systems plc.

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