Doc re. Annual Financial Report

RNS Number : 3459A

BAE SYSTEMS PLC

19 March 2013

BAE Systems plc

Annual Report 2012

BAE Systems plc has today published its Annual Report and Accounts for the year ended 31 December 2012 ('Annual Report 2012'). The full document can be viewed on the Company's website at:

www.baesystems.com/investors

Copies of the Annual Report 2012 will be posted to those shareholders who have requested to receive communications from the Company in printed form on 28 March 2013.

In compliance with section 9.6.1 of the Listing Rules, a copy of the Annual Report 2012 has also been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM

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 2012 in unedited full text. Page and chart references within the text of this announcement are references to pages and charts in the Annual Report 2012 that can be viewed as detailed above.

The financial information for the year ended 31 December 2012 contained in this announcement was approved by the Board on 20 February 2013. 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 2011 have been delivered to the Registrar of Companies. Statutory accounts for the year ended 31 December 2012 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 2012 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.

In addition, each of the directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Dick Olver	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
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

20 February 2013

CHIEF EXECUTIVE'S REVIEW

"The Group's geographic breadth of business has provided, and is expected to continue to provide, resilience at a time when some of its markets are constrained by economic pressures." Ian King Chief Executive

DELIVERING ON A CLEAR STRATEGY

BAE Systems has continued to deliver on a clear strategy during 2012. The Group's geographic breadth of business has provided, and is expected to continue to provide, resilience at a time when some of its markets are constrained by economic pressures. Following a period of growth, defence budgets in the US have flattened and are expected to remain constrained in response to reducing overseas operations and measures to address federal deficits. In the UK, the defence market has stabilised following changes to programme priorities outlined in 2010 through the UK government's Strategic Defence and Security Review.

Growth opportunities in some segments of the US and UK markets are identified, but the overall outlook in both countries is expected to continue to be constrained.

In wider international markets, the Group is seeing good growth in order intake leading to anticipated growth in international sales. In 2012, order intake outside of the US and UK was £11.2bn, compared with £4.8bn in 2011.

BAE Systems has a clear strategy, focused on enhancing its position as a premier global defence, aerospace and security company. Consistent with that strategy, discussions between BAE Systems and EADS were held between June and October of 2012. The discussions involved extensive engagement with many of the Group's government stakeholders, including in the UK, US and Saudi Arabia, and we were grateful for the positive support received. The merger would have been an exciting development, but no agreement acceptable to all parties could be reached.

Focus on the underlying business performance was sustained as a priority while the merger discussions were underway. The Group's continued strategic aim is to drive shareholder value through a combination of meeting our customers' requirements, further improvements in financial performance and enhanced competitive positions across the business. The focus of the Group's Strategic Actions in pursuit of these goals includes: growth in its cyber, intelligence and security businesses; addressing growth opportunities in electronic systems; driving further value from the Group's broad base of platforms and services positions; and increased business in international markets outside of the UK and US.

The evolution of BAE Systems has seen the Group's business develop from an equipment supply-centred model to one that now embraces a services culture. In 2012, 50% of the Group's sales were generated in services across a wide range of activities and geographies.

Services activities include in-service support in the UK for the Royal Air Force's trainer aircraft and fast jet fleets, and the Royal Navy's surface fleet. In Australia and Saudi Arabia, the Group provides a broadly-based range of support services to the armed forces.

BAE Systems provides extensive support to US armed forces through provision of land vehicle reset and upgrade programmes, rotary wing and other aircraft support, and naval ship repair services. The Group also manages complex facilities including ammunition production in the US and the UK.

BAE Systems' services activities also include the provision of extensive cyber and intelligence capabilities. The Group's strategy includes growing its positions in the cyber and intelligence services markets for governments, and pursuing organic growth opportunities in commercial cyber and security applications and systems.

Affordability is a key consideration for all the Group's customers and BAE Systems has been successful in reducing costs over a sustained period. Whilst necessary to address lower demand in some business areas, cost reduction has also been targeted to achieve competitive advantage. A regrettable but unavoidable element of these cost reduction measures is the impact on employment. Excluding M&A activity, net employee headcount (including contractors) reduced by approximately 3,600 during the year, bringing the total net reduction across the past four years to approximately 26,000. In addition, site rationalisation has continued. These efficiency improvements lead to benefits for customers as well as underpinning the Group's value proposition for shareholders.

BAE Systems' business in the US contributed approximately 40% of Group sales in 2012. The US business has felt the dual pressure of reduced activity in support of deployed operations in Iraq and Afghanistan, and measures to reduce US federal budget deficits. In particular, the US land vehicles business has, as forecast, seen significant year-on-year reductions from the peak of activity in 2008.

The US elections have introduced some additional defence procurement uncertainty with the administration entering a six-month period of Continuing Resolution from the end of September 2012.

Overhanging the US defence sector into 2013 is the potential impact of a sequestration or other budget reductions that could result in indiscriminate funding cuts. The Group bases its plans on conservative assumptions and continues to address its cost base accordingly.

Defence budgets in the UK are expected to remain flat, but the recent stabilising of equipment and services requirements and the budget outlook has established a more predictable planning environment.

The Group's UK maritime business is experiencing a high level of activity. Growth is anticipated in the submarines business on the back of the multi-year Astute Class submarine programme and the build-up in engineering workload for the Successor programme. BAE Systems received further Successor funding during the year, with approximately 1,000 people now working on the programme.

Also in the UK maritime business, the last ship of the six-ship Type 45 destroyer programme completed sea trials. Good progress continues to be made on the Queen Elizabeth Class Carrier programme with delivery of major blocks underway for the assembly of the first of these two ships. Work continues on the design of the Type 26 ships to replace the UK's Type 23 frigates from early in the next decade. Type 26 production is expected to utilise a lower level of UK ship build capacity following the currently high levels on the Carrier programme. Discussions continue with the UK government to determine how best to sustain the capability to deliver complex warships in the UK in the future.

In the military air sector, European Tranche 2 Typhoon deliveries have continued and international prospects for Typhoon remain good with the potential to extend production into the next decade. The Group continues to deliver assemblies for the US-led F-35 Lightning II programme under Low-Rate Initial Production contracts.

International

In addition to its US and UK operations, BAE Systems continues to build on its positions in international markets. As well as established operations in Saudi Arabia, Australia and more recently India, the Group is pursuing multiple new business opportunities worldwide.

Defence remains a high priority in the Kingdom of Saudi Arabia. BAE Systems has a large involvement in the support of established Royal Saudi Air Force (RSAF) and Royal Saudi Navy programmes in the Kingdom.

Deliveries of RSAF Typhoon aircraft are contracted to recommence in 2013, following a contract amendment to enable UK final assembly of the balance of 48 aircraft under the original contract for 72.

Discussions to formalise Typhoon price escalation under the Salam programme remain ongoing.

Discussions have commenced on the next phase of support, following on from the three-year agreement that formed part of the arrangements for initial entry into service of the Typhoon aircraft.

Under the Saudi British Defence Co-operation Programme, orders totalling £3.4bn were awarded for support through to 2016, including the provision of manpower, logistics and training to the RSAF. In addition, a £1.6bn contract was awarded in May to support the RSAF's future aircrew training requirements involving the supply of, and initial support for, Hawk Advanced Jet Trainer and Pilatus training aircraft.

BAE Systems is the leading provider of equipment and support to the Australian armed forces. The Group's largest programme in Australia is the Canberra Class programme to build two 27,000 tonne Landing Helicopter Dock vessels for the Royal Australian Navy.

BAE Systems continues to develop its business in India. The Indian government has recently confirmed its intention to buy the M777 artillery system and negotiations for a third batch of 20 locally assembled Hawk aircraft are expected to commence in 2013.

In Oman, a £2.5bn contract for 12 Typhoon and eight Hawk aircraft and associated training and support has been awarded, and we are progressing opportunities for Typhoon in Malaysia and the United Arab Emirates.

In June, the business was awarded a $750m (£462m) CV90 combat vehicle contract in Norway.

Balance sheet and capital allocation

The Group recognises the importance to investors of a clear capital allocation policy, consistent with sustaining a strong investment grade credit rating, as part of its value proposition.

In addition to meeting its pension funding obligations, the Group expects to continue organic investment in its businesses to sustain and grow, plans to continue to pay dividends in line with its policy of a long-term sustainable cover of around two times underlying earnings and to make accelerated returns of capital to shareholders when the balance sheet allows. Consistent with this approach, in February 2013, the Group initiated a three-year share repurchase programme of up to £1bn. Full implementation of this programme is subject to satisfactory resolution of Salam Typhoon price escalation negotiations. Discussions with the Group's UK pension scheme trustees have commenced to address any implications for deficit funding plans. Investment in value-enhancing acquisitions will continue to be considered where market conditions are right, where they deliver on the Group's strategy and where they offer greater value than repurchasing the Group's own shares.

M&A activity

The Group's business portfolio is reviewed regularly to determine whether greater value can be created from the sale of a business rather than its retention, and three small business disposals were made during the year for a combined consideration of approximately £111m.

In March, the Group completed the sale of BAE Systems Safety Products Inc. and Schroth Safety Products GmbH (Safety Products). In July, the Safariland, LLC (Safariland) business and the assets comprising BAE Systems Tensylon High Performance Materials Inc. (Tensylon) were sold.

BAE Systems continues to seek bolt-on acquisitions that enhance routes to market or which provide rapid access to relevant technologies and capabilities.

In November, the Group agreed the acquisition of Marine Hydraulics International, Inc., a US marine repair, overhaul and conversion company, for cash consideration of approximately $69m (£42m). The acquisition is expected to complete in the first quarter of 2013.

Pension funding

Triennial funding valuations of the Group's two largest UK pension schemes, the BAE Systems Pension Scheme and the BAE Systems 2000 Pension Plan, were completed as at 31 March 2011. In 2012, agreement on revised deficit funding plans was reached with the trustees of those schemes and the next valuation will commence in April 2014.

Total Performance

The Group continues to build on the good progress in recent years to establish a Total Performance culture across its business operations. For BAE Systems, Total Performance is not just about what the Group does, but how it is done. Total Performance places emphasis on delivering shareholder value, meeting the needs of customers and, at all times, acting responsibly.

In addition to delivering against its Financial Performance objectives, the Group sets targets for the achievement of non-financial performance measures, including Customer Focus, Programme Execution and Responsible Behaviour.

BAE Systems is committed to achieving and sustaining high standards of business conduct and continues to reinforce a culture of responsible behaviour. Mandated policies and processes within the Group's Operational Framework are updated routinely to ensure they reflect the Group's Responsible Trading Principles. All employees receive training to help them apply the Group's global Code of Conduct, with mandatory refresher programmes undertaken during the year.

The Group's people strategy of through-career capability development and emphasis on promoting high levels of employee engagement seeks to maximise the contribution that its workforce makes to a culture of Total Performance. It enables every member of the team to fulfil their personal potential. The success of this strategy is measured ultimately in the success of the business as a whole.

BAE Systems has talented people who are committed to excellence, doing work that is truly inspired.

The safety of our employees and those using our products is critical to our business and a fundamental responsibility. I am deeply saddened to report the death of one of our employees whilst at work in Saudi Arabia in a road traffic accident.

Safety continues to be a priority for the Group, with businesses continuing to drive consistently high standards of safety. Performance in safety was underpinned this year by the Group achieving a 30% reduction in the Recordable Accident Rate.

Management

In June, Tom Arseneault was appointed Executive Vice President of the Product Sector businesses headquartered in the US and Chief Technology Officer for BAE Systems, Inc. Also in June, Lynn Minella was appointed Group Human Resources Director following the retirement of Alastair Imrie. On their appointment, both Tom and Lynn joined the Group's Executive Committee.

With effect from 30 March 2013, Larry Prior, Executive Vice President of the Service Sector businesses headquartered in the US and Chief Operating Officer for BAE Systems, Inc., and member of the Group's Executive Committee, will leave the Group to pursue other opportunities.

In February 2013, David Herr was appointed Executive Vice President of the Service Sector businesses and joined the Group's Executive Committee.

Summary

BAE Systems is a resilient business with talented people and the resources to continue to develop within a clear strategic framework. The strategy has seen the Group focus on defence, aerospace and security markets across a broad geographic base. BAE Systems aims to deliver attractive returns to its shareholders through its positions on priority programmes and in services with high relevance to its customers.

Ian King

Chief Executive

Extract from
CHAIRMAN'S LETTER

Directors

In May, Michael Hartnall, a non-executive director, stood down from the Board having served nearly nine years in that capacity.

As previously announced, Sir Peter Mason stepped down as the Board's Senior Independent Director in January 2013. Nick Rose, a non-executive director, succeeds Sir Peter as the Board's Senior Independent Director. Sir Peter will step down from the Board at the Annual General Meeting in May 2013. Sir Peter has been a great asset to the Board, over many years, sharing his wise counsel and extensive industrial experience. The Board is grateful to him for his support and, more generally, his contribution to the development of the Group.

As I near the start of my tenth year as Chairman, one of Nick Rose's tasks as the Board's new Senior Independent Director is to manage the succession for my own role. It is important that this process is driven by the objective of finding the right person, not just by the timetable. Notwithstanding the undoubted challenges the future holds, I believe I will be handing over the tiller of a well-managed, strong and successful company, that is operating to high standards of governance.

Financial Performance

This section of the report covers Financial Performance from a Group perspective.

See pages 54 to 75 on Financial Performance by reporting segment

Financial highlights

- Order backlog^1,2 increased by 8% to £42.4bn

- Non-US and UK order intake¹ increased to £11.2bn from £4.8bn in 2011

- Sales¹ reduced by 7%

- Underlying EBITA³ reduced by 6% to £1,895m. Deferred recognition of sales and profit relating to the formalisation of price escalation on the Salam Typhoon programme

- Underlying earnings⁴ per share down by 2% (excluding the benefit in 2011 of the UK tax settlement)

- Total dividend increased by 4% to 19.5p

- Operating business cash flow⁷ increased to £2.7bn

- Net cash⁶ balance of £387m

- Three-year share repurchase programme of up to £1bn initiated

- Longevity risk on £2.7bn of pension scheme liabilities transferred to the insurance market

Summary income statement

Summary income statement - continuing operations		2012 £m	2011 £m
Sales¹	KPI	17,834	19,154
Underlying EBITA³	KPI	1,895	2,025
Return on sales		10.6%	10.6%
Profit/(loss) on disposal of businesses		103	(29)
Regulatory penalties		-	(49)
EBITA		1,998	1,947
Amortisation of intangible assets		(226)	(239)
Impairment of intangible assets		(86)	(109)
Finance costs¹		(275)	(106)
Taxation expense¹		(337)	(233)
Profit for the year		1,074	1,260

Exchange rates - average
£/$		1.585	1.604
£/€		1.233	1.153
£/A$		1.531	1.553

The results of the Regional Aircraft line of business are shown within discontinued operations (see note 7 to the Group accounts).

Order backlog^1,2

Order backlog^1,2 has increased by 8% to £42.4bn driven by a high level of awards in Saudi Arabia and a contract to supply Typhoon and Hawk aircraft to Oman. Non-US and UK funded order intake¹ increased to £11.2bn from £4.8bn in 2011.

Income statement

Sales¹ reduced by 7% reflecting lower volumes in the Land & Armaments business, and there being no contracted Typhoon aircraft deliveries in the year under the Salam Typhoon programme. The Group's sales¹ performance is illustrated in the bridge chart below.

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

Underlying EBITA³ was £1,895m (2011 £2,025m) giving a return on sales of 10.6% (2011 10.6%).

Non-recurring items are defined as items that are relevant to an understanding of the Group's performance with reference to their materiality and nature. Profit on disposal of businesses of £103m in 2012 includes the disposals of Safety Products and Safariland, and assets comprising the Tensylon business, which were part of the Land & Armaments business. The loss of £29m in 2011 arose on the disposals of the Advanced Ceramics and Swiss-Photonics businesses.

Amortisation of intangible assets is £13m lower at £226m mainly reflecting the completion of deliveries under the Family of Medium Tactical Vehicles (FMTV) contract in 2011.

Impairment of intangible assets, including goodwill, of £86m mainly relates to the Safariland and Tensylon businesses sold in July 2012, and the Commercial Armored Vehicles business expected to be sold in the first quarter of 2013. In 2011, charges included those taken against the Safety Products (£66m) and Naval Ships (£34m) businesses.

Finance costs¹ were £275m (2011 £106m). The underlying interest charge, which excludes pension accounting, marked-to-market revaluation of financial instruments and foreign currency movements, was £204m. In the prior year, the underlying interest charge of £199m included £28m relating to the early redemption of debt in connection with the disposal of the Regional Aircraft Asset Management business. Costs in 2012 include interest on the £400m debt refinancing completed in June and a higher level of net present value charges on long-term liabilities.

Taxation expense¹ reflects an effective tax rate of 25%. In 2011, excluding the benefit of an agreement with the UK tax authorities addressing a number of items, including research and development tax credits, the effective tax rate was 26%. The calculation of the effective tax rate is shown below:

Calculation of the effective tax rate	2012 £m	2011 £m
Profit before taxation	1,411	1,493
(Deduct)/add back:
(Profit)/loss on disposal of businesses	(103)	29
Regulatory penalties	-	49
Goodwill impairment	57	94
	1,365	1,665
Taxation expense¹ (excluding 2011 UK tax agreement)	337	430
UK tax agreement	-	(197)
Taxation expense¹	337	233
Effective tax rate	25%	14%
Effective tax rate (excluding 2011 UK tax agreement)	25%	26%

The underlying tax rate for 2013 is expected to be between 23% and 25%, with the final number dependent on the geographical mix of profits.

Earnings per share

Reconciliation from underlying EBITA³ to underlying earnings⁴ - continuing operations		2012 £m	2011 £m
Underlying EBITA³	KPI	1,895	2,025
Underlying interest charge (see note 5 to the Group accounts)		(204)	(199)
		1,691	1,826
Taxation		(417)	(472)
UK tax agreement		-	197
Non-controlling interests		(11)	(16)
Underlying earnings⁴		1,263	1,535

Weighted average number of shares		3,244m	3,365m
Underlying earnings⁴ per share		38.9p	45.6p
Underlying earnings⁴ per share (excluding 2011 UK tax agreement)	KPI	38.9p	39.7p

Underlying earnings⁴ per share was 38.9p, a decrease of 2% on 2011 (excluding the UK tax agreement benefit). The decrease is illustrated in the bridge chart below.

Basic earnings per share, in accordance with International Accounting Standard (IAS) 33, Earnings per Share, was 32.8p compared with 37.0p in 2011 (including the UK tax agreement benefit).

Dividends and share repurchase

The Board is recommending a final dividend of 11.7p per share (2011 11.3p), bringing the total dividend for the year to 19.5p per share (2011 18.8p), an increase of 4%.

The total dividend for the year is covered 2.0 times by underlying earnings⁴ from continuing operations (2011 2.1 times excluding the UK tax agreement benefit).

In February 2013, the Group initiated a three-year share repurchase programme of up to £1bn. Full implementation of this programme is subject to satisfactory resolution of Salam Typhoon price escalation negotiations. Discussions with the Group's UK pension scheme trustees have commenced to address any implications for deficit funding plans.

Cash flow

Reconciliation of cash inflow from operating activities⁵ to net cash/(debt) (as defined by the Group)⁶		2012 £m	2011 £m
Cash inflow from operating activities⁵		2,916	951
Capital expenditure (net) and financial investment		(293)	(268)
Dividends received from equity accounted investments		94	88
Assets contributed to Trust		(25)	(137)
Operating business cash flow⁷	KPI	2,692	634
Interest		(147)	(180)
Income from financial assets at fair value through profit or loss		-	4
Taxation		(115)	(257)
Free cash flow		2,430	201
Acquisitions and disposals		96	(256)
Purchase of equity shares (net)		(16)	(509)
Equity dividends paid		(620)	(606)
Dividends paid to non-controlling interests		(11)	(22)
Cash outflow from matured derivative financial instruments		(119)	(34)
Movement in cash collateral		(2)	-
Movement in cash received on customers' account⁸		1	13
Foreign exchange translation		92	(20)
Other non-cash movements		(25)	36
Total cash inflow/(outflow)		1,826	(1,197)
Opening net debt (as defined by the Group)		(1,439)	(242)
Closing net cash/(debt) (as defined by the Group)⁶		387	(1,439)

The components of net cash/(debt) (as defined by the Group)⁶ are as follows:

Components of net cash/(debt) (as defined by the Group)⁶	2012 £m	2011 £m
Debt-related derivative financial assets	22	56
Cash and cash equivalents	3,355	2,141
Loans - non-current	(2,967)	(2,682)
Loans and overdrafts - current	(21)	(518)
Less: Cash received on customers' account⁸	(2)	(3)
Less: Assets held in Trust	-	(403)
Less: Cash held for charitable contribution to Tanzania	-	(30)
Net cash/(debt) (as defined by the Group)⁶	387	(1,439)

Cash inflow from operating activities⁵ was £2,916m (2011 £951m), which includes down-payments received on new contracts to Saudi Arabia and Oman, and contributions in excess of service costs for the UK and US pension schemes totalling £507m (2011 £375m).

The outflow from net capital expenditure and financial investment of £293m (2011 £268m) was only marginally higher than 2011.

Dividends received from equity accounted investments, primarily MBDA, Advanced Electronics Company, FNSS and Eurofighter, totalled £94m (2011 £88m). This excludes a £424m non-cash special dividend received from MBDA during the year (see opposite).

Assets contributed to Trust comprise £25m of payments made into Trust for the benefit of the BAE Systems 2000 Pension Plan. In 2011, £137m was paid into Trust for the benefit of the Group's main pension scheme.

Taxation payments were £142m lower at £115m primarily reflecting tax refunds following the 2011 UK tax settlement and timing differences on UK and US tax payments, and reflect the level of pension deficit funding to the UK schemes.

Net cash inflow in respect of acquisitions and disposals of £96m mainly comprises the disposals of Safety Products and Safariland, and assets comprising the Tensylon business. The prior year outflow of £256m mainly comprised the acquisition of L-1 Identity Solutions, Inc.'s Intelligence Services Group, Norkom Group plc, ETI A/S, Fairchild Imaging, Inc. and stratsec.net Pty Limited (£524m), less the net proceeds from the disposal of the Regional Aircraft Asset Management business (£98m) and the Group's residual shareholding in Saab AB (£152m).

The net purchase of equity shares of £509m in the prior year included 184 million shares purchased under the buyback programme at a cost of £500m (excluding transaction costs of £3m).

As a consequence of movements in US dollar and Euro exchange rates during the year, there has been a cash outflow from matured derivative financial instruments of £119m (2011 £34m) from rolling hedges on balances with the Group's subsidiaries and equity accounted investments.

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

Net cash (as defined by the Group)⁶ is £387m, a net inflow from the net debt position⁶ of £1,439m at the start of the year. Cash and cash equivalents of £3,355m (2011 £2,141m) are held primarily for pension deficit funding, payment of the 2012 final dividend, the share repurchase programme and management of working capital.

In June 2012, the Group issued a £400m, ten-year bond with an annual coupon of 4.125% intended for general corporate purposes, including the repayment of debt securities at maturity in 2014.

The maturity profile of the borrowings component of net cash is illustrated in the chart below. Details of the Group's objectives and policies regarding net cash/(debt) are provided on page 36.

Balance sheet

Summary balance sheet	2012 £m	2011 £m
Intangible assets	10,928	11,465
Property, plant and equipment, and investment property	2,407	2,626
Equity accounted investments and other investments	270	788
Other financial assets and liabilities (net)	(50)	(219)
Tax assets and liabilities (net)	951	975
Pension deficit (as defined by the Group)	(4,560)	(4,217)
Working capital	(6,557)	(5,677)
Net cash/(debt) (as defined by the Group)⁶	387	(1,439)
Net liabilities of disposal group held for sale	(2)	(3)
Net assets	3,774	4,299

Exchange rates - year end
£/$	1.624	1.554
£/€	1.232	1.197
£/A$	1.564	1.516

The £537m reduction in intangible assets to £10.9bn (2011 £11.5bn) mainly reflects amortisation (£226m), impairments (£86m) and exchange translation (£273m).

Property, plant and equipment, and investment property reduced to £2.4bn (2011 £2.6bn) mainly reflecting the sale of certain properties to the BAE Systems Pension Scheme and exchange translation.

The reduction in equity accounted investments and other investments reflects the receipt of a £424m non-cash special dividend from MBDA.

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

Movement in the pension deficit (as defined by the Group)	£m
Total IAS 19 deficit at 1 January 2012	(5,585)
Actual return on assets above expected return	689
Increase in liabilities due to changes in assumptions	(1,723)
Additional contributions from assets held in Trust	428
Additional contributions from property disposals	75
Other additional contributions in excess of service cost	195
Recurring contributions in excess of service cost	237
Past service cost	(27)
Curtailment gains	26
Net financing charge	(72)
Foreign exchange translation	38
Movement in US healthcare schemes	11
Total IAS 19 deficit at 31 December 2012	(5,708)
Allocated to equity accounted investments and other participating employers	1,148
Group's share of IAS 19 deficit at 31 December 2012	(4,560)
Assets held in Trust	-
Pension deficit (as defined by the Group)	(4,560)

The increase in the Group's share of the pre-tax pension deficit mainly reflects reductions in real discount rates in both the UK and US. A net deferred tax asset of £1.1bn (2011 £1.2bn) relating to the Group's pension deficit is included within net tax assets and liabilities, and disclosed in note 18 to the Group accounts.

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

There was a £0.9bn decrease in working capital mainly reflecting a net increase in advance contract funding and utilisation of provisions.

1 Including share of equity accounted investments.

2 Order backlog comprises funded and unfunded unexecuted customer orders, and is stated after the elimination of intra-group orders.

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 Excludes the £428m contribution from Trust to the UK pension schemes and the £29.5m charitable contribution for the benefit of the people of Tanzania in connection with the global settlement with the UK's Serious Fraud Office in 2010, both made in 2012, as the amounts had been deducted from the Group's net cash/(debt).

6 See note 10 to the Group accounts.

7 See note 9 to the Group accounts.

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

Note and page references used above refer to the Annual Report 2012 that can be viewed on the Company's website.

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 experiencing serious financial difficulties, affordability continues to be a key focus for customers.

Impact

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

Mitigation

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

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

See page 22 for more information on the Group's five home markets

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

See page 16 for more information on the Group's strategy

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.

See page 22 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 2012, the Group's financial performance was impacted by a delay in the award of a contract amendment from the Kingdom of Saudi Arabia relating to price escalation on the Salam Typhoon programme. Negotiations on the contract continue in 2013.

Mitigation

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

See page 55 for more information on the Group's major programmes

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

To mitigate risk on UK Ministry of Defence contracts, development programmes are normally contracted with appropriate levels of risk being initially held by the customer. Subsequent production programmes are priced when a platform's development has reached sufficient maturity. A variety of contract structures are used to mitigate risk on production programmes, such as incentive arrangements, whereby the customer and contractor share cost savings and overruns against target prices.

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

See page 55 for more information on the Group's order backlog by major programme and reporting segment

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 the Group's mandated Lifecycle Management (LCM) process at the operational level.

Robust bid preparation and approvals processes are well established throughout the Group, with decisions required to be taken at the appropriate level in line with clear delegations of authority. The consistent application of metrics is used to support the review of individual contract performance.

See page 84 for more information on LCM which mandates project management processes

Component availability, subcontractor performance and key suppliers

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

Description

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

Impact

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

Mitigation

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

See page 21 for more information on suppliers

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 three years, to monitor the Group's compliance with its respective commitments under those settlements and its compliance obligations going forward.

See page 40 for more information on the Group's approach to business conduct

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, including contracts where the Group is the current incumbent.

The Group's ability to compete for contracts depends in particular on: the strength of its intellectual property rights and technical knowhow; the effectiveness and innovation of its research and development programmes; its ability to offer better programme performance than its competitors at a lower cost to its customers; and the readiness of its facilities, equipment and personnel to undertake the programmes for which it competes.

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

Impact

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

Mitigation

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

See page 22 for more information on the Group's five home markets

Pension funding

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

Description

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

Impact

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

Mitigation

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

In future, the growth of the defined benefit liabilities is expected to be curtailed as follows:

- With effect from April 2012, new employees in the UK are offered membership of a defined contribution scheme rather than the previous defined benefit/defined contribution hybrid scheme. Existing members of the Group's legacy UK plans are unaffected by this change;

- With effect from January 2013, all employees in the US are offered membership of a defined contribution scheme (401(k)) and no longer accrue salary-related benefits in defined benefit schemes; and

- In February 2013, with the agreement of the Company, the trustees of the BAE Systems 2000 Pension Plan entered into an arrangement with Legal & General to insure against longevity risk for the current pensioner population, covering £2.7bn of pension scheme liabilities. This will reduce the funding volatility relating to increasing life expectancy.

See page 34 for more information on the Group's pension accounting and funding valuations, and deficit recovery plans

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.

See page 23 for more information on exports

Acquisitions

The anticipated benefits of acquisitions may not be achieved.

Description

The Group considers investment in value-enhancing acquisitions where market conditions are right and where they deliver on its strategy. Whether the Group realises the anticipated benefits from these transactions depends upon the successful integration of the acquired businesses, as well as their post-acquisition performance in the markets in which they operate.

Impact

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

Mitigation

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

See page 10 for more information on the Group's recent M&A activity

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.

See page 145 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 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.

See page 36 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.

See page 24 for an overview of the Cyber & Intelligence reporting segment

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

Page references used above refer to the Annual Report 2012 that can be viewed on the Company's website.

REPORTING SEGMENTS PERFORMANCE REVIEW

ELECTRONIC SYSTEMS

Electronic Systems, with 13,000 employees¹, comprises the US and UK-based electronics activities, including electronic warfare systems and electro-optical sensors, military and commercial digital engine and flight controls, next-generation military communications systems and data links, persistent surveillance capabilities, and hybrid electric drive systems.

Operational key points

- Sustained a leadership position in the airborne electronic warfare market

- Strengthened position in high growth commercial aircraft electronics market

- Won key development contracts in the classified area

- Continued focus on increasing productivity and efficiency

- Business recovery complete following disruption from flood damage at the Johnson City facility

- £0.2bn of research and development expenditure⁵ in 2012

Financial key points

- Underlying order backlog^1,4 increased in challenging business environment

- Sales¹ reduction from operational tempo-driven activity on Thermal Weapon Sights

- Return on sales of 14.2%

- Cash flow³ conversion of underlying EBITA² at 95%, before pension deficit funding

		2012	2011	2010
Funded order intake¹	KPI	£2,540m	£2,620m	£2,894m
Order backlog^1,4		£3.6bn	£3.6bn	£3.5bn
Sales¹	KPI	£2,507m	£2,645m	£2,969m
Underlying EBITA²	KPI	£356m	£386m	£455m
Return on sales		14.2%	14.6%	15.3%
Cash inflow³	KPI	£256m	£268m	£367m

KEY CHARACTERISTICS

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

- No programme greater than 5% of sales

- Over 67% of 2012 sales were fixed price-based

- Cutting-edge technology and capabilities, with significant levels of research and development invested in the business

- 17% of total sales are to commercial customers

Financial performance

Order backlog^1,4, excluding the impact of US dollar exchange translation, increased despite the impact of contracting delays as the US administration operated federal budgets under Continuing Resolution limitations.

On a like-for-like basis, sales¹ reduced by 7% on 2011 primarily reflecting the completion of deliveries of Thermal Weapon Sights as operational tempo-driven activity reduces. Sales in the Commercial Aircraft electronics business increased by 11%.

Underlying EBITA² was £356m (2011 £386m). Return on sales was 14.2% (2011 14.6%).

Cash flow³ conversion of underlying EBITA² was 95%, before pension deficit funding.

Operational performance

Following severe flooding in September 2011, operations formerly conducted at the Electronic Systems facility in Johnson City, New York, have been moved to Endicott, New York. After a year of recovery efforts, operational capability has been restored and programmes are back on schedule.

Electronic Combat The business maintains its leadership position in the electronic warfare market, with continued focus on the F-35 Lightning II Systems Design and Development programme, planning for the flight test programme starting in 2013. The business progressed Low-Rate Initial Production (LRIP) Lot 5 and 6 deliveries during the year, and has responded to the LRIP Lot 7 request for proposal, which includes production aircraft for international customers.

In support of the US Navy's Next-Generation Jammer, which will replace the ageing jammer currently on certain US Navy aircraft, a $20m (£12m) modification was received to expand the scope of the existing technology maturation contract. BAE Systems is one of three bidders on the next phase technology development contract valued at approximately $300m (£185m).

The Digital Electronic Warfare System (DEWS) continues to secure new contract awards, including a six-year, $0.4bn (£0.2bn) contract to upgrade 70 F-15 aircraft for the Royal Saudi Air Force. Initial flight testing providing advanced radar warning and countermeasure capabilities is scheduled to begin in March 2013. The business continues to pursue other export opportunities for the DEWS suite.

Also in international markets, the business received three contracts totalling $86m (£53m) to provide F-16 support equipment, test systems and spares to the governments of Oman, Indonesia and Iraq for delivery by early 2014.

Survivability & Targeting In early 2012, the US Army awarded the business a two-year, $38m (£23m) contract to develop the Common Infrared Countermeasures capability. Using its Boldstroke^® system, an integrated aircraft survivability system for protecting aircraft from infrared-guided missiles and other threats, the business will provide increased system capability in a smaller, more energy efficient package. Following a competitor protest, the award was upheld by the US Government Accountability Office and work restarted in June. Initial test systems are in progress, with the first units scheduled for government acceptance ahead of schedule.

The Advanced Precision Kill Weapon System programme passed tests on several airborne platforms. With deployment in theatre and positive performance feedback, the US Navy has authorised Full-Rate Production of the system and awarded a base contract valued at $28m (£17m) for 985 units and a Full-Rate Production option of $41m (£25m) for 1,476 units.

Under a $37m (£23m) subcontract, BAE Systems continues to support the engineering and manufacturing development of the Joint and Allied Threat Awareness System, a next-generation warning system to enhance aircraft survivability for the US Navy.

The Thermal High-Altitude Area Defence seeker programme provides a transportable, rapidly deployable, ground-based capability to intercept and destroy ballistic missiles inside or outside the atmosphere during their final phase of flight. BAE Systems has received an initial amount of $87m (£54m) in combined US government and Foreign Military Sales to the United Arab Emirates on the programme, including a base quantity of 146 seekers with an option for up to a further 147.

Deliveries of Thermal Weapon Sights to the US Army in support of military operations in Iraq and Afghanistan were completed.

BAE Systems has responded to a US Army request for proposal for its Joint Effects Targeting System programme, which has been designed to enhance dismounted, forward-deployed soldiers' ability to accurately locate positions and target precision-guided munitions fire support. An award decision is expected in the first half of 2013 for a 26-month Engineering and Manufacturing Development phase, which will be followed by a Low-Rate Initial Production award competition.

Communications & Control The F-35 Lightning II programme continues to be a key platform for the Group's avionics products. Deliveries continue on plan for the active inceptor system out of Rochester, UK, and the vehicle management system out of Endicott, New York. The business has continued to pursue additional opportunities expanding its content on the platform.

Leveraging commercial technology to create a low size, weight and power design, the business launched the PHOENIX™ family of networking radios to integrate easily into US Army ground combat vehicles. In October, the business responded to the US Army's next-generation Mid-tier Networking Vehicular Radio request for proposal with its two-channel PHOENIX-SC radio, with an award decision expected in 2013.

Intelligence, Surveillance & Reconnaissance (ISR) The business continues to provide Wide Area Airborne Surveillance capability for the US Air Force and US Army. These key programmes are based on two wide-area, high-resolution imaging sensor systems, the Airborne Wide Area Persistent Surveillance System, which has been operational for over 12,000 hours in theatre, and the Autonomous Real-time Ground Ubiquitous Surveillance - Imaging System. These systems enable observation of very wide areas of interest with sufficient imagery resolution to meet intelligence and surveillance needs.

The business is providing state-of-the-art processing capabilities to Boeing for the US Navy's P8A Poseidon programme. The mission computer suite has robust, flexible and rugged open architecture providing high performance in the military environment. Over 30 initial systems have been delivered and a contract for Full-Rate Production Lot 1 has been awarded.

As a leader in the Identification Friend or Foe market, the business has a strong order backlog⁴ driven by the Mode 5 cryptographic system upgrades, which have been incorporated into products deployed on multiple US Department of Defense platforms. Production has begun and is expected to continue to the end of the decade.

Commercial Aircraft electronics The business continues to be well positioned for growth in worldwide demand for commercial aviation through its engine and flight controls activities.

FADEC Alliance, a new joint venture between FADEC International (a joint venture between BAE Systems and Sagem) and GE Aviation, began development of the Full-Authority Digital Engine Controls for CFM International's LEAP and GE Aviation's Passport family of engines.

Ongoing development of the primary flight control electronics and active side sticks for Embraer's KC-390 military transport aircraft is raising the Group's profile in the emerging Brazilian aerospace industry. The first flight of the KC-390 is expected in 2014.

HybriDrive^® propulsion BAE Systems has delivered 3,800 hybrid diesel-electric propulsion systems since 2004, which are now in service with over 60 operators.

In April 2012, European bus manufacturer, Iveco Irisbus, announced that it had been awarded Europe's largest single order for 132 diesel-electric hybrid buses for Dijon and Bordeaux in France. Prior to this award, Iveco Irisbus had delivered approximately 20 diesel-electric hybrid buses equipped with BAE Systems' propulsion systems.

The business has progressed solutions for battery reliability issues in the field from its first-generation lithium-ion battery packs. In addition, ownership of the current battery supplier has changed and the business is working with the new owner to minimise the impact on the Group and its customers.

Looking forward

Efforts to reduce the US government's budget deficit are likely to impact all areas of government spend. A Continuing Resolution on the 2013 fiscal budget has been passed through to March 2013 and the risk of further reductions in US defence budgets remains, including the impact of sequestration.

Whilst likely funding reductions and the resultant slow down or cancellation of ongoing and new programmes could impact the business, Electronic Systems remains well positioned with a balanced portfolio that will enable it to respond to changing US Department of Defense priorities whilst maintaining its emphasis on cost reduction. The business expects to benefit from its incumbent positions on core platforms, and from positions in areas such as commercial aircraft electronics and international defence programmes.

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 31).

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 Comprises funded and unfunded unexecuted customer orders.

5 Includes both Group-funded and customer-funded expenditure.

CYBER & INTELLIGENCE

Cyber & Intelligence, with 8,200 employees¹, comprises the US-based Intelligence & Security business and UK-headquartered BAE Systems Detica business, and covers the Group's cyber, secure government, and commercial and financial security activities.

Operational key points

- The US-based business continues to perform well on existing programmes and secured strategic contract awards with existing customers

- The US-based business continues to invest in differentiating technologies, such as activity-based intelligence and cybersecurity, including a leading-edge network operations and security centre environment, to support a pipeline of submitted bids of $2.9bn (£1.8bn) at the end of 2012

- BAE Systems Detica continues to invest in products and capability, including its Security Operations Centre

- BAE Systems Detica awarded a contract by Vodafone for next-generation enterprise secure networks for mobile devices

Financial key points

- Funded order intake¹ and sales¹ were broadly unchanged from 2011

- Return on sales impacted by investment in the BAE Systems Detica business for future growth

- Cash flow³ conversion of underlying EBITA² at 91%

		2012	2011	2010
Funded order intake¹	KPI	£1,454m	£1,443m	£1,300m
Order backlog^1,4		£1.0bn	£1.1bn	£0.9bn
Sales¹	KPI	£1,402m	£1,399m	£1,201m
Underlying EBITA²	KPI	£124m	£136m	£108m
Return on sales		8.8%	9.7%	9.0%
Cash inflow³	KPI	£113m	£123m	£89m

KEY CHARACTERISTICS

Intelligence & Security:

- Delivers cost-effective IT solutions that solve complex problems of collaboration and security for the US national security community

- Delivers real-time threat assessments that rapidly inform critical security actions. The business is a leading provider of specialised security and intelligence operational support and solutions in the US

- Delivers automated, efficient and reliable intelligence processing, data management systems and imagery mapping tools for the US intelligence and defence communities

BAE Systems Detica:

- Expanding in the fast-growing cybersecurity market

- Increasing focus on products and services for the financial services and telecommunications sectors

- Providing core intelligence technology and managed services for government clients

Financial performance

Funded order intake¹ and sales¹ were broadly unchanged from 2011.

Order backlog^1,4 reduced to £1.0bn (2011 £1.1bn). There is a significant number and value of competitive bids in the Intelligence & Security business awaiting award decisions.

Underlying EBITA² was £124m (2011 £136m). Return on sales reduced to 8.8% (2011 9.7%) reflecting increased levels of investment in the BAE Systems Detica business in support of targeted future growth in commercial and international markets.

Operating cash inflow³ was £113m (2011 £123m), which represents a conversion of underlying EBITA² of 91%.

Operational performance

Intelligence & Security

The US-based Intelligence & Security business delivers a broad range of services, including secure IT solutions, cybersecurity, geospatial solutions and intelligence analysis to enable the US military and government to recognise, manage and defeat threats. The business is structured into four key business areas that provide specific domain expertise, whilst working closely together to provide enterprise-wide support to a range of customers, and key agencies in the intelligence, defence, homeland security and civilian markets.

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

Through 2012, work continued on the Solutions for the Information Technology Enterprise Indefinite Delivery, Indefinite Quantity (IDIQ) contract, with the business as the prime contractor, receiving task orders now worth a total of $344m (£212m). Since the project began, approximately 700 security-cleared IT experts, deployed across 84 locations in 14 countries, have assisted the US Defense Intelligence Agency in delivering IT services to 50,000 Department of Defense personnel by standardising global IT operations and reducing the time taken to deliver technician services.

Continuing work on the Next-Generation Desktop Environment (NGDE) programme for the US Defense Intelligence Agency, the business has virtualised hundreds of applications and deployed data centre infrastructure to 13 sites, now supporting over 12,000 global analyst workstations. The NGDE is an enterprise networking environment based on virtual desktop infrastructure.

The Security Operations Centre in the US protects the Group's networks by monitoring its global intranet, with more than 100,000 network interfaces serving employees across five home markets and offices in over 100 countries. Services include security engineering, risk analysis, support of IT hardware and software, IT engineering and applications, and global enterprise monitoring and security incident response.

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

The business was awarded a five-year, $106m (£65m) contract by the National Geospatial-Intelligence Agency (NGA), under which engineers will design, develop and implement a transformational solution enabling the US government to evolve from its current image library to a standardised image storage, management and dissemination process. This is an important strategic win that will drive future GEOINT and imagery systems development.

In December 2012, BAE Systems was awarded a multi-year, $60m (£37m) contract to provide activity-based intelligence systems, tools and support for mission priorities for the NGA. This award is a task order under the NGA's Total Application Services for Enterprise Requirements programme, a five-year IDIQ contract.

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

The business continues to provide approximately 450 security cleared analysts working alongside forward deployed US defence personnel as part of the Counter Improvised Explosive Device (C-IED) programme, with a total value of funded orders of approximately $450m (£277m) over the two years of the contract. The business is now working with the customer to manage staffing levels in line with reducing mission requirements.

The business is executing well on the Full Motion Video and Geospatial Imagery Analysis contract awarded in 2011, with a contract value of $402m (£248m) and over 400 employees being utilised.

SpecTal provides US government customers with specialised security and intelligence mission support, including intelligence analysis, targeting operations support, training and IT deployment.

With the 2011 acquisition of L-1 Identity Solutions' Intelligence Services Group, a key contract with an intelligence community customer was gained. The contract has since been re-competed and SpecTal was part of the winning bid team serving as a major subcontractor on the five-year programme.

BAE Systems Detica

BAE Systems Detica continues to build a business that provides security and intelligence products and services to both government and commercial customers. In July, the stratsec business in Australia, acquired in 2011, and a new security entity in India were integrated into BAE Systems Detica. The business is also focused on developing opportunities in the Americas' commercial market.

Cyber Security Demand is growing across both government and commercial sectors, with contracts secured with a global law firm and a US financial institution in 2012. The Security Operations Centre became fully operational in 2012, providing services to detect and remediate advanced cyber attacks for clients.

The business was one of four companies selected by the UK's Government Communications Headquarters (GCHQ) to work in partnership on a new Cyber Incident Response pilot programme, a government quality-assured service that organisations can turn to when they have suffered a cybersecurity incident.

Detica NetReveal^® As a provider of risk, fraud and compliance solutions to the global financial services industry, orders of £74m were received during the year, including contracts in new business areas of healthcare and insurance in the US.

Global Communications Solutions is a provider of specialist communications equipment, including monitoring and lawful intercept solutions, for use by government and commercial clients.

During 2012, a review of routes-to-market was carried out, resulting in necessary changes which adversely impacted the 2012 financial performance of the business.

Services The business, which provides consultancy, systems integration and managed services, was impacted by challenging market conditions in both the UK government and commercial sectors.

Orders in the year included a contract under a business change programme for a complex UK cross-government programme and a managed services contract with Vodafone for the provision of next-generation enterprise secure networks for mobile devices. The business was unsuccessful in its bid to provide services under the UK government's Disclosure and Barring Service.

The business continues to develop opportunities internationally, in both the Middle East and, with the addition of stratsec, the Asia Pacific region.

Looking forward

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

The US market is experiencing delays in procurement awards and descoping of existing contracts as US government agencies look to reduce IT budgets. Sales in 2013 are expected to be impacted by the completion of the C-IED contract as the US withdraws from Afghanistan. However, the business expects an enduring need to provide data management solutions, including the rapid collection, processing and dissemination of data to intelligence community customers and the US military. The business is well prepared to compete in this price-sensitive market through its customer intimacy, innovation and continued cost management.

BAE Systems Detica expects growth in cyber and intelligence, both in the UK and overseas government markets, with increasing demand for products and services in commercial markets to manage cyber threats, counter financial fraud and improve compliance, including next-generation security for mobile devices.

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 31).

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 Comprises funded and unfunded unexecuted customer orders.

PLATFORMS & SERVICES (US)

Platforms & Services (US), with 21,300 employees¹, comprises the US-headquartered Land & Armaments business, with operations in the US, UK, Sweden and South Africa, together with US-based services and sustainment activities, including ship repair and munitions services.

Operational key points

- Growth in US ship repair activities

- Executing munitions infrastructure and facility operations management contracts

- Strategic international win with Korean F-16 upgrade down-select

- Continued to protect Bradley franchise with $376m (£231m) in related awards

- Awarded a $750m (£462m) contract for CV90 armoured combat vehicles to Norway

- Letter of Request received from Indian government for 145 M777 howitzers

- Continued consolidation in the Land & Armaments business

- Business disposals of Safety Products, Safariland and Tensylon completed

Financial key points

- Sales¹ reduced by 2% in Support Solutions business and by 23% in Land & Armaments business

- Return on sales increased to 8.8% in Support Solutions business and reduced to 8.6% in Land & Armaments business

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

		2012	2011	2010
Funded order intake¹	KPI	£5,010m	£5,077m	£5,605m
Order backlog^1,4		£8.4bn	£8.7bn	£9.1bn
Sales¹	KPI	£4,539m	£5,305m	£7,671m
Underlying EBITA²	KPI	£394m	£478m	£728m
Return on sales		8.7%	9.0%	9.5%
Cash inflow³	KPI	£314m	£410m	£967m

KEY CHARACTERISTICS

Support Solutions:

- US naval ship repair and modernisation

- Complex infrastructure services and operations support

- Aircraft sustainment and modernisation

- Soldier survivability products

Land & Armaments:

- Tracked combat vehicles

- Tactical wheeled vehicles

- Artillery, ammunition and naval armaments

Financial performance

Sales¹ were £4.5bn (2011 £5.3bn), representing a like-for-like reduction of 13%. Sales¹ at Support Solutions were just 2% below 2011. Like-for-like sales¹ at Land & Armaments reduced by 20% primarily reflecting the completed Family of Medium Tactical Vehicles programme, and lower volumes on Bradley, Caiman and Mine Resistant Ambush Protected vehicles.

Underlying EBITA² was £394m (2011 £478m). Return on sales reduced to 8.7% (2011 9.0%). Return on sales at Support Solutions increased from 7.5% to 8.8% benefiting from certain legal settlements. Return on sales at Land & Armaments reduced from 9.9% to 8.6% reflecting accelerated rationalisation charges in respect of the Newcastle vehicle manufacturing site in the UK and certain legal claims.

Operating cash inflow³ reduced to £314m (2011 £410m) reflecting continued investment in the UK munitions facilities in the Land & Armaments business. Excluding pension deficit funding, cash flow³ conversion of underlying EBITA² at Support Solutions and Land & Armaments was 100% and 83%, respectively.

Operational performance

Support Solutions

The US-based ship repair business achieved 2012 commitments under its Multi-Ship, Multi-Option contract vehicles with the US Navy, receiving superior scores on award fee assessments. The business was awarded new commercial maritime construction contracts totalling $190m (£117m), including four platform supply vessels and two barges.

In the complex infrastructure services market, the business secured the Holston Army Ammunition Plant award of a follow-on five-year, $145m (£89m) contract for facility operations. In addition, the business completed the planned transition to begin operating the Radford Army Ammunition Plant on 1 July 2012 under a contract worth approximately $850m (£523m) over ten years. In October 2012, the business was notified that it had not been awarded the Lake City Army Ammunition Plant management contract.

The business won a five-year, $44m (£27m) Navy Munitions Command - Hawaii contract to handle and store munitions, which continues more than 27 years of distinguished service recognised by the US Navy.

The US Naval Air Warfare Center Aircraft Division awarded a follow-on five-year, $193m (£119m) contract to provide Command, Control, Communications, Computers and Intelligence (C4I), lifecycle support, integration and test engineering, and technical services, supporting a broad range of air, land and sea platforms.

The business was awarded a $60m (£37m) task order under the US Department of Defense's Joint Improvised Explosive Device Defeat Organization contract to develop and implement a five-year training programme.

Support Solutions continues to pursue international aircraft upgrade and modification opportunities. In August, the Republic of Korea selected BAE Systems to upgrade avionics and electronic systems on its fleet of more than 130 F-16 aircraft. The programme is expected to be contracted in 2013 and is forecast to be worth over $500m (£308m) over ten years.

In November, the business was awarded a contract by the US Navy for depot level maintenance and logistics support for more than 360 T-34/T-44/T-6 training aircraft. If all options are exercised, the contract would be valued at more than $400m (£246m) over five years.

BAE Systems is pursuing a potential bid as prime contractor for the US Air Force's T-X programme to replace the T-38 jet training system with its Hawk trainer aircraft. The programme is valued at between $11bn (£7bn) and $17bn (£10bn). The US Air Force is expected to announce the timing of its request for proposals in 2013.

In the Protection Systems business, contracts have been secured totalling over $200m (£123m) for the supply of Enhanced Small Arms Protective Inserts, Tactical Vests and Modular Lightweight Load Carrying Equipment.

In November, the Group announced a definitive agreement to acquire Marine Hydraulics International, Inc., a marine repair, overhaul and conversion company with shipyard, pier and waterfront facilities in Norfolk, Virginia. The proposed acquisition, which is expected to complete during the first quarter of 2013, complements the existing ship repair business.

Land & Armaments

During 2012, Land & Armaments completed the disposals of its Safety Products, Safariland and Tensylon businesses. The disposal of the Commercial Armored Vehicles business is expected to complete in the first quarter of 2013. In September, the business announced that production of military equipment at its Fairfield, Ohio, facility would be moved to Sealy, Texas, in early 2013. The Protection Systems business, formerly reported in Land & Armaments, was transferred to Support Solutions at the start of the year. Management of the Combat Vehicles (UK) business was transferred to Platforms & Services (UK) from 1 October 2012.

Vehicle Systems This division comprises the franchises in tracked and wheeled vehicles.

The business received a $306m (£188m) contract modification in August to upgrade 353 Bradley fighting vehicles, extending Bradley activity into 2014. This production contract is in addition to $70m (£43m) to purchase upgrade materials for the Bradley programme.

The business has received the Paladin Integrated Management (PIM) Low-Rate Initial Production request for proposal scheduled for submission in early 2013. Testing continues on the contracted prototypes activity. An award decision is expected in 2013.

On the Ground Combat Vehicle (GCV) programme, the business continues test work under the $450m (£277m) technology development phase. Continuing development testing demonstrates that the technology provides more power, efficiency and vehicle performance than comparable conventional drive systems.

In January 2012, the business was awarded a £65m contract to supply 48 BvS10 armoured all-terrain vehicles and associated support to Sweden. The business was also awarded a £38m contract to regenerate the British Royal Marines' fleet of BvS10 vehicles. The last of 53 BvS10s ordered by France was delivered by year end.

In June, the business was awarded a $750m (£462m) contract to upgrade Norway's existing 103-vehicle CV90 fleet and build new vehicle chassis to deliver 144 CV90s in five different configurations, including a variant equipped with a sensor suite for improved surveillance capability.

All deliveries of the Caiman Multi-Terrain Vehicle were delivered to contract schedule, with re-fit and integration of 592 vehicles completed at the Mine Resistant Ambush Protected (MRAP) sustainment facility in November.

In August, the business was selected as part of the industry team led by Lockheed Martin for the engineering and manufacturing development phase of the US government's potentially large Joint Light Tactical Vehicle programme.

The South African business continues to execute on a £39m contract for 73 RG31 Mobile Mortar Platforms for the United Arab Emirates and a £43m order for 110 RG32 patrol vehicles for the Swedish Defence Force that were secured in December 2011.

The business secured places on all the amphibious trade studies, demonstrators and hull survivability demonstrations, allowing the US Marine Corps customer to evaluate design concepts based on a new design or an upgrade to current vehicles.

In November, Denmark announced that eight bids had been received in response to its requirement for up to 450 armoured vehicles. BAE Systems bid a version of the CV90, which Denmark already operates. The award decision is expected in late 2013.

In Canada, following a one-year delay, a new request for proposal was released for up to 138 Close Combat Vehicles. BAE Systems submitted a proposal based on its CV90 armoured combat vehicle.

The business was unsuccessful in its bid for the Tactical Armoured Patrol Vehicle programme for the Canadian armed forces.

Weapons Systems & Support This division comprises munitions and artillery activities.

In naval armaments, orders for six Mk110 57mm naval guns were received for the US Coast Guard and to equip the US Navy's Littoral Combat Ships.

During the year, Australia announced its intention to buy 19 M777 howitzers to augment the 35 it already operates. In addition, the Indian government has issued a Letter of Request to the US government under the US Foreign Military Sales process for the supply of 145 M777 howitzers for the Indian Army.

Under the 15-year Munitions Acquisition Supply Solution contract, the UK Ministry of Defence placed an order to meet its 2015 munitions requirement reflecting lower demand and quantities deferred from previous years. This anticipated lower volume results from armed force cuts and the draw-down of Afghanistan operations. Efficiencies achieved through a £123m transformation of UK munitions manufacturing facilities and support from the UK Ministry of Defence position the business to offset this reduction with exports.

Joint ventures FNSS, BAE Systems' Turkish joint venture, continues to produce and upgrade tracked and wheeled military vehicles for international customers. Design work and successful mine testing were completed on a $559m (£344m) programme to produce 259 8x8 wheeled armoured vehicles in 12 different variants for the Malaysian Army. Production has commenced and the first Infantry Fighting Vehicles are scheduled to be delivered in 2013.

Looking forward

In February 2013, the Group was notified that the US Navy was considering the potential to cancel, defer or descope 13 ship availability contracts, resulting in the decision to issue conditional Worker Adjustment and Retraining Notification (WARN) Act notices to nearly 3,600 employees in the ship repair business.

Whilst downward pressure will be seen across the services market as a whole, potential cancellations and delays in new programmes may present opportunities to sustain and modernise existing platforms.

In the near term, Land & Armaments continues to operate in a challenging market environment. To offset these pressures and remain viable in the future, the business is investing to protect current programme positions like Bradley modernisation and UK munitions, establish new US domestic programmes such as PIM and GCV, and to win export programmes. The business continues to drive rationalisation efforts, efficiencies and cost reduction in order to remain competitive.

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 31).

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 Comprises funded and unfunded unexecuted customer orders.

PLATFORMS & SERVICES (UK)

Platforms & Services (UK), with 27,900 employees¹, comprises the Group's UK-based air, maritime and combat vehicle activities, and certain shared services activities.

Operational key points

- 46 Typhoon Tranche 2 aircraft delivered to the partner nations

- £2.5bn Typhoon and Hawk contract for Oman secured

- £446m contract awarded for European support on Typhoon

- First F-35 Lightning II aircraft accepted by the UK Ministry of Defence (MoD)

- Fifth Type 45 destroyer accepted off-contract and support provided for all Royal Navy Type 45 deployments

- Settlement reached with the Government of the Republic of Trinidad and Tobago in respect of the cancelled Offshore Patrol Vessels (OPV) programme

- Two OPVs delivered to the Brazilian Navy

- £0.8bn of customer funding received for ongoing design and development of the Successor submarine, and continuing production of the fourth Astute Class submarine

- £0.7bn of research and development expenditure⁴ in 2012

Financial key points

- Order backlog¹ increased by £2.5bn on significant awards for Oman Typhoon and Hawk and Saudi training aircraft

- 10% decrease in sales¹ pending recommencement of Salam Typhoon deliveries in 2013

- Return on sales improved to 12.2%

- Strong cash flow³ performance on significant contract advances

		2012	2011	2010
Funded order intake¹	KPI	£8,077m	£4,355m	£3,968m
Order backlog¹		£21.2bn	£18.7bn	£21.0bn
Sales¹	KPI	£5,646m	£6,258m	£6,529m
Underlying EBITA²	KPI	£689m	£658m	£522m
Return on sales		12.2%	10.5%	8.0%
Cash inflow³	KPI	£1,719m	£69m	£191m

KEY CHARACTERISTICS

- Multi-year through-life programmes

Military Air & Information:

- Full spectrum of military aircraft capabilities, including design, development, manufacture, in-service support and training for combat and trainer aircraft, and design and development of Unmanned Air Systems

- Defence information systems, such as the Falcon secure deployable communication system

Maritime:

- Full spectrum of maritime systems capabilities, including design, build, integration and commissioning, in-service support and training for naval ships, submarines, radar and combat management systems, and underwater systems

Combat Vehicles (UK):

- Design, build and through-life support of armoured vehicles

Financial performance

Funded order intake¹ in the year increased to £8.1bn following the award of significant contracts for the supply of 12 Typhoon and eight Hawk aircraft to Oman (£2.5bn), and for training aircraft for the Royal Saudi Air Force (£1.6bn).

Sales¹ in 2012 were £5.6bn, 10% lower than 2011, reflecting no contractual aircraft deliveries on the Salam Typhoon programme in 2012 and the completion of South African Gripen aircraft deliveries in 2011.

Underlying EBITA² was £689m (2011 £658m). Return on sales increased to 12.2% benefiting from strong programme execution, particularly on the European Typhoon and Type 45 programmes.

There was an operating cash inflow³ of £1,719m (2011 £69m) reflecting advances received on the Omani and Saudi contract awards. These were partially offset by the utilisation of advances on the European Typhoon programme and costs against the provision on the Omani Offshore Patrol Vessel (OPV) programme.

Operational performance

Military Air & Information

Deliveries of Typhoon Tranche 2 aircraft to the four European partner nations totalled 46 in the year. At the end of 2012, cumulative aircraft deliveries to the four nations were 169 of the contracted 236. The first ten Tranche 3 front fuselage sub-assemblies were manufactured during the year. Manufacture of sub-assemblies continues in advance of recommencement of deliveries of Typhoon aircraft to Saudi Arabia in 2013.

In December 2012, a £2.5bn contract was awarded for the supply of 12 Typhoon and eight Hawk aircraft, associated training, and support to the Royal Air Force of Oman.

The business continues to support its UK and European customers' Typhoon and Tornado aircraft, and their operational commitments through availability-based service contracts and support operations. Orders of £668m were received in the year, including a contract worth £446m for Typhoon support operations across Germany, Italy, Spain and the UK. Support volumes on Tornado are expected to decline as the number of aircraft and flying hours reduce in advance of the out-of-service date of April 2019.

Delivery of the first F-35 Lightning II aircraft was accepted by the UK MoD. The business has delivered a further 42 production aircraft fuselage assemblies to Lockheed Martin. Interim funding of £234m for the fifth and sixth Low-Rate Initial Production contracts was secured in the year and negotiations continue in respect of final funding.

Support continues to be provided to operators of Hawk trainer aircraft around the world. In partnership with Hindustan Aeronautics Limited, production of 66 Batch 1 Hawk aircraft has been completed in India. Deliveries of materials and equipment in support of licence production of the 57 Batch 2 aircraft continue and aircraft assembly in India is ongoing. The business has provided an initial response to a request for proposal for an additional 20 aircraft to India.

Following the 2011 government-to-government Memorandum of Understanding, BAE Systems and Dassault Aviation have jointly secured an order from the UK and French governments for a Future Combat Air System demonstration programme preparation phase to plan how to mature and demonstrate critical technology and operational aspects for an Unmanned Combat Air System.

In the defence information domain, the Falcon secure deployable communication system is now in service with the British Army and RAF.

Under a continuing focus on cost reduction and efficiency, there has been a net headcount¹ reduction of approximately 1,400 in the year.

Maritime

Cumulative savings of £342m have been reported to the MoD against commitments made under the 15-year Terms of Business Agreement (ToBA), significantly ahead of target. In line with the ToBA, the Group is progressing discussions with the MoD regarding future shipbuilding strategy after completion of block build for the Royal Navy's new aircraft carriers, and as the business transitions to the design and manufacture phase of the Type 26 Global Combat Ship.

The largest hull section of the first of the Royal Navy's new aircraft carriers, the Queen Elizabeth, has been delivered to Rosyth for assembly with the other completed hull sections. Block manufacture for the second ship, Prince of Wales, is well underway. BAE Systems and its Aircraft Carrier Alliance partners are working to finalise the detailed design changes required for operation of the short take-off and vertical landing variant of F-35 Lightning II on the carriers.

Defender, the fifth Type 45 destroyer, was accepted by the Royal Navy in July. The final ship, Duncan, has undertaken her sea trials and is on schedule for delivery in 2013. The Type 45 support contract met all ship deployment dates during the year.

Settlement with the Government of the Republic of Trinidad and Tobago, in respect of the cancelled OPV programme, was reached in November at an amount consistent with provisions held. In January 2013, £101m of the £131m cash settlement was paid, with the remainder due in May 2013. Following the agreement in December 2011 for the sale of the OPVs to the Brazilian Navy, the first two vessels were delivered in the year, with the third ship due for delivery in 2013.

Following an incident at sea during gunnery trials on the first Khareef Class corvette for Oman, detailed engineering, schedule and contract reviews have resulted in revised delivery dates for the ships. This has resulted in an increase in costs to complete the contract. The ships are expected to be delivered in 2013 and 2014.

The Type 26 Global Combat Ship assessment phase contract continues and is intended to be completed by the end of 2014. The Type 26 is planned to replace the Royal Navy's Type 23 frigates.

The warship support modernisation initiative contract, for delivery of services at Portsmouth Naval Base, continues to exceed contract performance. A new maritime support delivery framework will replace the existing contract in 2013.

The Advanced Radar Target Indication Situational Awareness Navigation (ARTISAN) 3-D radar successfully passed its factory acceptance test and the first of class has been fitted to HMS Iron Duke, a Type 23 frigate. The programme continues on track towards full production.

The Maritime Composite Training System, a shore-based warfare operator training solution, was declared ready for training by the Royal Navy in August having completed a year of initial training. Over 3,000 Royal Navy personnel have now been trained through the facility.

The Sting Ray lightweight torpedo delivery contract for the Norwegian government was completed in December.

Ambush, the second of class Astute submarine for the Royal Navy, departed for sea trials in the second half of the year. The operational handovers of both HMS Astute, the first of class, and Ambush are planned for 2013. Pricing for the fourth boat has been agreed with the customer and long lead procurement has commenced on the sixth and seventh boats.

BAE Systems secured a further £383m of funding from the UK MoD for the design and development phase of the Successor submarine programme, to replace the Vanguard Class fleet, and now has approximately 1,000 people engaged on the programme.

Combat Vehicles (UK)

The Terrier combat engineer vehicle contract concluded its reliability growth confirmation trials, which identified a number of required engineering changes. This has resulted in an increase in costs to complete the contract. Final trials are complete and deliveries of the 60 vehicles will commence in 2013.

Following delivery of the Terrier vehicles, the Newcastle facility will close, and support to Terrier and existing vehicles used by the British Army customer will be provided from the remaining facility at Telford and satellite offices.

Looking forward

Platforms & Services (UK) has a strong order backlog of long-term committed programmes and an enduring support business.

In Military Air & Information, sales are underpinned by military aircraft production on Typhoon, Hawk and F-35 Lightning II, and in-service support for existing and legacy combat and trainer aircraft. There are significant opportunities to secure future Typhoon export contracts to Malaysia, the United Arab Emirates and Saudi Arabia.

In Maritime, sales are underpinned by the Queen Elizabeth Class carrier and Astute Class submarine manufacturing programmes, the 15-year ToBA, the maritime support delivery framework, and the design of the Successor submarine and Type 26. The through-life support of these platforms and Type 45, together with their associated command and combat systems, provides sustainable business in technical services and mid-life upgrades.

In Combat Vehicles (UK), sales beyond the Terrier programme depend upon through-life support of legacy platforms.

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 31).

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 Includes both Group-funded and customer-funded expenditure.

PLATFORMS & SERVICES (INTERNATIONAL)

Platforms & Services (International), with 15,500 employees¹, comprises the Group's businesses in Saudi Arabia, Australia, India and Oman, together with its 37.5% interest in the pan-European MBDA joint venture.

Operational key points

- Salam price escalation negotiations ongoing

- £5.0bn of orders received under the Saudi British Defence Co-operation Programme (SBDCP) for training aircraft and support to the end of 2016

- First Landing Helicopter Dock hull arrived in Australia for completion and second hull launched in Spain

- MBDA export order for MICA air-to-air missiles to India

Financial key points

- Order backlog¹ increased reflecting multi-year support and training awards under the SBDCP

- Like-for-like increase in sales¹ of 9% on increased support activity on the Salam Typhoon programme and weapons deliveries under the Tornado Sustainment Programme (TSP)

- Strong operating cash flow³ reflecting acceleration of advances on TSP

		2012	2011	2010
Funded order intake¹	KPI	£5,266m	£3,319m	£2,694m
Order backlog¹		£9.3bn	£8.3bn	£9.1bn
Sales¹	KPI	£4,071m	£3,794m	£4,325m
Underlying EBITA²	KPI	£417m	£449m	£449m
Return on sales		10.2%	11.8%	10.4%
Cash inflow³	KPI	£506m	£80m	£190m

KEY CHARACTERISTICS

Saudi Arabia:

- Long-term contracts from the Royal Saudi Air Force for equipment, training and support, including Salam Typhoon aircraft

- Support to Royal Saudi Navy minehunter programme

Australia:

- Strategic capability and sustainment provider to the Australian Defence Force

- Delivering defence contracts across the air, land, maritime and electronics domains

India:

- Long-standing military aircraft relationships

MBDA:

- Pan-European guided weapons joint venture

Oman:

- In-service base across air, land and maritime products

Financial performance

Order intake¹ increased to £5.3bn (2011 £3.3bn) reflecting the award of orders for continuing support of the operational capability and training of the Saudi armed forces under the Saudi British Defence Co-operation Programme (SBDCP) to the end of 2016. Contracts were previously let on an annual basis.

Sales¹ in 2012 were £4.1bn, 9% higher than 2011 on a like-for-like basis, reflecting increased support activity on the Salam Typhoon programme and weapons deliveries under the Tornado Sustainment Programme (TSP).

Underlying EBITA² was £417m (2011 £449m). Return on sales reduced to 10.2% (2011 11.8%) as 2011 benefited from strong performance and risk reduction on the Tornado upgrade and core support programmes in Saudi Arabia.

Operating cash inflow³ of £506m (2011 £80m) reflected acceleration of advances on TSP.

Operational performance

Saudi Arabia

Through the entry into service of Typhoon and the continued development of the in-country industrial base, the Group remains committed to developing a greater indigenous capability in Saudi Arabia.

On the Salam programme, UK final assembly of the remaining 48 of the 72 Typhoon aircraft has commenced and deliveries are expected to resume in 2013. Work to expand the multi-role capabilities of the Royal Saudi Air Force (RSAF) Typhoon is progressing to schedule.

The initial three-year Typhoon support contract finished at the end of June and two subsequent six-month extensions have been secured. Discussions continue with the customer on the next five years of support.

Discussions on Typhoon price escalation with the Saudi Arabian government remain ongoing. Negotiations are also ongoing for the provision of maintenance and upgrade facilities in-Kingdom, and further capability enhancement of the aircraft.

The business continues to support the operational capability of both the RSAF and Royal Saudi Naval Forces (RSNF). A £1.6bn contract was awarded in May to upgrade the RSAF's aircrew training aircraft, involving the supply of, and initial support for, Hawk Advanced Jet Trainer and Pilatus PC-21 training aircraft. The business was also awarded orders totalling £3.4bn for support to the end of 2016, including the provision of manpower, logistics and training to the RSAF.

Under the Tornado Sustainment Programme (TSP), the upgrade of the RSAF Tornado fleet is complete, with all of the contracted aircraft having been delivered back into the RSAF fleet. Delivery of Storm Shadow missiles to the RSAF under the TSP is progressing in line with the agreed programme schedule.

Work continues on the first ship re-fit on the minehunter mid-life update programme. The ship is due to be handed back to the RSNF customer during the second half of 2013.

On the C4I (Command, Control, Communications, Computers & Intelligence) programme, the business continues to seek an acceptable closure of the contract with the customer.

Australia

Integration of the first of two Landing Helicopter Docks commenced at the Williamstown shipyard following the arrival of the hull from subcontractor Navantia in Spain. The second hull was launched at Navantia's Ferrol shipyard.

A total of nine hull blocks have been constructed and delivered under the A$209m (£134m) Air Warfare Destroyer contract, completing the Group's involvement in the first two ships of the three being built.

In 2012, the business completed the multi-year project to modernise 431 M113 armoured personnel carriers for the Australian Army.

The first of seven Royal Australian Navy ANZAC Class frigates is being upgraded with anti-ship missile defence capability at the Henderson shipyard under a A$267m (£171m) contract signed in January 2012.

The business has been selected as the preferred tenderer to provide ongoing in-service support for the Royal Australian Air Force's Hawk Lead-In Fighter fleet and contract negotiations are ongoing.

The business was awarded an in-service electronic warfare support contract for the Wedgetail airborne early warning and control aircraft fleet to 2015 with a value up to A$68m (£43m).

Whilst the business submitted a bid for the next-generation Battlespace Communications System, the decision was taken to withdraw from this competition after a breach of tender protocols had occurred during its participation in the initial tender process.

India

Following a strategic review of the Defence Land Systems India (DLSI) joint venture, it has been jointly agreed that Mahindra & Mahindra will acquire BAE Systems' 26% shareholding in DLSI. This decision is a reflection of the shareholders' belief that they can best meet customer requirements and address market opportunities on a case-by-case basis, including continuing to explore opportunities for co-operating on specific defence projects.

BAE Systems is participating as a subcontractor to Bharat Electronics Limited (BEL) on the Tactical Communications Systems programme for the Indian military, for which BEL has been selected as one of two design authorities.

The Indian government has issued a Letter of Request to the US government under the US Foreign Military Sales process for the supply of 145 M777 howitzers for the Indian Army.

Together with its Eurofighter industry partners, the Group continues to monitor the Medium Multi-Role Combat Aircraft competition and stands ready to support the Indian government's procurement process.

The Group has received a request for proposal for a third batch of Hawk Advanced Jet Trainer aircraft for the Indian Air Force.

Oman

The contract for the supply of Typhoon and Hawk aircraft awarded in December 2012 builds on the close partnership with the Omani armed forces and provides the platform to ensure this relationship is further developed. The Group has a long history of working closely with the Omani armed forces, and currently supports their existing air, land and maritime platforms, such as air defence radars, Challenger tanks, and Jaguar and Hawk aircraft.

MBDA

In the export market, a significant order was received from India in early 2012 for MICA air-to-air missiles as part of the Indian Air Force's Mirage 2000 upgrade.

In the domestic market, the business secured an important support contract for the Principal Anti-Air Missile System and a development contract for the Future Local Anti-Air Defence System. The business continues to pursue the Anglo-French joint development and production opportunity for the Future Anti-Ship Guided Weapon - Anti-Navire Léger.

Development programmes continue to progress well. The Meteor beyond visual range air-to-air missile successfully concluded its guided firing programme.

Looking forward

In the Kingdom of Saudi Arabia, the Group seeks to build upon its long-term presence through delivering current programmes and industrialisation, and developing new business in support of the Saudi military and security forces.

Following agreement of the training aircraft and support orders under the SBDCP in 2012, the focus turns towards mobilising activities on the next phases of these programmes.

In Australia, BAE Systems will continue to support the Department of Defence by working with the customer to deliver cost and service improvements. The business continues to explore and secure opportunities in adjacent markets, including commercial maritime repair and support, and commercial fabrication for the natural resources industry.

In India, significant aircraft and artillery opportunities continue to be pursued.

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

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 31).

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

Note and page references used above refer to the Annual Report 2012 that can be viewed on the Company's website.

CONSOLIDATED INCOME STATEMENT

for the year ended 31 December

		2012		2011
	Notes	£m	Total £m	£m	Total £m
Continuing operations
Combined sales of Group and share of equity accounted investments	1		17,834		19,154
Less: share of sales of equity accounted investments	1		(1,214)		(1,384)
Revenue	1		16,620		17,770
Operating costs	2		(15,353)		(16,478)
Other income	4		280		157
Group operating profit			1,547		1,449
Share of results of equity accounted investments	1		93		131

Underlying EBITA¹		1,895		2,025
Non-recurring items²		103		(78)
EBITA		1,998		1,947
Amortisation		(226)		(239)
Impairment		(86)		(109)
Financial (expense)/income of equity accounted investments	5	(4)		8
Taxation expense of equity accounted investments		(42)		(27)
Operating profit	1		1,640		1,580

Financial income		1,326		1,294
Financial expense		(1,597)		(1,408)
Finance costs	5		(271)		(114)
Profit before taxation			1,369		1,466
Taxation expense	6		(295)		(206)
Profit for the year - continuing operations			1,074		1,260
Profit/(loss) for the year - discontinued operations	7		5		(4)
Profit for the year			1,079		1,256

Attributable to:
Equity shareholders			1,068		1,240
Non-controlling interests			11		16
			1,079		1,256

Earnings per share	8
Basic earnings per share			33.0p		36.9p
Diluted earnings per share			32.8p		36.7p

Earnings per share - continuing operations
Basic earnings per share			32.8p		37.0p
Diluted earnings per share			32.6p		36.8p

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

2 Comprises profit on disposal of businesses £103m (2011 loss £29m) and regulatory penalties £nil (2011 £49m).

Note references used above are references to notes to the Group accounts in the Annual Report 2012 that can be viewed on the Company's website.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December

		2012			2011
	Notes	Other reserves¹ £m	Retained earnings £m	Total £m	Other reserves¹ £m	Retained earnings £m	Total £m
Profit for the year		-	1,079	1,079	-	1,256	1,256
Other comprehensive income
Items that will not be reclassified to the income statement:
Net actuarial losses on defined benefit pension schemes:
Subsidiaries		-	(796)	(796)	-	(1,522)	(1,522)
Equity accounted investments		-	(84)	(84)	-	(45)	(45)
Tax on items that will not be reclassified to the income statement	6	-	173	173	-	387	387
Items that may be reclassified to the income statement:
Currency translation on foreign currency net investments:
Subsidiaries		(164)	-	(164)	(19)	-	(19)
Equity accounted investments		(25)	-	(25)	(17)	-	(17)
Reclassification of cumulative currency translation reserve on disposal	26	(97)	-	(97)	(14)	-	(14)
Amounts charged to hedging reserve	17	(21)	-	(21)	(56)	-	(56)
Fair value movements on available-for-sale investments	15	-	-	-	-	5	5
Reclassification of fair value movements on available-for-sale investments	5	-	-	-	-	(21)	(21)
Tax on items that may be reclassified to the income statement	6	5	-	5	17	-	17
Total other comprehensive income for the year (net of tax)		(302)	(707)	(1,009)	(89)	(1,196)	(1,285)
Total comprehensive income for the year		(302)	372	70	(89)	60	(29)

Attributable to:
Equity shareholders		(302)	361	59	(89)	44	(45)
Non-controlling interests		-	11	11	-	16	16
		(302)	372	70	(89)	60	(29)

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 2012 that can be viewed on the Company's website.

CONSOLIDATED CASH FLOW STATEMENT

for the year ended 31 December

	Notes	2012 £m	2011 £m
Profit for the year		1,079	1,256
Taxation expense	6,7	296	211
Share of results of equity accounted investments	1	(93)	(131)
Net finance costs	5,7	271	117
Depreciation, amortisation and impairment	2,7	669	751
Profit on disposal of property, plant and equipment	2,4,7	(7)	(17)
Profit on disposal of investment property	2,4	(12)	(21)
(Profit)/loss on disposal of businesses	2,4,7	(103)	15
Cost of equity-settled employee share schemes		57	68
Movements in provisions		(224)	(148)
Decrease in liabilities for retirement benefit obligations		(859)	(287)
Decrease/(increase) in working capital:
Inventories		6	(85)
Trade and other receivables		447	191
Trade and other payables		931	(969)
Cash inflow from operating activities		2,458	951
Interest paid		(170)	(212)
Taxation paid		(115)	(257)
Net cash inflow from operating activities		2,173	482
Dividends received from equity accounted investments	14	94	88
Interest received		23	32
Income from financial assets at fair value through profit or loss		-	4
Purchases of property, plant and equipment, and investment property		(359)	(359)
Purchases of intangible assets		(43)	(24)
Proceeds from sale of property, plant and equipment, and investment property		115	115
Purchase of subsidiary undertakings (net of cash acquired)	9	(5)	(532)
Equity accounted investment funding	14	(6)	(1)
Proceeds from sale of subsidiary undertakings (net of cash disposed)	9	101	124
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 of other deposits/securities	15	-	265
Net cash outflow from investing activities		(80)	(135)
Purchase of treasury shares		-	(503)
Purchase of own shares		(16)	(6)
Equity dividends paid	25	(620)	(606)
Dividends paid to non-controlling interests		(11)	(22)
Cash outflow from matured derivative financial instruments		(119)	(34)
Cash outflow from movement in cash collateral		(2)	-
Cash inflow from loans		1,863	2,693
Cash outflow from repayment of loans		(1,975)	(2,541)
Net cash outflow from financing activities		(880)	(1,019)
Net increase/(decrease) in cash and cash equivalents¹		1,213	(672)
Cash and cash equivalents at 1 January		2,136	2,802
Effect of foreign exchange rate changes on cash and cash equivalents		(15)	6
Cash and cash equivalents at 31 December		3,334	2,136
Comprising:
Cash and cash equivalents²		3,355	2,141
Overdrafts		(21)	(5)
Cash and cash equivalents at 31 December		3,334	2,136

1 Includes net cash inflow from discontinued operations of £2m (2011 £51m).

2 Includes £nil (2011 £403m) 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 2012 that can be viewed on the Company's website.

CONSOLIDATED BALANCE SHEET

as at 31 December

	Notes	2012 £m	2011 £m
Non-current assets
Intangible assets	11	10,928	11,465
Property, plant and equipment	12	2,285	2,496
Investment property	13	122	130
Equity accounted investments	14	265	783
Other investments	15	5	5
Other receivables	16	254	314
Other financial assets	17	62	118
Deferred tax assets	18	1,375	1,409
		15,296	16,720
Current assets
Inventories	19	655	716
Trade and other receivables including amounts due from customers for contract work	16	2,873	3,369
Current tax		11	60
Other financial assets	17	64	77
Cash and cash equivalents		3,355	2,141
Assets held for sale		20	18
		6,978	6,381
Total assets	20	22,274	23,101
Non-current liabilities
Loans	21	(2,967)	(2,682)
Trade and other payables	22	(1,481)	(571)
Retirement benefit obligations	23	(4,607)	(4,673)
Other financial liabilities	17	(66)	(74)
Deferred tax liabilities	18	(13)	(26)
Provisions	24	(449)	(501)
		(9,583)	(8,527)
Current liabilities
Loans and overdrafts	21	(21)	(518)
Trade and other payables	22	(8,067)	(8,531)
Other financial liabilities	17	(88)	(284)
Current tax		(422)	(468)
Provisions	24	(297)	(453)
Liabilities held for sale		(22)	(21)
		(8,917)	(10,275)
Total liabilities		(18,500)	(18,802)
Net assets		3,774	4,299

Capital and reserves
Issued share capital	25	90	90
Share premium		1,249	1,249
Other reserves	25	5,079	5,381
Retained earnings - deficit		(2,698)	(2,480)
Total equity attributable to equity holders of the parent		3,720	4,240
Non-controlling interests		54	59
Total equity		3,774	4,299

Approved by the Board on 20 February 2013 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 2012 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 2012	90	1,249	5,381	(2,480)	4,240	59	4,299
Profit for the year	-	-	-	1,068	1,068	11	1,079
Total other comprehensive income for the year	-	-	(302)	(707)	(1,009)	-	(1,009)
Share-based payments	-	-	-	57	57	-	57
Purchase of own shares	-	-	-	(16)	(16)	-	(16)
Ordinary share dividends	-	-	-	(620)	(620)	(11)	(631)
Other	-	-	-	-	-	(5)	(5)
At 31 December 2012	90	1,249	5,079	(2,698)	3,720	54	3,774

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
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

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 2012 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 schemes (note 23).

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

	Sales to related party		Purchases from related party		Amounts owed by related party		Amounts owed to related party		Management recharges
Related party	2012 £m	2011 £m	2012 £m	2011 £m	2012 £m	2011 £m	2012 £m	2011 £m	2012 £m	2011 £m
Advanced Electronics Company Limited	-	-	19	153	-	1	-	-	-	-
CTA International SAS	1	2	-	-	2	2	-	-	-	-
Eurofighter Jagdflugzeug GmbH	1,324	1,353	-	-	136	206	161¹	142¹	-	-
FADEC International LLC	52	49	-	-	-	-	-	-	-	-
Gripen International KB	-	-	-	-	17	10	60¹	68¹	-	-
MBDA SAS	21	24	166	65	7	9	487^1,2	951¹	18¹	17¹
Panavia Aircraft GmbH	35	34	65	98	1	4	-	-	-	-
Other	-	-	-	1	-	2	-	-	-	-
	1,433	1,462	250	317	163	234	708	1,161	18	17

1 Also relates to disclosures under Financial Reporting Standard 8, Related Party Disclosures, for the parent company, BAE Systems plc. At 31 December 2012, £705m (2011 £1,158m) was owed by BAE Systems plc and £3m (2011 £3m) by other Group subsidiaries.

2 Reduction primarily relates to the £424m non-cash special dividend received in 2012.

The Group considers key management personnel as defined under IAS 24, Related Party Disclosures, to be the members of the Group's Executive Committee and the Company's non-executive directors. Fuller disclosures on directors' remuneration are set out in the Remuneration report on pages 93 to 113. Total emoluments for directors and key management personnel were:

	2012 £'000	2011 £'000
Short-term employee benefits	14,375	14,807
Post-employment benefits	2,163	1,310
Share-based payments	4,029	5,534
	20,567	21,651

Note and page references used above refer to the Annual Report 2012 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.

This information is provided by RNS

The company news service from the London Stock Exchange

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