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We also have a growing position inadjacent commercial markets, includingavionics and cyber security.Strategic reportAir support and trainingDesign and manufacture of seven AstuteClass nuclear-powered attack submarinesfor the Royal Navy. The first three AstuteClass submarines are in operational service withthe Royal Navy, with the remaining four boatsin build. The final boat is expected to enterservice in the middle of the next decade.Design and manufacture of four DreadnoughtClass nuclear‑powered submarines to carry theUK’s Trident ballistic missiles. Manufacture ofthe first Dreadnought Class boat, Dreadnought,commenced in 2016.Upgrade of tracked vehicles, including BradleyFighting Vehicles; design and manufacture ofthe M109 self-propelled howitzer andArmored Multi-Purpose Vehicle; anddevelopment of light combat vehicles underthe Mobile Protected Firepower programmefor the US Army. Manufacture of amphibiousvehicles for the US Marine Corps andinternational customers. Design, manufactureand support of the CV90 and BvS10 combatvehicles for international customers. Vehicleupgrade and support to the British Army.Provision of support to operational capability,including maintenance, support and trainingfor Typhoon aircraft in service with the UK,Saudi Arabian and Omani air forces. Under theSaudi British Defence Co-operation Programme,delivery of contracts for manpower, logisticsand training, training aircraft (including Hawk)and upgrades to Tornado aircraft in SaudiArabia. Provision of support for Hawk aircraftin service in 14 countries and a range ofsustainment services for the F-35 Lightning IIaircraft in the Europe and Pacific regions.Weapon systemsand munitionsNaval ship repairand supportCyber securityDesign and manufacture of naval gunsystems, munitions, torpedoes, radars,naval command and combat systems,artillery systems, missile launchers and,through a 37.5% interest in MBDA, missilesand missile systems. BAE Systems alsomanages and operates complex ammunitionplant operations for the US Army to produceinsensitive munitions and propellant grains.Provision of naval ship repair and modernisationservices in the US and UK, together withsupport to the navies of the US, UK andAustralia. In the US, BAE Systems has facilitieslocated on the Atlantic and Pacific coasts,as well as in Hawaii, to include expandeddry dock facilities in the San Diego shipyardto support the US Navy’s increased focuson Asia-Pacific operations.Delivery of a broad range of services toenable the US military and governmentto recognise, manage and defeat threats.Support to UK and other government agenciesin their intelligence missions. Provision ofdefence-grade solutions for commercial cyberapplications.BAE SystemsAnnual Report 201805Financial statementsCombat vehiclesGovernanceSubmarines

Group financialhighlightsWe monitor the underlying financialperformance of the Group using alternativeperformance measures. These measuresare not defined in IFRS1 and, therefore, areconsidered to be non-GAAP2 measures.Accordingly, the relevant IFRS1 measuresare also presented where appropriate.– Sales3 decreased by 0.1bn but grew 1%excluding the impact of currency translation.– Underlying EBITA decreased by 46m, a 1%decline on a constant currency basis3,4.– Underlying earnings per share3 increasedby 2% to 42.9p.– Operating business cash flow decreasedby 759m to 993m.– Net debt increased by 152m comparedwith 31 December 2017.– Order intake5 of 28.3bn.– Order backlog3,5 of 48.4bn was up 25%.Financial performance measures as defined by the GroupSales3 18,407m(2017 18,487m)KPIDefinition Revenue plus theGroup’s share of revenue ofequity accounted investments.Purpose Allows management tomonitor the sales performanceof subsidiaries and equityaccounted investments.Underlying EBITA3 1,928m(2017 1,974m)Underlying earnings per share342.9p(2017 42.1p)Operating business cash flow 993m(2017 1,752m)06BAE SystemsAnnual Report 2018BONUS (904)mDefinition Operating profitexcluding amortisation andimpairment of intangible assets,finance costs and taxation expenseof equity accounted investments(EBITA), and non-recurring items 6.Purpose Provides a measure ofoperating profitability that iscomparable over time.KPIOrder intake5BONUS 28,280m(2017 20,257m)Definition Funded ordersreceived from customers includingthe Group’s share of order intakeof equity accounted investments.Purpose Allows managementto monitor the order intake ofsubsidiaries and equity accountedinvestments.Definition Funded and unfundedunexecuted customer ordersincluding the Group’s share oforder backlog of equity accountedinvestments. Unfunded ordersinclude the elements of USmulti-year contracts for whichfunding has not been authorisedby the customer.Purpose Supports future years’sales performance of subsidiariesand equity accounted investments.(2017 38.7bn)KPIDefinition Net cash flow fromoperating activities excluding taxationand including net capital expenditure,financial investment and dividendsfrom equity accounted investments.Purpose Allows management tomonitor the operational cashgeneration of the Group.KPIOrder backlog3,5 48.4bnDefinition Basic earnings pershare excluding amortisation andimpairment of intangible assets,non-cash finance movements onpensions and financial derivatives,and non-recurring items 6.Purpose Provides a measureof underlying performance thatis comparable over time.KPIDefinition Cash and cashequivalents, less loans andoverdrafts (including debt-relatedderivative financial instruments).Purpose Allows managementto monitor the indebtedness ofthe Group.(2017 (752)m)KPIBONUSNet debtKPIBONUS References to Key Performance Indicators(KPIs) throughout the Annual Report. 80% of the UK executive directors’bonuses are based on the achievementof financial KPIs (see page 107).

Reconciliations from the financial performancemeasures as defined by the Group to thefinancial performance measures definedin IFRS1 are provided in the Group financialreview on pages 35 to 41.– Group’s share of the pre-tax accounting netpension deficit3 reduced by 0.1bn to 3.9bncompared to 31 December 2017.– Final dividend of 13.2p making a total of22.2p per share for the year, an increaseof 2% over 2017.GovernanceFinancial performance measures defined in IFRS1Other financial highlightsRevenue3Group’s share of the net pension deficit3 16,821m(2017 17,224m)Definition Income derived fromthe provision of goods and servicesby the Company and its subsidiaryundertakings.(2017 (4.0)bn)Definition Net InternationalAccounting Standard 19 EmployeeBenefits, deficit excluding amountsallocated to equity accountedinvestments.Financial statements(2017 1,419m) (3.9)bnDividend per shareOperating profit 3 1,605mStrategic report– Revenue3 decreased by 0.4bn, a 1% declineon a constant currency basis.– Operating profit3 increased to 1,605m.The prior year included a 384m non-cashgoodwill impairment in Applied Intelligence.– Basic earnings per share3 increased by 20% to 31.3p.– Net cash flow from operating activities reducedby 697m to 1,200m.Definition Profit for the year beforefinance costs and taxation expense.This measure includes finance costsand taxation expense of equityaccounted investments.22.2pDefinition Interim dividendpaid and final dividendproposed per share.(2017 21.8p)Basic earnings per share331.3p(2017 26.0p)Definition Basic earnings per sharein accordance with InternationalAccounting Standard 33 Earningsper Share.Net cash flow from operating activities 1,200m(2017 1,897m)Definition Net cash flow fromoperating activities in accordancewith International AccountingStandard 7 Statement ofCash Flows.1. International Financial Reporting Standards.2. Generally Accepted Accounting Principles.3. Prior year comparatives have been restated upon the Group’s adoption of IFRS 15Revenue from Contracts with Customers and to correct a prior year error in respectof the accounting valuation of a longevity swap held by one of the Group’s definedbenefit pension schemes. See note 37 to the Group accounts for details regardingthe restatement.4. Current year compared with prior year translated at current year exchange rates.5. Including share of equity accounted investments.6. Items that are not relevant to an understanding of the Group’s underlying performance(see page 35).BAE SystemsAnnual Report 201807

Operational andstrategic highlightsIn 2018, we made good progressacross the Group in achieving ourstrategic objectives.During the year, BAE Systems’ Type 26 frigate was selected for theCommonwealth of Australia’s Hunter Class nine-ship Future Frigateprogramme with the contract which provides the framework for thedesign and build of the ships being signed in December. The Type 26was also selected as the design for Canada’s Surface Combatantprogramme, reinforcing its position as one of the world’s mostadvanced anti-submarine warships.08The contract with the Government of the State of Qatar forthe supply of 24 Typhoon aircraft and nine Hawk AdvancedJet Trainer aircraft, along with a bespoke support and trainingpackage, became effective in September upon receipt of thefirst contractual payment. Deliveries of the first Hawk aircraftare expected to commence in 2022 and the first Typhoonaircraft in 2023.We were awarded a 376m ( 295m) contractby the US Army for the development phaseof the Mobile Protected Firepower programme,to deliver a rapidly deployable and highly agilearmour-protected light combat vehicle.The US-based Intelligence and Security business securedseven new task orders valued at approximately 320m( 251m) to provide motion‑imagery analysis, training andresearch support services to the US intelligence community.The first four UK F-35 Lightning II aircraft arrived atRAF Marham in June and initial operational serviceswere stood up. Additionally, the integration of theF-35 onto the new HMS Queen Elizabeth aircraftcarrier commenced, and the first F-35 deck landingwas successfully completed in September.BAE SystemsAnnual Report 2018

13Chief Executive’sreview18Group strategicframework43SegmentalreviewStrategic reportDuring the year agreement was reachedwith the Saudi Arabian government to continueto provide support services for Typhoon aircraftin service with the Royal Saudi Air Force.GovernanceIn June, BAE Systems and industry teammate IvecoDefence Vehicles were competitively selected forthe US Marine Corps’ Amphibious Combat Vehicle 1.1programme phase. We have commenced workon the production contract for an initial 30 vehiclesworth 198m ( 155m), with options for a totalof 204 vehicles worth up to 1.2bn ( 0.9bn).Financial statementsThe UK Combat Air Strategy announced in July is a significant milestonefor our Air sector and sends a strong signal of intent about the UK’scommitment to retaining a leading position in Combat Air. The strategywill enable long-term planning in a key strategic part of the business asUK government and industry jointly invest in cutting-edge, next-generationcombat air systems. The Tempest programme has been launched insupport of the strategy.During the year we secured the full 1.6bn contractfor delivery of the seventh Astute Class submarine,and a further 1.3bn of funding on the Dreadnoughtprogramme from the UK Ministry of Defence.Our Advanced Precision Kill Weapon System (APKWS )is experiencing growing demand in both the US andinternationally, with awards totalling nearly 400m ( 314m)in the year, and we continue to ramp-up production capacitytowards an annual production level of 25,000 units.BAE SystemsAnnual Report 201809

Chairman’s letterSir Roger CarrChairman“2018 was another successfulyear for the Companyunder the leadership ofCharles Woodburn in his firstfull year as Chief Executive,strengthening the outlookwith significant contract wins.”Our record order bookWe added to the strong order book wehad built in the previous 12 months to createa record defence order book. Our successesincluded the completion of financing forthe Typhoon and Hawk aircraft for Qatar,continued strong demand for our electronicsystems products and the award of acontract for the Hunter Class nine-frigateprogramme by the Australian governmentto be built in Adelaide based on the designof the Type 26. This contract, won in theface of fierce competition, demonstratedthe cutting-edge anti-submarine warfarecapabilities of the Type 26 frigate alreadyordered by the Royal Navy and the valueof the deep partnership we have built inAustralia over the last half century.Our US Combat Vehicles business furtherincreased both the deep order book andproduction volumes on a number ofprogrammes. Whilst the sudden increasein pace and incline of the production rampcaused teething problems in the earlymonths, management continues to makesteady progress toward establishingproduction stability in support ofexpanding requirements.I visited Australia in November to thank theAustralian government for placing this orderwith the Company and toured the shipyardin which the Hunter Class frigates will be built.The existing site was impressive and the newshipyard under construction will prove to bea world-class facility when it is completed inthe early 2020s.The drumbeat of our submarine productionin Barrow continued to increase with the buildof the first Dreadnought Class submarinealongside the existing Astute boats.The competitive strength of the Type 26was further underpinned when theCanadian government selected the designin February 2019.From the challenge of building a strongorder book, I was pleased that managementfocus in the second half of the year movedto the task of manufacturing and deliveringadditional volumes of products and services.10BAE SystemsAnnual Report 2018Increased production volume associatedwith the F-35 Lightning II aircraft wassuccessfully managed by the Samlesburyteam who also celebrated the arrival of thefirst nine aircraft to the UK squadron andthe successful completion of initial F-35flight trials on the deck of the Queen Elizabethcarrier off the East Coast of the US.Recognising the increasing demands onthe business, our focus was to ensure theexecutive team has the skillset, experienceand career time horizon to drive change andmanage performance as the deep orderbacklog is converted into finished productand customer service. Our processes andprocedures remain vital to the discipline andcontrol of the business, but people makethe difference.

Strategic reportI am pleased to say the benefits of thesechanges are being seen in improvedperformance, greater co-ordination,increased sharing of knowledge andstronger focus on technology in line withCharles’s business priorities.I continue to believe that in keeping with ourculture and tradition of building home-growncapability, we develop the skills we need inthe business by an unwavering commitmentto apprenticeships, graduate training andlife-long learning.Looking forward, our emphasis will remain onensuring we have a talent pipeline that reflectsambition, enthusiasm, ability and diversity andis committed to the values of the organisationas to how we make money rather than simplyhow much money we make.We continue to believe that being performancedriven, but values led, should be at the core ofour culture.Our strategyOur strategy is regularly reviewed, but hasremained constant. We are a business thatis focused on the provision of technologyproducts and services through governmentapproved contracts as a world leader in thedefence industry.As with many UK companies, we have beencarefully considering and planning for anypotential impact that Brexit could have onthe Company, and the Board has been keptinformed of this analysis. Whilst we haverecognised some potential Brexit impact inour Principal Risks analysis (see page 69), weare fortunate that, given the geographic spreadof our operations, the near-term impactsacross the business are likely to be limited.Financial statementsThese changes are now evident in theleadership of Human Resources, Australia,Maritime sector management, submarineproduction and the consolidation of ourUK Air business with our operations inthe Kingdom of Saudi Arabia.During 2019, we plan to recruit nearly 700apprentices and 300 graduates across ourUK business, a 30% increase on the previousyear and a demonstration of the work we doto nurture talent and develop high-end skillsfor the future. It is vital we train the nextgeneration of engineers and business leadersto develop the necessary skills needed to driveinnovation and solve complex challenges.GovernanceOur people and cultureDuring the course of the year, successionplanning and talent management became toppriorities for the Executive Committee and theBoard. In that context, Charles made a seriesof changes in his leadership team bypromotions from within, supplemented by anumber of external recruitments, to ensurefresh thinking is balanced with seasonedindustry experience.The Middle East remains unstable. In theGulf region we work primarily with Oman,Qatar, Kuwait and the Kingdom of SaudiArabia, respecting the importance of thedefence and security relationships, and thestrength and depth of our economic ties.To that end, agreement was reachedat the end of the year with the Kingdomfor us to extend the provision of Typhoonsupport services.It should be recognised, however, that theCompany is reliant on the approval of exportlicences by a number of governments in orderto continue supplies to Saudi Arabia. In thiscontext, the current position on exportlicensing adopted by the German governmentmay affect our ability to provide the requiredcapability to the Kingdom. We are thereforeworking closely with the UK governmentto minimise the risk of any such occurrenceand the impact it would have on financialperformance, the supply chain and relationships.Dividend (pence)22.2p 2%2018201720162015201422.221.821.320.920.5BAE SystemsAnnual Report 201811

Chairman’s lettercontinuedRecognising the fluctuation in demandpatterns, we seek to diversify our marketsover a wide geographic area with particularemphasis on the US, the UK, the Kingdomof Saudi Arabia and Australia.In 2018, the major programme award wereceived from the Australian governmentfor the advanced anti-submarine warshipswill serve, over time, to add further attractivebalance to our geographic mix.We continue to operate in all domains ofair, maritime, land and cyber. The weightingof maritime activities within our long-termbusiness mix has increased with theconsiderable orders for Dreadnought Classsubmarines and Type 26 frigates we havereceived over the last two years.Our continued commitment to the air domainis underpinned by recent orders for Typhoonand Hawk and our decision to work in closepartnership with the UK government on theTempest programme to develop the nextgeneration of military fighter jet.Our US Combat Vehicles businesscontinues to grow following the awardof the Amphibious Combat Vehicle andMobile Protected Firepower programmes.In the UK the proposed joint venture withRheinmetall is expected to secure theproduction and upgrade of vehicles forthe British Army for years to come.In Cyber we have focused investment at thetop end of the market, where sophisticatedsystems for military grade intelligence providebarriers to entry for competitors.In order to smooth the inevitable fluctuationsin demand for our products, our businessmodel has a strong service content, whichoffers a reliable revenue stream andstrengthens the partnership with ourmajor customers.12BAE SystemsAnnual Report 2018There are few businesses with such strongorder books and with programme visibilityextending for several decades, few defencecompanies that enjoy such a wide geographicspread and even fewer technology andengineering businesses that have the depthof expertise that is embedded in BAE Systems.It is against this background that I believeour strategy is sound and our emphasis onoperational excellence appropriate to ensurethe delivery of long-term shareholder value.Our BoardThe Board continues to benefit from ahigh-quality team that is diverse in gender,skill, experience, country of origin and timeserved. With Revathi Advaithi joining us atthe beginning of 2018, currently 28% havebeen Board members for up to three years,36% for between three and six years, and36% for over six years, with an averagetenure of five and a half years.Board chemistry is excellent with candour,mutual respect and collective commitmentproviding a healthy dynamic for debate,challenge and decision making.Board succession planning is key to preservingt

A US 42% B UK 21% C Saudi Arabia 14% D Australia 3% E Other international markets 3 20% A Platforms 30% B Military and technical services and support 43% C Electronic systems 22% D Cyber 5% A Electronic Systems 22% B Cyber & Intelligence 9% C Platforms & Services (US) 16% D Air 37% E Maritime 16% Sales1 by activity BAE Systems has a diverse portfolio, broadly balanced between an enduring .