Doc re. Annual Report

RNS Number : 9018S

BAE SYSTEMS PLC

22 March 2016

 

BAE Systems plc

Annual Report 2015

BAE Systems plc has today published its Annual Report and Accounts for the year ended 31 December 2015 ('Annual Report 2015'). The full document can be viewed on the Company's website at:

www.baesystems.com/investors

Copies of the Annual Report 2015 will be posted to those shareholders who have requested to receive communications from the Company in printed form on 24 March 2016.

In compliance with Section 9.6.1 of the Listing Rules, a copy of the Annual Report 2015 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 2015 in unedited full text. Page and chart references within the text of this announcement are references to pages and charts in the Annual Report 2015 that can be viewed as detailed above.

The financial information for the year ended 31 December 2015 contained in this announcement was approved by the Board on 17 February 2016. 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 2014 have been delivered to the Registrar of Companies. Statutory accounts for the year ended 31 December 2015 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 2015 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 Strategic report and Directors' report, taken together, include a fair review of the development and performance of the business, and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

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

Sir Roger Carr	Chairman
Ian King	Chief Executive
Jerry DeMuro	President and Chief Executive Officer of BAE Systems, Inc.
Peter Lynas	Group Finance Director
Elizabeth Corley	Non-executive director
Harriet Green	Non-executive director
Chris Grigg	Non-executive director
Paula Rosput Reynolds	Non-executive director
Nick Rose	Non-executive director
Ian Tyler	Non-executive director

On behalf of the Board

Sir Roger Carr

Chairman

17 February 2016

Chief Executive's review

"Another year of solid performance."

Ian King Chief Executive

Overview and key business attributes

We have delivered another year of solid performance. BAE Systems has continued to demonstrate resilience in markets constrained by wider economic pressures.

Over the past several years, the Group has navigated through a period of constrained defence budgets. Where sales volumes have been challenged, we have taken actions to protect earnings and deliver attractive shareholder returns. The overall business environment is now improving and the Group is well positioned as we enter this phase.

Our business benefits from a number of distinct attributes which underpin performance and prospects.

Geographic diversity

BAE Systems has a broader geographic presence than many of its defence industry peers, with its largest markets in the US, UK, Saudi Arabia and Australia. Growing our international business further remains a key strategic objective.

Customer focus

Our businesses continue to focus on operational excellence to deliver on customer commitments. In addition to the design and production of platforms and equipment, we have established extensive support services delivering long-term capability to customers beyond the manufacturing phase of products. In 2015, support and service activities generated approximately 42% of sales.

Ethical business

As a leading defence company operating in international markets, we take pride in our culture of responsible behaviour and recognise that ethical behaviour in all aspects of our business is essential for our ongoing success.

Technology and innovation

BAE Systems has developed some of the world's most innovative technologies and we continue to invest in research and development to generate future products and capabilities. This company-funded research and development often leads to customer-funded development activity as requirements mature.

Company-funded research and development investment is more relevant in some areas of the Group's activities and is, therefore, disproportionately focused in areas such as defence and commercial aerospace electronics, military aircraft and cyber security.

Approximately 7% of sales is invested in customer and company-funded research and development activities.

2015 performance

US

In the US, President Obama signed the Bipartisan Budget Act of 2015, which lifts defence budget caps for fiscal years 2016 and 2017 by $33bn (£22bn) and $23bn (£16bn), respectively. This is expected to enhance the funding environment for the Group's US businesses through 2017.

The Group's electronics businesses have performed well and remain well positioned to address current and evolving priority programme requirements. As a major supplier of electronics equipment on the F-35 Lightning II aircraft, including the electronic warfare system, BAE Systems is positioned to benefit from the commitment to progressive increases in production output over coming years to meet the requirements of US and international customers.

Important new business wins in key technology areas in 2015 included the Eagle Passive Active Warning Survivability System (EPAWSS) electronic warfare upgrade for US Air Force F-15 aircraft and electronics upgrades to US Special Operations Command C-130J aircraft.

We have a strong position in the Intelligence, Surveillance and Reconnaissance domain, providing customers with high-technology sensing solutions, including advanced geospatial intelligence capabilities.

We continue to perform in commercial electronics through our broadly-based flight and engine controls activities. Company-funded investment in innovative commercial aircraft cabin systems took an important step forward with the signing of the first IntelliCabin^® in-flight entertainment system airline customer.

The US Navy is redeploying some ships consistent with its stated strategy, to include expanding operations in the Asia-Pacific region. As a leading supplier of ship repair services to the US Navy, BAE Systems is responding to these changes with a reduction in workforce at its Norfolk, Virginia, facility on the Atlantic coast and by investing in additional capacity at its San Diego shipyard. In 2016, the Group expects to deliver the remaining commercial ships currently under construction in Jacksonville, Florida, and Mobile, Alabama.

Whilst much of the Group's US-based activity has proven resilient over recent years through the downturn in US defence spending, land programmes and manpower services have been disproportionately impacted. Both activities performed well in 2015, supporting expectations for an improved outlook going forward.

In land, we continued to make good progress building on the award in 2014 of the Armored Multi‑Purpose Vehicle (AMPV) programme and further order intake for M109A7 (Paladin) tracked artillery systems. These two programmes draw on commonality with the Bradley family of vehicles and underpin our strong franchise in tracked combat vehicles. The Group was also down-selected as one of two companies awarded a contract for the engineering and manufacturing development phase of a competition for the US Marine Corps' Amphibious Combat Vehicle programme.

Beyond the US market, FNSS, the Turkish land systems business in which BAE Systems holds a 49% interest, secured further international armoured vehicle orders in the year.

Following external interest in the Group's US-based manpower and services activities, BAE Systems undertook a strategic review of the business. Recognising the performance of the business and its good order intake, the review concluded, in November, that greater value could be derived from retaining the businesses. Throughout the period, Intelligence & Security remained focused on providing leading-edge products and services to customers and delivered solid financial performance, winning re-compete awards and a number of new, multi-year service contracts.

UK

The Group's UK businesses continued to perform well, benefiting from good programme execution and continuity in UK customer requirements. UK government commitments in July 2015 to protect defence and security spend, in a still tightly constrained UK economic environment, were helpful.

In November, the UK government published its Strategic Defence and Security Review (SDSR). The SDSR identified defence and security priorities and set out a plan to spend £178bn on defence equipment and support over the next ten years.

A number of important SDSR commitments for BAE Systems included continued investment in expanding Typhoon capabilities and an extension of the aircraft's expected service life until at least 2040. There was also a commitment to continued joint investment with France in the development of a future unmanned combat air capability. Also in the air domain, the SDSR identified an accelerated UK procurement of F-35 Lightning II aircraft. BAE Systems is a major participant in the F-35 programme, supplying airframe assemblies and electronics equipment.

In the maritime domain, the SDSR included a continued commitment to seven Astute Class submarines and the replacement of the four Vanguard Class submarines. The UK government reaffirmed its commitment to shipbuilding continuity providing clarity and future opportunities for the Group's shipbuilding facilities and workforce in Scotland. A fleet of at least 19 frigates and destroyers is expected to be maintained, including eight Type 26 frigates. The government's SDSR commitments also include a concept study followed by the design and build of a new class of lighter, flexible, general purpose frigates, in addition to two new Offshore Patrol Vessels.

In September, an agreement between Kuwait and Italy was announced relating to the supply of 28 Typhoon aircraft to the Kuwait Air Force. We continue to support the campaign, led by Finmeccanica, to achieve a formal contract. In November, BAE Systems announced a reduction in its build rate for Typhoon assemblies to ensure production continuity at competitive costs over the medium term. We also announced a proposal to reduce the workforce of the Military Air & Information business.

The UK government continues to provide strong support for Typhoon and other export campaigns. Although there can be no certainty as to the timing of orders, discussions with current and prospective operators of the Typhoon aircraft continue to support our expectations for additional Typhoon contract awards.

Consistent with the Group's focused investment in research and technology, in November, BAE Systems announced an agreement to acquire a 20% interest in Reaction Engines Limited (REL). REL is working on a radical new aerospace engine concept, SABRE^™, which combines rocket and jet engine functions, made possible by exciting new heat exchanger technology. We expect our involvement to expedite transition of the concept to a working demonstration engine.

International

We continued to deliver Typhoon aircraft to the Kingdom of Saudi Arabia during 2015 and the Group's extensive in-Kingdom training and support activities are at a high tempo. The Royal Saudi Air Force has achieved high utilisation and aircraft availability across its Typhoon and Tornado fleets, operating under demanding conditions.

We reached agreement with the Saudi customer for the provision of a further 22 Hawk Advanced Jet Trainer aircraft, associated ground equipment and training aids for the Royal Saudi Air Force, which form part of an enhancement to the Kingdom's pilot training capacity.

As the 50th anniversary of the relationship approaches, BAE Systems continues to address current and potential new requirements as part of the long-standing agreements between the UK government and the Kingdom.

In Australia, the second of the two Landing Helicopter Dock (LHD) ships was successfully delivered into service with the Royal Australian Navy. Whilst we welcomed the Australian government's announcement of its intention to launch a naval shipbuilding strategy, the viability of the Williamstown, Melbourne, shipyard remains uncertain. With no near-term prospect of work beyond the LHD programme and Air Warfare Destroyer block manufacture, we announced further headcount reductions in November, together with other cost reduction measures across the Australian businesses. In addition, a non-cash impairment charge has been taken against the carrying value of the Williamstown facility.

In India, BAE Systems has a long-standing relationship with Hindustan Aeronautics Limited (HAL). Delivery of a second batch of HAL-assembled Hawk aircraft continues and negotiations are underway to agree a third batch. The Group has also commenced discussions with HAL for further co-development of Indian Hawk aircraft to meet potential requirements for new capabilities.

The Group continues to discuss the potential sale of M777 howitzers, including prospective local arrangements for assembly, integration and testing, to address India's large requirement for new-generation artillery systems.

BAE Systems is a 37.5% shareholder in the MBDA guided weapons business. MBDA continues to win significant order intake, including naval weapon systems and weapons awards in support of multiple combat aircraft types. The business expects to win further orders from recently announced, and anticipated, international sales of European combat aircraft. MBDA is expected to generate strong growth in later years from this rising order book.

Cyber security

A substantial expansion of the Group's Applied Intelligence business into commercial markets is underway, with significant recruitment and product development alongside integration of the former SilverSky business, acquired at the end of 2014. Sales growth is expected to continue, underpinned by continued good order intake as cyber security becomes an increasingly important part of government security and a core element of stewardship for commercial enterprises.

Acquisitions and disposals

In April, BAE Systems completed the sale of its 75% holding in BAE Systems Land Systems South Africa (Pty) Limited to Denel (SOC) Limited for cash consideration of 655 million Rand (£36m).

In June, we acquired Eclipse Electronic Systems, Inc. from Esterline Corporation. The Texas-based business provides advanced Intelligence, Surveillance and Reconnaissance products and services to the US defence and intelligence community.

Balance sheet and capital allocation

The Group's balance sheet continues to be managed conservatively in line with its policy to retain its investment grade credit rating and to ensure operating flexibility. Consistent with this approach, the Group meets pension obligations, pursues organic investment opportunities, plans to pay dividends in line with its policy of long-term sustainable cover of around two times underlying earnings and to make accelerated returns of capital to shareholders when the balance sheet allows and only when the return from doing so is in excess of the Group's Weighted Average Cost of Capital. Investment in value-enhancing acquisitions is considered where market conditions are right and where they deliver on the Group's strategy.

The Group continues to fund the pension deficits of the UK schemes under funding agreements determined following the last UK valuations in 2014. The next valuations of the UK pension schemes are expected to begin in April 2017.

In February 2013, we initiated a share repurchase programme of up to £1bn over three years. As at 31 December 2015, a total of 120.5 million shares had been purchased for £502m under the programme.

Responsible business

BAE Systems continues to instil responsible behaviour across the Group by supporting employees in making the right ethical decisions. During 2015, a revised Code of Conduct was launched and cascaded to employees via face-to-face briefings.

The safety of our employees, and anybody who works on, or visits, our sites, is a key priority. We provide training and tools to employees to help them understand the importance of a safe workplace. Senior leadership plays a key role in maintaining the focus on safety and leading through example.

We are saddened to report that, during 2015, there were two air incidents that resulted in seven fatalities, four of our employees and three from other companies. We have been supporting investigations with air accident authorities in Saudi Arabia and the US, and are carrying out internal reviews into the incidents.

Engaging and developing the skills and talent of our employees and future workforce to address our customers' complex and challenging projects remained a key focus during 2015, including continuing to develop an inclusive and diverse work environment to help drive innovation.

Looking forward

BAE Systems has a large order backlog generated by a well‑balanced portfolio of businesses serving the needs of customers in many of the world's larger accessible markets.

Many contracts are multi-year and our current order backlog will deliver a significant proportion of our sales over the next five years, providing long-term visibility of revenues.

Having demonstrated good resilience through an extended period of economic challenge in many of its markets, the Group is well placed to continue to generate attractive returns for shareholders as defence budgets increase.

Ian King Chief Executive

Extract from

Chairman's letter

The Board and directors

In June 2015, Carl Symon resigned from the Board having completed seven years' service. Carl made a valuable contribution as both a non-executive director and chair of the Remuneration Committee, and we wish him well in his retirement. Paula Rosput Reynolds has now taken over the role of chair of the Remuneration Committee.

Elizabeth Corley has recently joined the Board as a non-executive director. Elizabeth will shortly step down from her current position as Chief Executive Officer of Allianz Global Investors. As a highly respected leader in the financial services industry and member of the Financial Reporting Council, Elizabeth will bring considerable business acumen, international perspective and strong governance credentials to the Board.

I am delighted that as part of our succession planning programme we have recently been able to announce the appointment of Charles Woodburn to the Board, in the newly-created role of Chief Operating Officer. Reporting to the Chief Executive, he will bring outstanding engineering credentials, valuable international experience and a fresh perspective to the Company's operations and the Board.

Led by our Senior Independent Director, Nick Rose, the Board has agreed to extend my term of appointment as Chairman until February 2020. I very much look forward to continuing to work with fellow directors and the executive team during this period.

Dividend

The Board has recommended a final dividend of 12.5p per share making a total of 20.9p per share for the year, an increase of 2% over 2014. Subject to shareholder approval at the 2016 Annual General Meeting, the dividend will be paid on 1 June 2016 to holders of ordinary shares registered on 22 April 2016.

Financial review

Income statement

		2015 £m	2014 £m
Sales1	KPI	17,904	16,637
Underlying EBITA2	KPI	1,683	1,702
Return on sales		9.4%	10.2%
Non-recurring items		26	-
EBITA		1,709	1,702
Amortisation of intangible assets1		(108)	(184)
Impairment of intangible assets		(78)	(170)
Finance costs1		(409)	(448)
Taxation expense1		(171)	(148)
Profit for the year		943	752

P112 Note 1 to the Group accounts

Exchange rates

Average	2015	2014
£/$	1.528	1.647
£/€	1.377	1.241
£/A$	2.036	1.827

Sensitivity analysis
Estimated impact on sales1 of a ten cent movement in the average exchange rate	£m
$	400
€	50
A$	30

Income statement

Sales¹ increased by £1.3bn to £17.9bn, including a £0.8bn benefit to UK sales from increased aircraft deliveries to Saudi Arabia and sales from the trading of equipment on the European Typhoon programme and the increased activity across the naval business. Exchange translation added £0.2bn compared to prior year.

Underlying EBITA² decreased by £19m to £1,683m (2014 £1,702m), giving a return on sales of 9.4% (2014 10.2%), impacted by both the previously announced Typhoon production slowdown and Australian shipyard impairment and rationalisation charges. There was an exchange translation benefit of £15m.

Non-recurring items in 2015 of £26m includes research and development expenditure credits relating to 2013 and 2014 (£50m), partly offset by a loss on the disposal of the Group's 75% shareholding in the Land Systems South Africa business (£24m).

Amortisation of intangible assets¹ reduced to £108m (2014 £184m) due to acquired intangible assets fully amortising in 2014.

Impairment of intangible assets mainly comprises the impairment of goodwill in the US Intelligence & Security business reflecting lower growth assumptions. In 2014, goodwill impairment charges were taken against the carrying value of the US Support Solutions (£87m) and South African (£74m) businesses.

Finance costs¹ were £409m (2014 £448m). The underlying interest charge, excluding pension accounting, and fair value and foreign exchange adjustments on financial instruments and investments, reduced to £194m (2014 £204m) primarily from a lower level of net present value adjustments. Net interest expense on the Group's pension deficit was higher at £200m (2014 £155m) mainly reflecting the increase in the deficit at the beginning of 2015.

Taxation expense¹ reflects the Group's underlying effective tax rate for the year of 21%, which excludes the change in accounting for UK research and development credits and the benefit of £134m arising from the adjustment of certain tax provisions. Including these items, the underlying effective tax rate is 14%. The calculation of the underlying effective tax rate is shown in note 6 to the Group accounts on page 120. The underlying effective tax rate for 2016 is expected to be around 22%, with the final rate dependent on the geographical mix of profits.

Looking beyond 2016, the effective tax rate will depend principally on whether there are any changes in tax legislation in the Group's most significant countries of operation, the geographical mix of profits and the resolution of open issues. The Group does not expect the future rate to be materially impacted by the changes to the international tax landscape resulting from the package of measures developed under the OECD/G20 Base Erosion and Profit Shifting project and the investigations and proposals of the European Commission. However, the details of those are yet to be finalised and the Group will keep these under review.

Order intake

Order intake represents the value of funded orders received from customers in the year. It is a measure of in-year performance and supports future years' sales performance.

Order intake¹ of £14.9bn was broadly similar to 2014 (£15.1bn). Key awards included the UK Type 26 demonstration phase contract (£0.9bn), weapons package agreements for Egypt and Qatar in MBDA as part of agreed export contracts for Rafale aircraft (£0.8bn), and further Hawk aircraft and associated equipment for Saudi Arabia.

Earnings per share

Underlying earnings³ per share for the year was 2.2p higher than in 2014, at 40.2p (2014 38.0p), including a 2.6p benefit from the previously announced overseas tax provision release and an additional 1.7p benefit from a UK tax provision release.

Basic earnings per share, in accordance with International Accounting Standard 33, Earnings per Share, was 29.0p (2014 23.4p).

Earnings per share

		2015	2014
Underlying earnings3 per share	KPI	40.2p	38.0p
Basic earnings per share		29.0p	23.4p

P122 Note 7 to the Group accounts

Cash flow

		2015 £m	2014 £m
Cash inflow from operating activities		924	913
Capital (expenditure)/proceeds (net) and financial investment		(284)	215
Dividends received from equity accounted investments		41	63
Operating business cash flow4	KPI	681	1,191
Interest		(173)	(145)
Taxation		(116)	(92)
Free cash flow		392	954
Acquisitions and disposals		16	(230)
Cash classified as held for sale		-	(6)
Share repurchase programme		(7)	(283)
Other net sale of own shares		8	2
Equity dividends paid		(655)	(642)
Dividends paid to non-controlling interests		(40)	(14)
Cash flow from matured derivative financial instruments		12	8
Movement in cash collateral		3	10
Movement in cash received on customers' account8		-	1
Total cash outflow		(271)	(200)
Foreign exchange translation		(165)	(146)
Other non-cash movements		46	13
Increase in net debt (as defined by the Group)		(390)	(333)
Opening net debt (as defined by the Group)		(1,032)	(699)
Net debt (as defined by the Group)		(1,422)	(1,032)
Debt-related derivative financial instrument assets		53	10
Cash and cash equivalents		2,537	2,314
Less: Cash classified as held for sale		-	(6)
Cash (as defined by the Group)		2,590	2,318
Loans - non-current		(3,775)	(2,868)
Loans and overdrafts - current		(237)	(482)
Debt (as defined by the Group)		(4,012)	(3,350)
Net debt (as defined by the Group)	KPI	(1,422)	(1,032)

Cash flow

Operating business cash flow⁴

Cash inflow from operating activities was £924m (2014 £913m), which includes cash contributions in respect of pension deficit funding, over and above service costs, for the UK and US schemes totalling £274m (2014 £391m).

The major advances received in 2012 on the Omani Typhoon and Hawk order, and the Saudi training aircraft contract, continue to be consumed. Advances were also utilised in the year on European Typhoon production. Costs are being incurred against provisions created in previous years, including the US commercial shipbuilding programmes and on UK rationalisation. The second of the two payments under the Salam price escalation settlement was received.

Net capital expenditure and financial investment was £284m. In 2014, there was a net cash inflow of £215m, which included the receipt of £418m in respect of the sale and leaseback of two properties in Saudi Arabia.

Dividends received from equity accounted investments reduced by £22m to £41m (2014 £63m) reflecting a lower dividend from MBDA.

Interest payments were £28m higher at £173m (2014 £145m) primarily reflecting the timing of interest payments on US dollar bonds and interest receipts in the UK.

The net cash inflow in respect of acquisitions and disposals of £16m includes £21m received in respect of the sale of the Group's 75% shareholding in the Land Systems South Africa business, less £5m paid in respect of the acquisition of Eclipse Electronic Systems, Inc. In 2014, there was a net cash outflow of £230m comprising the acquisition of SilverSky (£147m) and Signal Innovations Group (£12m), together with an additional 59% shareholding in Saudi Development and Training Company (£71m).

During 2015, there was a cash outflow of £7m (2014 £283m) under the share repurchase programme representing shares purchased and cancelled under the programme announced in February 2013. The return on investment from buying back the Group's own shares reduces as the share price rises and, as a result, activity on the programme has been minimal in the year.

Equity dividends paid in 2015 includes payments in respect of the 2014 final (£389m) and 2015 interim (£266m) dividends.

Dividends paid to non-controlling interests increased to £40m (2014 £14m) reflecting higher dividends paid by both the Group's 75%-owned South African business prior to disposal and a 51%-owned Saudi portfolio company.

Foreign exchange translation, primarily in respect of the Group's US dollar-denominated borrowing, increased reported net debt by £165m.

Balance sheet

		2015 £m	2014 £m
Intangible assets		10,117	9,983
Property, plant and equipment, and investment property		1,818	1,718
Equity accounted investments and other investments		256	236
Other financial assets and liabilities, net		(43)	(112)
Pension deficit, net (see below)		(4,501)	(5,368)
Tax assets and liabilities, net		661	865
Working capital		(3,896)	(4,466)
Net assets held for sale		12	53
Net debt (as defined by the Group)		(1,422)	(1,032)
Net assets		3,002	1,877
Pension deficit, net (see above)		4,501	5,368
Add back: Amounts allocated to equity accounted investments and other participating employers		1,053	1,444
Total IAS 19 deficit, net		5,554	6,812

Exchange rates

Year end	2015	2014
£/$	1.474	1.559
£/€	1.357	1.287
£/A$	2.027	1.908

Balance sheet

The £134m increase in intangible assets to £10.1bn (2014 £10.0bn) mainly reflects exchange translation (£257m), partly offset by amortisation and impairment (£182m).

Property, plant and equipment, and investment property increased to £1.8bn (2014 £1.7bn), including £32m of exchange translation.

Equity accounted investments and other investments increased to £256m (2014 £236m) reflecting the Group's share of profit for the year (£110m), partly offset by exchange translation (£45m) and dividends received (£41m).

The £0.9bn reduction in the Group's share of the pre-tax net pension deficit mainly reflects a decrease in liabilities due to a 0.3 percentage point increase in the real discount rate to 0.7% in the UK and a 0.4 percentage point increase in the nominal discount rate to 4.5% in the US.

In December 2015, BAE Systems, Airbus and the scheme trustees agreed to work towards the creation of a separate Airbus section of the BAE Systems Pension Scheme (Main Scheme) in 2016 with the allocation of the deficit to the BAE Systems and Airbus sections based on each member's last employer. This allocation methodology has been reflected in the allocation of the IAS 19 pension deficit in the Main Scheme at 31 December 2015. The impact of this change on the amounts allocated at 31 December 2015 is an increase of £187m (£153m post-tax) in the Group's share of the reported IAS 19 deficit.

Details of the Group's pension schemes are provided in note 20 to the Group accounts on page 139.

A net deferred tax asset of £0.9bn (2014 £1.2bn) relating to the Group's pension deficit is included within net tax assets and liabilities.

There was a £0.6bn increase in working capital mainly reflecting a net reduction in advance contract funding and utilisation of provisions.

The Group expects to complete the disposal of Aircraft Accessories and Components Company during 2016 and, accordingly, it is classified as held for sale at 31 December 2015 (£12m). The disposal of the Group's 75% shareholding in the Land Systems South Africa business, which was held for sale at 31 December 2014 (£41m), was completed during 2015.

The Group's net debt⁵ at 31 December 2015 is £1,422m, a net increase of £390m from the net debt position of £1,032m at the start of the year.

A $750m (£481m) 5.2% bond was repaid at maturity in August.

In December, BAE Systems issued $1.5bn (£1.0bn) of bonds in the US capital market comprising a $500m five-year bond at a 2.85% coupon, a $750m ten-year bond at a 3.85% coupon and a $250m 30-year bond maturing in 2044 at a 4.75% coupon.

Cash and cash equivalents of £2,537m (2014 £2,314m) are held primarily for the repayment of debt securities, pension deficit funding, payment of the 2015 final dividend and management of working capital.

1. Including share of equity accounted investments.

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

3. Earnings excluding amortisation and impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, non-recurring items and, in 2014, a credit in respect of the re-assessment of existing tax provisions (see note 7 to the Group accounts).

4. Net cash inflow from operating activities after capital expenditure (net), financial investment and dividends from equity accounted investments.

5. Comprises cash and cash equivalents, less loans and overdrafts (including debt-related derivative financial instruments) and cash received on customers' account (see page 19).

6. The target is the Group's budget for the year, which represents the first year of the five-year Integrated Business Plan (see page 64).

7. 85% (including 5% relating to safety objectives - see page 46) of the UK executive directors' bonuses are based on the achievement of objectives aligned to certain Executive Committee objectives measured on Group-level quantitative key performance indicators, with the remaining 15% based on the achievement of personal objectives aligned to the delivery of specific elements of the Group's strategy measured using both quantitative and qualitative performance indicators (see page 76).

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.

Critical accounting policies

Certain of the Group's significant accounting policies are considered by the directors to be critical because of the level of complexity, judgement or estimation involved in their application and their impact on the consolidated financial statements:

Revenue and profit recognition
Revenue	£16.8bn (year ended 31 December 2015) See note 1 to the Group accounts
Carrying value of intangible assets
Intangible assets	£10.1bn (at 31 December 2015) See note 8 to the Group accounts
Valuation of retirement benefit obligations
Group's share of IAS 19 deficit, net	£4.5bn (at 31 December 2015) See note 20 to the Group accounts

P106 For more information

Capital

Objectives

Maintain the Group's investment grade credit rating and ensure operating flexibility, whilst: meeting its pension obligations; pursuing organic investment opportunities; paying dividends in line with the Group's policy of long-term sustainable cover of around two times underlying earnings; making accelerated returns of capital to shareholders when the balance sheet allows and only when the return from doing so is in excess of the Group's Weighted Average Cost of Capital; and investing in value-enhancing acquisitions, where market conditions are right and where they deliver on the Group's strategy.

Policies

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

The capital structure of the Group reflects the judgement of the directors of an appropriate balance of funding required. Three credit rating agencies publish credit ratings for the Group:

Agency	Rating	Outlook	Category
Moody's Investors Service	Baa2	Stable	Investment grade
Standard & Poor's Ratings Services	BBB+	Negative	Investment grade
Fitch Ratings	BBB+	Negative	Investment grade

P150 Note 22 to the Group accounts

Treasury

The Group's treasury activities are overseen by the Treasury Review Management Committee (TRMC). Two executive directors are members of the TRMC, including the Group Finance Director who chairs the Committee. The TRMC also has representatives with legal and tax expertise. The Group operates a centralised treasury department that is accountable to the TRMC for managing treasury activities in accordance with the treasury policies approved by the Board.

Objectives/policies

Net debt

Maintain a balance between the continuity, flexibility and cost of debt funding through the use of borrowings from a range of markets with a range of maturities, currencies and interest rates, reflecting the Group's risk profile.

- Material borrowings are arranged by the central treasury department and funds raised are lent onward to operating subsidiaries as required.

Interest rates

Manage the exposure to interest rate fluctuations on borrowings through varying the proportion of fixed rate debt relative to floating rate debt with derivative instruments, including interest rate and cross-currency swaps.

- A minimum of 50% and a maximum of 90% of gross debt is maintained at fixed interest rates.

Liquidity

Maintain adequate undrawn committed borrowing facilities.

- An undrawn committed Revolving Credit Facility of £2bn contracted to December 2018 and £1.9bn contracted from December 2018 to December 2020 is available to meet expected general corporate funding requirements.

Monitor and control counterparty credit risk and credit limit utilisation.

- The Group adopts a conservative approach to the investment of its surplus cash. It is deposited with financial institutions with the strongest credit ratings for short periods.

Currency

Reduce the Group's exposure to transactional volatility in earnings and cash flows from movements in foreign currency exchange rates.

- All material firm transactional exposures are hedged.

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

P156 Note 27 to the Group accounts

Tax strategy

The Group's tax strategy is to:

- ensure compliance with all applicable tax laws and regulations; and

- manage the Group's tax expense in a way that is consistent with its values and its legal obligations in all relevant jurisdictions.

The Group promotes collaborative professional working with tax authorities in order to build open, transparent and trusted relationships. As part of this, the Group engages in open and early dialogue to discuss tax planning, strategy, risks and significant transactions, and discloses any significant uncertainties in relation to tax matters. Queries and information requests by tax authorities are responded to in a timely fashion and the Group ensures that tax authorities are kept informed about how issues are progressing. The Group seeks to resolve issues in real-time and before returns are filed where possible. Fair, accurate and timely disclosures are made in tax returns, reports and documents that the Group files with, or submits to, tax authorities. Where disagreements over tax arise, the Group works proactively to seek to resolve all issues by agreement (where possible) and reach reasonable solutions.

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

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

BAE Systems operates internationally and is subject to tax in many different jurisdictions. The Group employs professional tax managers and takes appropriate advice from reputable professional firms. The Group is routinely subject to tax audits and reviews which can take a considerable period of time to conclude. Provision is made for known issues based on management's interpretation of country-specific legislation and the likely outcome of negotiations or litigation. The assessment and management of tax risks are regularly reviewed by the Audit Committee, as is the Group's tax strategy.

Arm's length principles are applied in the pricing of all intra-group transactions of goods and services in accordance with Organisation for Economic Co-operation and Development guidelines. Where appropriate, the Group engages with governments in relation to proposed legislation and tax policy. The Group endorses the statement of tax principles issued by the Confederation of British Industry in May 2013 (www.cbi.org.uk/media/2051390/statement_of_principles.pdf).

P119 Note 6 to the Group accounts

Note and page references used above refer to the Annual Report 2015 that can be viewed on the Company's website.

Principal risks

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

1. Defence spending The Group is dependent on defence spending.
Description In 2015, 92% of the Group's sales were defence-related. Defence spending by governments can fluctuate depending on political considerations, budgetary constraints, specific threats and movements in the international oil price. There have been constraints on government expenditure in a number of the Group's principal markets, in particular in the US and UK. With the Eurozone area experiencing financial difficulties, affordability continues to be a key focus for customers. Some countries' economies may be influenced by oil prices, with consequent reduced defence spending.		Impact Lower 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 business is geographically spread across US, UK and international defence markets: - In the US, further clarity regarding potential market improvement was gained after Congress reached agreement on a new budget deal that provides for defence and domestic programme spending above the Budget Control Act caps through 2017. - In the UK, the Strategic Defence and Security Review announced in November provides clarity, continuity and stability for the business. An increased budget for defence equipment overall includes significant investments in military aerospace, maritime, cyber and intelligence, surveillance and reconnaissance capabilities and ongoing support for defence exports. - In Saudi Arabia, regional tensions continue to dictate that defence remains a high priority. The diverse product and services portfolio is marketed across a range of defence markets. BAE Systems has a growing portfolio of commercial businesses, including commercial avionics and the commercial areas of the Applied Intelligence business. Sales in commercial markets represented 8% of the Group's sales in 2015.
2. Government customers The Group's largest customers are governments.
Description The Group has long-standing relationships and security arrangements with a number of its government customers, including its three largest customers, the governments of the UK, US and Saudi Arabia, and their agencies. It is important that these relationships and arrangements are maintained. In the defence and security industries, governments can typically modify contracts for their convenience or terminate them at short notice. Long-term US government contracts, for example, are funded annually and are subject to cancellation if funding appropriations for subsequent periods are not made. The Group's performance on its contracts with some government customers is subject to financial audits and other reviews which can result in adjustments to prices and costs.		Impact Deterioration in the Group's principal government relationships resulting in the failure to obtain contracts or expected funding appropriations, adverse changes in the terms of its arrangements with those customers or their agencies, or the termination of contracts could have a material adverse effect on the Group's future results and financial condition.		Mitigation Government customers have sophisticated procurement and security organisations with which the Group can have long-standing relationships with well-established and understood terms of business. In the event of a customer terminating a contract for convenience, the Group would typically be paid for work done and commitments made at the time of termination.
3. International market The Group operates in an international market.
Description BAE Systems is an international company conducting business in a number of regions, including the US and the Middle East. The risks of operating in some countries include: political changes impacting the business environment; economic downturns, political instability and civil disturbances; changes in government regulations and administrative policies; the imposition of restraints on the movement of capital; the introduction of burdensome taxes or tariffs; and the inability to obtain or maintain the necessary export licences. The Group is exposed to translational volatility arising from movements in currency exchange rates, particularly in respect of the US dollar, Euro, Saudi Riyal and Australian dollar.		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 a number of markets internationally. The Group's policy is to hedge all material firm transactional exposures. The Group's contracts are often long-term in nature and, consequently, it may be able to mitigate these risks over the terms of those contracts. Political risk insurance is held in respect of export contracts not structured on a government-to-government basis.
4. Competition in international markets The Group's business is subject to significant competition in international markets.
Description The Group's business plan depends upon its ability to win and contract for high-quality new programmes, an increasing number of which are expected to be in markets outside the UK and US. The Group is dependent upon UK and US government support in relation to a number of its business opportunities in export markets.		Impact The Group's business and future results may be adversely impacted if it is unable to compete adequately and obtain new business in the markets in which it operates.		Mitigation The Group has an international, multi-market presence, a balanced portfolio of businesses, leading capabilities and a track record of delivery on its commitments to its customers. The Group continues to invest in research and development, and to reduce its cost base and improve efficiencies, to remain competitive. In the UK, export contracts can be structured on a government-to-government basis and government support can also involve military training, ministerial support for promotional activities and financial support through UK Export Finance. In the US, most of the Group's defence export sales are delivered through the Foreign Military Sales process, under which the importing government contracts with the US government.
5. Laws and regulations The Group is subject to risk from a failure to comply with laws and regulations.
Description The Group operates in a highly-regulated environment across many jurisdictions and is subject, without limitation, to regulations relating to import-export controls, money laundering, false accounting, anti-bribery and anti-boycott provisions. It is important that the Group maintains a culture in which it focuses on embedding responsible business behaviours and that all employees act in accordance with the requirements of the Group's policies, including the Code of Conduct, at all times. Export restrictions could become more stringent and political factors or changing international circumstances could result in the Group being unable to obtain or maintain necessary export licences.		Impact Failure by the Group, or its sales representatives, marketing advisers or others acting on its behalf, to comply with these regulations could result in fines and penalties and/or the suspension or debarment of the Group from government contracts or the suspension of the Group's export privileges, which could have a material adverse effect on the Group. Reduced access to export markets could have a material adverse effect on the Group's future results and financial condition.		Mitigation BAE Systems has a well-established legal and regulatory compliance structure aimed at ensuring adherence to regulatory requirements and identifying any restrictions that could adversely impact the Group's activities. Internal and external market risk assessments form an important element of ongoing corporate development and training processes. A uniform global policy and process for the appointment of advisers engaged in business development is in effect. The special compliance officer, appointed pursuant to commitments concerning ongoing regulatory compliance made in the course of the 2011 settlement with the US Department of State, concluded his monitorship in May 2014 and, at the invitation of BAE Systems, agreed to remain in a limited capacity for a limited further period of time.
6. Contract risk and execution The Group has many contracts, including a small number of large contracts and fixed-price contracts.
Description In 2015, 48% of the Group's sales were generated by its 12 largest programmes. At 31 December 2015, the Group had seven programmes with order backlog in excess of £1bn. A significant portion of the Group's revenue is derived from fixed-price contracts. Actual costs may exceed the projected costs on which the fixed prices are agreed and, since these contracts can extend over many years, it can be difficult to predict the ultimate outturn costs. It is important that the Group maintains a culture in which it delivers on its projects within tight tolerances of quality, time and cost performance in a reliable, predictable and repeatable manner.		Impact The inability of the Group to deliver on its contractual commitments, the loss, expiration, suspension, cancellation or termination of any one of its large contracts or its failure to anticipate technical problems or estimate accurately and control costs on fixed-price contracts could have a material adverse effect on the Group's future results and financial condition.		Mitigation Contract-related risks and uncertainties are managed under the Group's mandated Lifecycle Management process. A significant proportion of the Group's largest contracts are with the UK Ministry of Defence. In the UK, development programmes are normally contracted with appropriate levels of risk being initially held by the customer and contract structures are used to mitigate risk on production programmes, including where the customer and contractor share cost savings and overruns against target prices. The Group has a well-balanced spread of programmes and significant order backlog which provides forward visibility. The Group has limited exposure to fixed-price design and development activity which is in general more risk intensive than fixed-price production activity. Robust bid preparation and approvals processes are well established throughout the Group, with decisions required to be taken at the appropriate level in line with clear delegations of authority.
7. Contract cash profiles The Group is dependent on the award timing and cash profile of its contracts.
Description The Group's profits and cash flows are dependent, to a significant extent, on the timing of, or failure to receive, award of defence contracts and the profile of cash receipts on its contracts.		Impact Amounts receivable under the Group's defence contracts can be substantial and, therefore, the timing of, or failure to receive, awards and associated cash advances and milestone payments could materially affect the Group's profits and cash flows for the periods affected, thereby reducing cash available to meet the Group's cash allocation priorities, potentially resulting in the need to arrange external funding and impacting its investment grade credit rating.		Mitigation The Group's balance sheet continues to be managed conservatively in line with its policy to retain an investment grade credit rating and to ensure operating flexibility. The Group monitors a rolling forecast of its liquidity requirements to ensure that there is sufficient cash to meet its operational needs and maintain adequate headroom.
8. Pension funding The Group has an aggregate funding deficit in its defined benefit pension schemes.
Description In aggregate, there is an actuarial deficit between the value of the projected liabilities of the Group's defined benefit pension schemes and the assets they hold. The 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.		Impact 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 cash allocation priorities. In December 2015, BAE Systems, Airbus and the scheme trustees agreed to work towards the creation of a separate Airbus section of the BAE Systems Pension Scheme (Main Scheme) in 2016 with the allocation of the deficit to the BAE Systems and Airbus sections based on each member's last employer. This allocation methodology is considered to represent a better estimate of the deficit allocation and has been reflected in the allocation of the IAS 19 pension deficit in the Main Scheme at 31 December 2015. The impact of this change on the amounts allocated at 31 December 2015 is an increase of £187m (£153m post-tax) in the Group's share of the reported IAS 19 deficit.		Mitigation Following triennial funding valuations of the Group's UK pension schemes during 2014, where appropriate, revised deficit recovery plans have been agreed which run until 2026. Growth of the defined benefit pension liabilities is expected to be curtailed as, in the UK, new employees have been offered defined contribution benefits since April 2012 and, in the US, with effect from January 2013, employees no longer accrue salary-related benefits in defined benefit schemes. In 2013, the trustees of a number of UK pension schemes entered into arrangements to insure against longevity risk for current pensioners, covering a total of £4.4bn of liabilities, and, in 2014, 38% of eligible Main Scheme pensioners opted to exchange future increases on part of their pensions for higher non-increasing pensions.
9. Information technology security The Group could be negatively impacted by information technology security threats.
Description 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.
10. People The Group's strategy is dependent on its ability to recruit and retain people with appropriate talent and skills.
Description Delivery of the Group's strategy and business plan is dependent on its ability to compete to recruit and retain people with appropriate talent and skills, including those with innovative technological capabilities. With constraints on defence spending in its UK and US markets, the Group's business plan is targeting an increasing level of business in international export markets. It is important that the Group recruits and retains management with the necessary international skills and experience in the relevant jurisdictions.		Impact The loss of key employees or inability to attract the appropriate people on a timely basis, could adversely impact its ability to deliver its strategy, meet the business plan and, accordingly, have a negative impact on the Group's future results and financial condition.		Mitigation The Group recognises that its employees are key to delivering its strategy and business plan, and focuses on developing the existing workforce and hiring talented people to meet current and future requirements. The Group has well-established graduate recruitment and apprenticeship programmes and, in order to maximise the contribution that its workforce can make to the performance of the business, has an effective through-career capability development programme. In order to seek to maximise its talent pool, the Group is committed to creating a diverse and inclusive environment for its employees. BAE Systems continues to embed its ethics programme globally, driving the right behaviours by supporting employees in making ethical decisions and embedding responsible business practices.
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 2015 that can be viewed on the Company's website.

Segmental performance

Electronic Systems

Electronic Systems, with 12,400 employees¹, comprises the US and UK-based electronics activities, including electronic warfare systems, electro-optical sensors, military and commercial digital engine and flight controls, next-generation military communications systems and data links, persistent surveillance capabilities, and hybrid electric drive systems.

Electronic Combat includes the Electronic Protection, Electronic Warfare and Electronic Attack product lines, and provides a depth of capability in integrated electromagnetic systems for airborne applications, mission planning and battle management solutions, secure networked communications and navigation systems, radio frequency communication and data links.

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

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

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

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

Operational and strategic highlights

-    Selected for the Eagle Passive Active Warning Survivability System programme with Boeing, potentially worth over $1.0bn (£0.7bn) over the life of the programme, to upgrade up to 400 US Air Force F-15 aircraft

-    Delivered the first international order for the Advanced Precision Kill Weapon System (APKWS™)

-    Awarded a five-year contract for the US Army's Enhanced Night Vision Goggle III and Family of Weapon Sights - Individual programme, with a potential value of $435m (£295m)

-    Acquired Eclipse Electronic Systems, Inc., a provider of leading-edge communications intelligence receivers and services

-    Selected by Boeing to provide the entire flight control electronics suite on the next-generation 777X aircraft programme following the award, in 2015, for the remote electronic units

-    Opened a state-of-the-art aviation technology manufacturing facility in Fort Wayne, Indiana

Financial performance

		2015	2014
Sales1	KPI	£2,638m	£2,415m
Underlying EBITA2	KPI	£396m	£373m
Return on sales		15.0%	15.4%
Cash inflow3	KPI	£323m	£246m
Order intake1	KPI	£2,523m	£2,341m
Order backlog1,4		£4.2bn	£3.9bn

-    Sales¹ compared to 2014 increased marginally to $4.0bn (£2.6bn). The commercial areas of the business now amount to 23% having seen sales growth in the year of 7%. On the defence side, sales were stable with growth on the F-35 Lightning II programme offsetting contracts completing in 2014.

-    The return on sales achieved of 15.0% benefited from continued strong programme execution and risk retirement. Last year's return on sales of 15.4% included a 0.5 percentage point non-recurring gain from a contract pricing settlement.

-    Cash³ conversion of underlying EBITA² for the year was at 89%, excluding pension deficit funding.

-    Order backlog^1,4 was sustained at $6.1bn (£4.2bn) benefiting from awards for Enhanced Night Vision Goggles, F-15 electronic warfare upgrades, production of P-8A Poseidon mission computers and F-35 Lightning II Low-Rate Initial Production Lots 9 to 11.

1. Including share of equity accounted investments.

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

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

4. Comprises funded and unfunded unexecuted customer orders.

Operational performance

Electronic Combat

Electronic Systems has sustained its leadership position in the US electronic warfare market and production is ramping up across a number of programmes. Low-Rate Initial Production hardware deliveries on the F-35 Lightning II programme continue with Lot 8 and 9 deliveries, and Lot 10 deliveries expected to commence in 2016. The business has received initial funding for Lot 11, with negotiations anticipated in 2016.

The business is under contracts, from Boeing and Warner Robins Air Logistics Complex, totalling over $1.0bn (£0.7bn) to install the Digital Electronic Warfare System (DEWS) on 84 new F-15 aircraft, upgrade 70 existing F-15 aircraft with DEWS and provide spare units and modules for an international customer. Hardware and software deliveries, and system verification testing remain on schedule.

BAE Systems has been selected by Boeing to develop and manufacture the next‑generation digital electronic warfare system for the US Air Force's Eagle Passive Active Warning Survivability System programme to upgrade up to 400 F-15 aircraft. The programme could be worth over $1.0bn (£0.7bn) over its life.

BAE Systems was selected by the US Special Operations Command to develop a new electronic warfare system for its fleet of C-130J aircraft. The initial contract, worth more than $20m (£14m), is the first phase of a multi-phase programme to provide product development and platform integration work over the next 12 months. The lifecycle value of the contract could exceed $400m (£271m).

Due to the sensitive nature of electronic combat systems and technology, many of the business's programmes are classified. As a world leader in electronic warfare systems, the business continues to experience growth in this increasingly important area.

Survivability, Targeting & Sensing

The US Army continues to field the third‑generation upgrade to its Common Missile Warning Systems and has placed its first Foreign Military Sales orders for systems to Qatar, the Republic of Korea, Indonesia and Turkey.

Electronic Systems continues to deliver on Advanced Precision Kill Weapon System (APKWS^™) Full-Rate Production Lots 3 and 4, now worth a total of $115m (£78m) with the US Navy. BAE Systems received customer recognition for the completion of the 5,000th production unit during September and the first Foreign Military Sales order of 110 systems for Jordan was completed in October. The US Army acquired an initial quantity of APKWS^™ laser-guided rockets from the US Navy for use in ongoing operations.

The business continues to perform on the Terminal High-Altitude Area Defence Full-Rate Production contract, valued at $340m (£231m), for 307 infrared missile seekers supporting both the US government and Foreign Military Sales.

A five-year, Indefinite Delivery, Indefinite Quantity (IDIQ) contract to support the US Army's Enhanced Night Vision Goggle III and Family of Weapon Sights - Individual programme was awarded to BAE Systems in March. The contract has a potential value of approximately $435m (£295m). The programme has commenced initial deliveries to support user evaluation and reliability testing.

The next-generation Striker^® II helmet-mounted display has completed initial flight trials, successfully demonstrating the performance of the integrated digital night vision camera.

The business was unsuccessful in bidding for the US Army's Common Infrared Countermeasures programme.

Intelligence, Surveillance & Reconnaissance

The business continues to provide Airborne Surveillance capability for the US Air Force and US Army based on two wide-area, high-resolution imaging sensor systems - the Airborne Wide Area Persistent Surveillance System, which has been operational for more than 28,000 hours in theatre, and the Autonomous Real-time Ground Ubiquitous Surveillance - Imaging System.

The business provides state-of-the-art processing capabilities for the US Navy's P-8A Poseidon programme, which has entered Full-Rate Production, and delivered 35 mission computer and display systems during the year. Four systems were purchased by Australia in 2015.

Electronic Systems continues to provide Signals Intelligence capability for the US Army and other US Department of Defense customers. BAE Systems was awarded $28m (£19m) for additional enhancements to the existing two-year contract valued in excess of $95m (£64m) to provide Tactical Signals Intelligence Payloads and associated equipment for the US Army's Gray Eagle unmanned aircraft. Deliveries of pods and ground stations have commenced.

In June, BAE Systems completed the acquisition of Eclipse Electronic Systems, Inc., a Texas-based provider of highly‑advanced Intelligence, Surveillance and Reconnaissance products and services to the US defence and intelligence community.

Controls & Avionics

BAE Systems is a major supplier to Boeing for flight controls, and cabin and flight deck systems. In February, the Group was selected to provide the remote electronic units on Boeing's next-generation 777X aircraft programme. With this new award, BAE Systems will now provide the entire flight control suite for 777X aircraft. Delivery of subsystems for the first 737 MAX test aircraft was completed on schedule.

FADEC Alliance, a joint venture between FADEC International (the Group's joint venture with Sagem) and GE Aviation, completed certification of the full authority digital engine controls on the Leap engine for the Airbus A320neo aircraft.

The business completed certification of the flight control electronics for the Embraer Legacy 500 and Bombardier CSeries aircraft, and its flight control electronics enabled first flights of the Gulfstream G500 and Embraer KC-390 aircraft.

Vistara, an Indian airline, became the launch customer for BAE Systems' IntelliCabin^® wireless in-flight entertainment system. The first installation of the system was certified in January 2016.

A new state-of-the-art manufacturing facility in Fort Wayne, Indiana, officially opened in September for the production of commercial aircraft electronics.

On the F-35 Lightning II programme, BAE Systems completed Low-Rate Initial Production (LRIP) Lot 7 deliveries of 38 production shipsets, plus spares, of the vehicle management computer and active inceptor system equipment to Lockheed Martin. Both systems are currently in production for LRIP Lot 8 and under contract for LRIP Lot 9.

HybriDrive^® Solutions

With the recent delivery of its 5,000th hybrid propulsion system, the business is continuing to meet the needs of an environmentally-conscious global transit bus market with its new anti-idling technology and zero-emission drive modes. Cities including London, Paris, Boston and Seattle are now using engine-off technology to save fuel, reduce noise and improve local air quality.

Other

In July, the Communications & Control line of business was realigned across the three remaining defence businesses.

From 2016, Cyber & Intelligence's Geospatial Intelligence - Intelligence, Surveillance and Reconnaissance business will be reported in Electronic Systems.

Looking forward

In the US, further clarity regarding potential market improvement was gained after Congress reached agreement on a new budget deal that provides for defence and domestic programme spending above the Budget Control Act caps through 2017.

Whilst the longer-term outlook retains some uncertainty, Electronic Systems remains well positioned to address changing US Department of Defense priorities. Its focus remains on maintaining a diverse portfolio of defence and commercial products and capabilities for US and international customers, while sustaining its emphasis on cost reduction, and research and development.

The business expects to benefit from its franchise positions, particularly on the F-35 Lightning II and F-15 programmes, and its ability to apply innovative technology solutions that meet defence customers' changing requirements. In the commercial aviation market, Electronic Systems' technology innovations are enabling the business to renew long-standing customer positions and win new business.

Cyber & Intelligence

Cyber & Intelligence, with 12,900 employees¹, comprises the US-based Intelligence & Security business and UK-headquartered Applied Intelligence business, and covers the Group's cyber security, secure government, and commercial and financial security activities.

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

GEOINT-ISR develops and supports mission software and systems for US intelligence and defence customers, leveraging domain expertise in geospatial, Intelligence, Surveillance and Reconnaissance (ISR) and mission management.

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

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

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

Applied Intelligence collects, manages and exploits information to provide intelligence enabling government and commercial customers to maintain security, manage risk and optimise performance.

Alongside its secure government-focused activities, the business is a supplier of solutions that combine large-scale data exploitation, intelligence‑grade security and services and solutions integration to commercial customers, with a focus on financial services, telecommunications, and energy and utility companies.

Primary operations are located in the UK, Denmark, Ireland, Australia, Malaysia and the US.

Operational and strategic highlights

Intelligence & Security

-    Strategic review of manpower and services businesses determined that retaining the businesses delivers greater value

-    Secured a ten-year contract with an expected value of over $1.0bn (£0.7bn) to provide information technology services to high-priority US government agencies

-    Secured a five-year, $278m (£189m) re-compete award to provide logistics and sustainment engineering services for radar, optical and telemetry systems

Applied Intelligence

-    Integration of the acquired SilverSky business substantially completed

-    Significant investment in engineering capabilities and product development

-    Strong performance in commercial cyber security products, with multi-year contracts awarded

-    Launch and initial take-up of cloud-based cyber security products in Europe, Canada and Asia-Pacific

-    Continued growth of security and digital services projects in government and critical national infrastructure in the UK and internationally

Financial performance

		2015	20142
Sales1	KPI	£1,848m	£1,658m
Underlying EBITA3	KPI	£145m	£153m
Return on sales		7.8%	9.2%
Cash inflow4	KPI	£93m	£125m
Order intake1	KPI	£2,029m	£1,784m
Order backlog1,5		£2.4bn	£2.0bn

-    In aggregate, sales¹ increased by 3% to $2.8bn (£1.8bn). The US business saw just a 1% decrease largely in government IT services. Growth in the Applied Intelligence business was at 31%, of which 13% came from the acquisition of SilverSky and 18% organically, largely from non-UK government customers.

-    The return on sales reduced to 7.8% (2014 9.2%) due to a higher level of costs expensed in Applied Intelligence as the business focuses on further growth.

-    Cash⁴ conversion of underlying EBITA³ for the year was at 82%, excluding pension deficit funding.

-    In aggregate, order backlog^1,5 increased to $3.5bn (£2.4bn). Order backlog in the US business grew by 13% largely on imagery analysis and cyber support awards. In the Applied Intelligence business, order backlog increased by 21% over the year driven mainly by international and commercial awards.

1. Including share of equity accounted investments.

2. Re-presented for the reallocation of the Integrated Electronics & Warfare Systems activities from Platforms & Services (US) to Cyber & Intelligence.

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

4. Net cash inflow from operating activities after capital expenditure (net), financial investment and dividends from equity accounted investments.

5. Comprises funded and unfunded unexecuted customer orders.

Operational performance

Intelligence & Security

GEOINT-ISR (Geospatial Intelligence - Intelligence, Surveillance and Reconnaissance)

Intelligence & Security continues to mature its capabilities in software-based data analytics with an emphasis on big data, production, automation and efficiencies to help the intelligence and defence communities transform data into actionable intelligence.

The business continues to build on its legacy of support to the National Geospatial-Intelligence Agency. Under the Consolidated Library programme, the business was awarded a 15-month, $18m (£12m) contract for a Flexible Content Management System that provides new flexible and adaptable capabilities that can be deployed to enhance intelligence collection and tradecraft.

Since winning the Geospatial Data Services Foundational GEOINT Content Management programme in 2014, the business has been awarded orders valued at over $104m (£71m).

The business is performing well on two new contracts awarded in 2015 to assist new US intelligence community customers with the development of advanced GEOINT data processing and next-generation geospatial intelligence data collection solutions.

The Mobility Air Force Automated Flight Planning Service programme is developing advanced mission planning software for US Air Force non-combat aircraft. The software generates four-dimension optimised flight plans to minimise fuel consumption and take advantage of new and evolving air space regulations. The latest software version has been delivered to the customer for formal qualification testing and is on track to be operational in 2016.

Signal Innovations Group, Inc., acquired in 2014, has been integrated into the Geospatial eXploitation Products business. The new organisation is combining enhanced full motion video imagery capabilities with existing geospatial analytic software products to pursue new opportunities in the US intelligence and defence communities.

From 1 January 2016, the GEOINT-ISR business will be managed and reported within Electronic Systems.

Global Analysis & Operations

In full motion video and intelligence, surveillance and reconnaissance analysis, the business has more than 500 analysts globally sustaining mission critical activities on programmes worth over $400m (£271m).

The business secured a five-year re-compete contract worth up to $145m (£98m) to provide counter-terrorism analysis services.

Integrated Electronics & Warfare Systems

The business secured a five-year, $278m (£189m) re-compete award to provide logistics and sustainment engineering services for US Department of Defense radar, optical and telemetry systems used by the Department of Defense, Department of Energy and NASA, as well as international government agencies.

On the US Air Force's Intercontinental Ballistic Missile Integration Support Contractor programme, the business has been awarded $174m (£118m) in additional engineering scope change proposals in 2015. Since assuming control of the programme in 2014, the team has supported five successful missile test launches.

The business was awarded a five-year US Marine Corps Air Traffic Control and Landing Systems re-compete contract, with a potential total value of $77m (£52m).

The US Army awarded BAE Systems a five-year contract, potentially worth $76m (£52m), to test Command, Control, Communications, Computers and Intelligence (C4i) systems for tactical vehicles, and then prototype, engineer and upgrade more than 2,000 vehicles per year.

IT Solutions

Intelligence & Security was selected to provide information technology services to the US government in a single-award contract with a potential value of over $1.0bn (£0.7bn) over a ten-year period.

The business secured a five-year re-compete award with a potential ceiling value of $47m (£32m) to continue its support of the US Department of Homeland Security Office of Biometric Identity Management with large-scale, mission-critical fingerprint analysis and verification services.

The business was selected for three important Indefinite Delivery, Indefinite Quantity (IDIQ) contracts in the year. Under the Network Operations and Infrastructure and Application Services Full and Open multiple-award contracts, the business is pursuing task orders to expand its IT services footprint with the US Air Force. The third IDIQ contract award positions the business to pursue task orders for mission support services to the Federal Bureau of Investigation.

Applied Intelligence

Applied Intelligence's markets are highly competitive with fast-changing customer requirements. It typically faces competition from multiple vendors. Whilst it has won positions on a number of framework agreements, business tendered under these contracts is still competitive. Whilst continuing to grow in the UK market, it was disappointing to note the loss in the Metropolitan Police Service Integration and Applications Management competition this year. The business continues to focus on delivering a value-for-money service to all its current and prospective customers in this area of government business.

The strategy for the Applied Intelligence business is to create market-leading positions in the commercial cyber security market and increasing the scale of systems and service integration contracts to the UK government and for government customers overseas.

The integration of the SilverSky business in the US, acquired in 2014 to accelerate the drive into the commercial cyber security market, has been a success and is substantially completed.

During the year, the business has invested in engineering and product development and the sales team to support growth. In 2015, Applied Intelligence recruited 1,200 employees, including 700 engineers.

Commercial Solutions

Commercial Solutions focuses on the provision of cyber security, counter-fraud and compliance software and solutions, primarily to commercial organisations.

The sale of products and services which provide multi-year or recurring revenue streams has continued to grow. Applied Intelligence's cloud-based e-mail protection products, launched in Europe, Canada and Asia-Pacific during the year, have been deployed by a leading international airline and a leading UK media producer and broadcaster.

New managed security services awards include a three-year contract to provide advanced threat detection services to an international law firm and a three-year networking security monitoring services contract with one of the main national UK television broadcasters.

The CyberReveal^™ threat analytics solution, which defends organisations against sophisticated cyber attacks, continues to receive orders from both new and existing customers, including major financial institutions in Europe and North America.

During the year, new NetReveal^® wins included Metro Bank in the UK to provide a range of anti-money laundering services and a large credit union in the US to provide an enterprise fraud solution. Growth in existing accounts has included the procurement of a trade finance fraud solution by a large financial institution. The year also saw the successful implementation of a managed fraud analytics platform for Canadian National Insurance Crime Services (CANATICS), the largest insurance consortium in Canada.

UK Services

UK Services is a provider of systems integration and consulting services to UK government, national security customers and critical national infrastructure providers, with a particular focus on digital, data analytics and cyber security. The business has continued to grow.

The business has strengthened its relationship with Network Rail, being awarded a three-year contract for its business intelligence IT portfolio, winning a contract to provide cyber security systems integration services to help mitigate the cyber threats to the UK's national rail network and winning a contract to support the digital enablement of the UK rail network as part of Network Rail's Digital Railway Initiative.

Demand for Applied Intelligence's cyber security services continues, with contracts awarded for a cyber security and information assurance managed service at the Ministry of Justice, for digital identity and fraud analytics at the Department for Work and Pensions and to provide cyber threat intelligence strategy consulting services for a major international financial services group. The business has also been awarded a position on the UK government's Defence Science and Technology Laboratory framework for electronic warfare and cyber research.

Applied Intelligence's digital and data transformation business continues to grow, with new contracts including a data migration strategy project for the Atomic Weapons Establishment, a secure, cloud-based, open-source IT platform for Lloyd's Register and a digital capability assessment project for a leading UK television and broadband provider in support of its digital transformation programme.

International Services & Solutions

International Services & Solutions focuses on cyber and communications intelligence services and solutions for international governments and communications service providers, pulling through Applied Intelligence's commercial product-based solutions where relevant.

The business continues to see demand in Asia-Pacific and the Middle East in support of protection against national threats. In Europe, the business was awarded a contract to provide a long-term government partner with a solution to investigate new concepts for situational awareness using the IntelligenceReveal^™ all-source analysis solution.

In the second half of the year, the business won major contracts to provide integrated intelligence solutions to support the missions of South European and Asian customers. It also won a substantial cyber security services contract in Asia to build an advanced Security Operations Centre.

Looking forward

Intelligence & Security

In the US, further clarity regarding potential market improvement was gained after Congress reached agreement on a new budget deal that provides for defence and domestic programme spending above the Budget Control Act caps through 2017.

In April, BAE Systems announced that it had engaged advisers to support a strategic assessment of the Intelligence & Security sector's Global Analysis & Operations, Integrated Electronics & Warfare Systems and IT Solutions businesses. The review determined that retaining the businesses within BAE Systems, Inc. delivers greater value.

Following a period of market contraction in the US government services sector, the Group believes the outlook is now stabilising.

Intelligence & Security has reduced costs to address government budgets, whilst pursuing growth opportunities, particularly in critical, mission-focused areas.

Applied Intelligence

Applied Intelligence has invested in engineering and product development and the sales team to grow further its order backlog and pipeline of opportunities from commercial and government customers in North America, Europe, Asia-Pacific and the Middle East.

Platforms & Services (US)

Platforms & Services (US), with 11,500 employees¹ and operations in the US, UK and Sweden, produces combat vehicles, weapons and munitions, and delivers US-based services and sustainment activities, including ship repair and the management of government-owned munitions facilities.

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

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

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

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

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

FNSS, BAE Systems' Turkish joint venture, produces and upgrades tracked and wheeled military vehicles for domestic and international customers.

Operational and strategic highlights

-    Award of a five-year contract worth up to $332m (£225m) to perform technical support for the US Army's Bradley Fighting Vehicle and M113 family of vehicles

-    Low-Rate Initial Production contract options awarded, worth $245m (£166m), for US Army M109A7 (Paladin)self-propelled howitzers

-    Contract worth $104m (£71m) awarded for the engineering and manufacturing development phase of the competition for the Amphibious Combat Vehicle 1.1 programme

-    Secured naval gun system contracts with the US, Canada and Brazil

-    FNSS received a new export order for the PARS wheeled armoured vehicle

-    Continued challenges on commercial shipbuilding programmes

-    Workforce reductions announced in commercial shipbuilding, ship repair and BAE Systems Hägglunds

-    Sale of 75% interest in Land Systems South Africa completed

Financial performance

		2015	20142
Sales1	KPI	£2,779m	£2,689m
Underlying EBITA3	KPI	£177m	£117m
Return on sales		6.4%	4.4%
Cash inflow4	KPI	£100m	£147m
Order intake1	KPI	£2,737m	£2,565m
Order backlog1,5		£3.9bn	£4.7bn

-    Sales¹ reduced by 4% to $4.2bn (£2.8bn), or by just 1% on a like-for-like basis after adjusting for exchange translation and the South African business disposal. Higher than expected sales were seen on both ship repair activity and munitions volume.

-    The business has delivered an improved return on sales of 6.4% (2014 4.4%). Whilst further charges had to be taken in the year on the commercial shipbuilding programmes, these were partly offset by improvements to the Radford munitions contract.

-    Cash⁴ conversion of underlying EBITA³ was impacted by the utilisation of provisions on commercial shipbuilding programmes and of customer advances on the CV90 Norway contract, as well as the investment in the new floating dry dock facilities in San Diego.

-    Order backlog^1,5 reduced to $5.8bn (£3.9bn) largely for the trading out of the five-year Multi-Ship, Multi-Option contracts in the ship repair business and the CV90 Norway programme.

1. Including share of equity accounted investments.

2. Re-presented for the reallocation of the Integrated Electronics & Warfare Systems activities from Platforms & Services (US) to Cyber & Intelligence.

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

4. Net cash inflow from operating activities after capital expenditure (net), financial investment and dividends from equity accounted investments.

5. Comprises funded and unfunded unexecuted customer orders.

Operational performance

As the US defence market stabilises, the business retains its focus on sustaining its franchise programmes and building a strong domestic and international pipeline, whilst optimising competitiveness by shaping and scaling operations.

US Combat Vehicles

In May, the US Army awarded BAE Systems a contract worth $110m (£75m) to convert 36 M88A1 recovery vehicles to the M88A2 Heavy Equipment Recovery Combat Utility Lift Evacuation System (HERCULES) configuration. The M88 plays an important role in maintaining the combat vehicle industrial base, with the first vehicle delivery scheduled for 2017. In October, BAE Systems received awards worth $31m (£21m) from the US Army to produce six M88A2 HERCULES vehicles and associated spare parts for the Australian government, as well as an additional vehicle and parts for the US Marine Corps.

Work has commenced on the US Army's Armored Multi-Purpose Vehicle (AMPV) programme and a preliminary design review was completed in June. BAE Systems is producing 29 vehicles under the engineering and manufacturing development phase. The total potential contract value for the initial programme phases is $1.2bn (£0.8bn), including options to produce 289 vehicles under Low-Rate Initial Production (LRIP). Anticipated full-rate production is expected to approach 3,000 vehicles.

The business was awarded a $29m (£20m) follow-on contract for trade studies and analysis related to the future infantry fighting vehicle. Under the contract, BAE Systems will develop concepts that span from modernising the Bradley vehicle to a new design, and will capitalise on technology created under the Ground Combat Vehicle programme.

In July, the US Army awarded BAE Systems a five-year contract worth up to $332m (£225m) to support ongoing service and improvements for the Bradley Fighting Vehicle and the M113 family of vehicles.

The business was notified in August that the Lockheed Martin Joint Light Tactical Vehicle team, of which BAE Systems was a member, was not selected for the LRIP contract. This competition outcome is currently in litigation.

In October, the business was awarded the final LRIP contract options, worth $245m (£166m), for the M109A7 self-propelled howitzers (Paladin) and their associated ammunition carriers. In March, the business delivered the first vehicles to the US Army under the previously awarded $335m (£227m) LRIP contract. The US Army's total acquisition objective is for 581 vehicle sets.

During the fourth quarter, BAE Systems completed contractor testing of six Bradley Engineering Change Proposal (ECP) 2 vehicles. Efforts are now underway to build an additional ten vehicles for US Army testing, with deliveries to begin in 2016. The Bradley ECP 2 programme helps to restore automotive performance to the Bradleys with a modified engine and transmission, and an upgraded generator and power distribution system.

In November, the US Marine Corps awarded BAE Systems, along with partner IVECO Defence, a contract worth $104m (£71m) for the engineering and manufacturing development phase of the Amphibious Combat Vehicle 1.1 programme. The award is one of two contracts for this phase, during which the BAE Systems team will produce 16 prototypes for Marine Corps testing. This competition outcome is currently being protested.

In 2015, BAE Systems was awarded two international Assault Amphibious Vehicle (AAV) contracts: an $82m (£56m) contract for the Brazilian Marine Corps under the US government's Foreign Military Sales programme to upgrade 23 vehicles, with deliveries expected in 2017; and an award from another international customer for advance work related to an expected production order for AAVs in 2016.

Weapon Systems and Munition Operations

In May, BAE Systems was awarded a contract for five Bofors 40 Mk4 naval guns for the Brazilian Navy. Series production of the guns has commenced, including local content in Brazil. Deliveries are scheduled to begin in 2016.

BAE Systems continues to work with the governments of India and the US to secure an award for M777 155mm lightweight howitzers. BAE Systems has proposed the establishment of an assembly, integration and test facility in partnership with an Indian company, which supports the Indian prime minister's 'Make in India' initiative.

In August, the business was awarded a contract to deliver up to six modified 25mm Mk 38 machine gun systems for the Royal Canadian Navy's Arctic Offshore Patrol Ship programme. Also in August, the US Navy awarded BAE Systems an $80m (£54m) contract to upgrade six Mk 45 naval guns to the Mod 4 configuration, with an option for four additional guns for an additional $50m (£34m) expected to be exercised in 2016.

In September, the business confirmed its selection by the UK Ministry of Defence as the preferred bidder to provide the gun system, known as the Maritime Indirect Fires System, for the Type 26 frigate. Subject to contract award, the business will provide the integrated gunnery system, which includes the Mk 45 Mod 4 naval gun system, along with an automated ammunition handling system, gun fire control system and qualified ammunition.

BAE Systems is executing on the re-baselined Archer artillery system for the Swedish government. The business delivered the first system in September, with deliveries planned to continue at a rate of two guns per month during 2016.

BAE Systems continues its partnership with the US Navy on the development of the Hyper Velocity Projectile and an Electromagnetic Railgun.

BAE Systems continues to manage operations at the Holston and Radford Army ammunition plants, receiving a $50m (£34m) contract for the continued production of MK 90 propellant grains, as well as a $30m (£20m) contract to modernise the Insensitive Munitions ingredient facility at Holston. In September, the business received $35m (£23m) in closing an historical pricing agreement. The business remains focused on enhancing performance under major facility modernisation contracts.

US Ship Repair and Modernisation

In the first quarter of 2015, BAE Systems announced a $100m (£68m) capital improvement programme at its San Diego, California, shipyard, principally for the construction of a new dry dock in anticipation of increased activity to support the US Navy's re-balance to the Pacific coast (see page 13).

In the second half of 2015, the business received a number of fixed-price orders as the US Navy began to transition its contracting strategy for ship modernisation and repair. For over a decade, the Navy had awarded Multi-Ship, Multi-Option cost-plus contracts, which effectively bundled the maintenance of a class of ships into one multi-year contract. Starting on the East coast in the first half of 2016, the Navy is expected to award Indefinite Delivery, Indefinite Quantity repair orders with fixed-price terms on a ship-to-ship basis. During the year, the ship repair business received a total of $1.2bn (£0.8bn) in orders from the US Navy.

The Jacksonville, Florida, shipyard delivered its third Platform Support Vessel (PSV) during the summer for service in the Gulf of Mexico. In early 2016, the business delivered the fourth and final ship of the PSV class to the customer. Four additional ships are in various stages of construction in Jacksonville, Florida, and Mobile, Alabama, and the business expects to deliver these ships in 2016. The commercial shipbuilding business continued to experience challenges in the year, taking a $73m (£48m) charge against ongoing contracts, principally driven by the Mobile shipbuilding programmes.

The business is responding to lower demand due to declining US Navy ship repair and commercial shipbuilding and repair work by reducing workforce numbers. Redundancies initiated in 2015 could impact approximately 1,100 employees in Norfolk, Virginia, and Jacksonville, Florida, through the first quarter of 2016.

BAE Systems Hägglunds

Series production has commenced on the $865m (£587m) contract for CV90 Infantry Fighting Vehicles to Norway. The business completed BvS10 vehicle deliveries to Sweden in 2015 and will continue to execute retrofitting and provide spare parts and documentation.

In September, the business launched a new vehicle based on the BvS10 called the BvS10 BEOWULF, a highly mobile, modular and fully-amphibious vehicle with an impressive payload.

At the September Defence and Security Equipment International trade show in London, BAE Systems launched its BattleView 360 system that employs cutting-edge display and sensor technology to improve situational awareness for soldiers inside combat vehicles.

In 2015, the business completed 130 redundancies related to the unsuccessful CV90 Armoured Personnel Carrier bid in Denmark. With two major production programmes winding down, in the first quarter of 2016, the business initiated an additional redundancy notification that could impact up to 150 employees during the second half of the year.

FNSS

FNSS, the Turkish land systems joint venture, has continued production under the $524m (£356m) programme to produce 259 8x8 wheeled armoured vehicles for the Royal Malaysian Army.

FNSS received a new export order for the PARS wheeled armoured vehicle. Under this new contract, FNSS will deliver the PARS vehicle to its new customer in multiple configurations.

Production is underway on a contract to upgrade M113 tracked armoured personnel carriers for the Royal Saudi Land Forces.

Four competitive proposals have been submitted for combat vehicle programmes in Turkey and the Middle East, with award decisions expected in 2016 or 2017.

Business disposal

In April, the Group completed the sale of its shareholding in Land Systems South Africa.

Looking forward

In the US, further clarity regarding potential market improvement was gained after Congress reached agreement on a new budget deal that provides for defence and domestic programme spending above the Budget Control Act caps through 2017.

The business is underpinned by strong positions on key franchise programmes. These include, in the land domain, the US Army's AMPV, Bradley and Paladin programmes, and the CV90 for Norway. In the maritime domain, the Group has a strong position on naval gun programmes and US Navy ship repair. Some near-term reduction in ship repair and construction activity is anticipated as commercial shipbuilding contracts are completed and with expected changes to the basing of US Navy ships. Actions to address reduced workload at the Group's US East and Gulf coast shipyards are underway alongside measures to support anticipated subsequent expansion of ship repair operations in San Diego, California.

The business continues to pursue a range of domestic and international opportunities in combat vehicles, weapon systems and maritime support services.

Platforms & Services (UK)

Platforms & Services (UK), with 29,600 employees¹, comprises the Group's UK-based air, maritime, combat vehicle, munitions and shared services activities.

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

Maritime programmes include the manufacture of two Queen Elizabeth Class aircraft carriers, three River Class Offshore Patrol Vessels and seven Astute Class submarines for the Royal Navy, the design of the Successor submarine and Type 26 frigate, and in-service support, including the five-year contract secured in 2014 for the delivery of services at HM Naval Base Portsmouth.

Combat Vehicles (UK) provides upgrades and support to the British Army and international customers.

Munitions focuses on the design, development and manufacture of a comprehensive range of products, servicing its main customer, the UK Ministry of Defence, as well as international customers. Munitions also develops and manufactures cased-telescoped weapons and ammunition through its CTA International joint venture. The business is a principal supplier of general munitions to the British armed forces.

Operational and strategic highlights

-    The Strategic Defence and Security Review announced in November 2015 provided clarity, continuity and stability for the UK business

-    Contracts awarded for the expansion of Typhoon's capabilities

-    £203m of F-35 Lightning II Lot 9 Low-Rate Initial Production orders received

-    £859m demonstration phase contract awarded for the Type 26 frigate programme

-    Full £1.3bn contract awarded for the fifth Astute Class submarine

-    Artful, the third Astute Class submarine, accepted by the Royal Navy in November

-    Third and final Khareef Class corvette accepted by the Royal Navy of Oman

-    €188m (£139m) contract award for 515 cased-telescopic cannons for the Ministry of Defence secured by our 50% joint venture, CTA International

Financial performance

		2015	2014
Sales1	KPI	£7,405m	£6,623m
Underlying EBITA2	KPI	£721m	£772m
Return on sales		9.7%	11.7%
Cash inflow3	KPI	£220m	£173m
Order intake1	KPI	£4,944m	£5,386m
Order backlog1		£17.8bn	£20.1bn

-    Sales¹ of £7.4bn were 12% higher than 2014. The increase came from a higher number of Saudi aircraft deliveries, trading of Radar and Defensive Aids Sub-System equipment on the European Typhoon Tranche 3 programme and the increasing activity in the Submarines business.

-    The return on sales was at 9.7% (2014 11.7%). An impact from lower pension discount rates has been that the service cost charged to the income statement increases and, in 2015, that amounted to 0.5 percentage points of margin compared with 2014. In addition, the 2015 result includes the in-year impact from the announced Typhoon production slowdown decision.

-    Cash performance was as expected with a cash inflow³ of £220m (2014 £173m). Consumption of customer advances occurred on the Omani, Saudi and European Typhoon contracts. There have also been rationalisation costs charged against provisions created in prior years.

-    Order backlog¹ reduced to £17.8bn (2014 £20.1bn) primarily from trading on the Typhoon aircraft and aircraft carrier 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.

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

Operational performance

Military Air & Information

In the year, 18 Typhoon aircraft were delivered from the UK final assembly facility, of which 12 were delivered to Saudi Arabia. Cumulative aircraft deliveries to the UK, Germany, Italy and Spain total 227 of the contracted 236 Tranche 2 aircraft and 22 of the contracted 88 Tranche 3 aircraft. The 2014 issues delaying acceptance of Typhoon Tranche 3 aircraft from the Group's partners in Germany, Italy and Spain were resolved.

The Oman Typhoon and Hawk aircraft programme continues to meet all contractual milestones and is on track for commencement of deliveries in 2017.

In order to meet existing and anticipated orders and delivery schedules, BAE Systems is reducing the rate of Typhoon major unit production. This will help reduce production discontinuity and provide a more sustainable and competitive position for Typhoon manufacturing in the years ahead. The action involves a proposed workforce reduction of up to 371 roles.

Typhoon's capabilities continue to expand with the integration of the Captor E-Scan radar and Brimstone 2 missile.

BAE Systems continues to successfully support its UK and European customers' Typhoon and Tornado aircraft in delivering their operational commitments. The business supports its UK customer through availability-based service contracts, and contract extensions totalling £147m were received in the year.

On the F-35 Lightning II programme, BAE Systems completed delivery of 43 aft fuselage assemblies for the Low-Rate Initial Production (LRIP) Lot 8 contract. A £203m contract on LRIP Lot 9 for 57 aircraft sets was received in the year, with 11 aft fuselage assemblies completed. The forward price for LRIP Lot 10 for 94 aircraft sets has been agreed, with full contract award for both Lots 9 and 10 anticipated during 2016. A proposal for LRIP Lot 11 has been submitted to Lockheed Martin in advance of negotiations commencing in 2016.

Support continues to be provided to users of Hawk trainer aircraft around the world. In 2015, the Indian Navy and Air Force received five and 15 Hawk aircraft, respectively, built under the Batch 2 licence for 57 aircraft by Hindustan Aeronautics Limited. An order for a further 20 Hawk aircraft from the Indian Air Force is currently being negotiated.

Orders for £255m were received in the year for continued support to the RAF advanced jet training facility in North Wales.

Working jointly with Dassault Aviation, progress is being made in maturing and demonstrating critical technology and operational aspects for an unmanned combat air system.

Taranis, the stealthy unmanned combat air vehicle demonstrator designed and built by BAE Systems with UK industry partners and the Ministry of Defence, has successfully completed further phases of flight trials in the year.

During 2015, the business concluded 236 management redundancies following the announcement in October 2014, with a further 204 potential redundancies mitigated through redeployment within either the business or the wider Group.

In October, BAE Systems agreed to invest £20.6m in Reaction Engines Limited (REL) to acquire 20% of its share capital and also enter into a working partner relationship. REL is a privately-held company based in the UK developing the technologies needed for SABRE™ (Synergetic Air-Breathing Rocket Engine), a new aerospace engine class.

Maritime

The consolidation of BAE Systems' UK shipbuilding operations into Glasgow concluded in 2015.

Following completion of the assessment phase contract for the Type 26 frigate in March, an £859m demonstration phase contract was secured, covering detailed design activities and enabling BAE Systems to subcontract for key equipment with companies throughout the supply chain. The programme continues to employ over 1,000 employees.

The government's reaffirmed commitment to shipbuilding continuity in November's UK Strategic Defence and Security Review provides clarity and future opportunities for the Group's shipbuilding facilities and workforce in Scotland. This includes maintaining a fleet of 19 frigates and destroyers, including eight Type 26 frigates and a planned concept study followed by the design and build of a new class of lighter, flexible, general purpose frigates. There is also a commitment to build two additional Offshore Patrol Vessels.

On the aircraft carrier programme, HMS Queen Elizabeth commenced the commissioning of its key systems, which will continue through to the second half of 2016. Construction of HMS Prince of Wales continued, with the integration of the bow, forward island and bridge during the year. The final manufacturing block was delivered to Rosyth in December.

HMS Forth, the first of a second batch of River Class Offshore Patrol Vessels for the Royal Navy, is planned for delivery in 2017. The construction of HMS Medway, the second ship, commenced in June and the third ship, HMS Trent, in October. This programme supports shipbuilding skills and provides the springboard to transform the business between the carrier programme and the start of manufacture for the Type 26 frigate programme.

Following successful sea trials, final acceptance of the third and final Khareef Class corvette for the Royal Navy of Oman was achieved during the second half of the year.

Under the five-year, £600m Maritime Support Delivery Framework contract, secured in 2014, the business provides services at HM Naval Base Portsmouth and support to half of the Royal Navy's surface fleet. The provision of services under the contract progresses well with cost savings remaining on target.

BAE Systems manages the support, maintenance and upgrade of the Royal Navy's fleet of Type 45 destroyers.

Successful completion of the first in-water trials was achieved on the £270m Spearfish torpedo upgrade programme. The demonstration phase of the contract is planned to complete in 2019 prior to full manufacture.

The first phase of the joint UK and French Maritime Mine Counter Measures demonstrator programme, which may form the basis of a future Royal Navy unmanned system to combat the threat of underwater sea mines, progresses.

Following handover and customer acceptance in November, Artful, the third Astute Class attack submarine, is now being operated by the Royal Navy. Good progress continues on the remaining four boats. The full £1.3bn contract for the fifth boat was secured in November and further limit of liability funding of £30m for the seventh boat was also received.

The Successor submarine, the replacement for the Vanguard Class fleet, continues to advance functional and spatial design as the programme approaches its production stage. Preparations include a major programme of building works to ensure the Barrow site will be ready to begin manufacturing when the anticipated UK Ministry of Defence's investment decision is approved in 2016 (see page 13). At 31 December, BAE Systems has almost 8,000 employees and contractors in the Submarines business.

Combat Vehicles (UK)

The final five Terrier combat engineering vehicles were completed in the year.

A £7m contract for the assessment phase of the upgrade to the British Army land bridging system was secured in December.

Other orders totalling £50m for ongoing support to the previously supplied armoured and bridging vehicles were received in the year.

Munitions

Negotiations on the pricing for the next five years of the 15-year Munitions Acquisition Supply Solution partnering agreement with the Ministry of Defence, secured in 2008, continue.

A €188m (£139m) contract for 515 cased‑telescopic cannons for the Ministry of Defence was secured in March by CTA International, a 50% joint venture between BAE Systems and Nexter.

Looking forward

Platforms & Services (UK) has a strong order backlog of long-term committed programmes and an enduring support business. The Strategic Defence and Security Review announced in November 2015 provided clarity, continuity and stability for the UK business.

In Military Air & Information, sales are underpinned by Typhoon and F-35 Lightning II aircraft production and in-service support. There are opportunities to secure future Typhoon export sales, supported by the announcement made in September relating to the supply of 28 aircraft for the Kuwait Air Force.

In Maritime, sales are underpinned by the design and subsequent build of the Successor submarine and Type 26 frigates, and the build of the Queen Elizabeth Class aircraft carriers, River Class Offshore Patrol Vessels and Astute Class submarines. The through-life support of existing and new platforms, together with their associated command and combat systems, provides a sustainable business in technical services and mid-life upgrades.

Combat Vehicles (UK) continues to pursue obsolescence management and upgrade programmes.

The Munitions business is underpinned by the 15-year Munitions Acquisition Supply Solution partnering agreement with the Ministry of Defence secured in 2008.

With the aim of continuously improving business delivery and efficiency, the Combat Vehicles (UK) and Munitions businesses, with effect from 1 January 2016, merged to form one business, BAE Systems Land (UK).

Platforms & Services (International)

Platforms & Services (International), with 13,600 employees¹, comprises the Group's businesses in Saudi Arabia, Australia and Oman, together with its 37.5% interest in the pan-European MBDA joint venture.

In Saudi Arabia, the business provides operational capability support to the country's air and naval forces through UK/Saudi government-to-government contracts. Contracts include multi-year agreements, such as the Saudi British Defence Co-operation Programme and Salam Typhoon programme.

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

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

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

Operational and strategic highlights

-    12 Typhoon aircraft delivered to Saudi Arabia in the year

-    Continued support to the operational capabilities of the Royal Saudi Air Force and Royal Saudi Naval Forces

-    Contract awarded in Saudi Arabia for a further 22 Hawk aircraft

-    Re-organisation of portfolio of interests in industrial companies in Saudi Arabia progressed

-    Customer acceptance of the second of two Landing Helicopter Dock ships in Australia

-    Headcount reductions and an impairment of assets at the Williamstown shipyard

-    Announced a consolidation of Australian operating divisions to reduce management costs and remain competitive

-    The UK and French governments signed a treaty relating to complex weapons technology

-    MBDA secured weapons package orders with Egypt and Qatar worth €1.1bn (£0.8bn) as part of agreed export contracts for Rafale aircraft

Financial performance

		2015	2014
Sales1	KPI	£3,742m	£3,572m
Underlying EBITA2	KPI	£335m	£366m
Return on sales		9.0%	10.2%
Cash inflow3	KPI	£164m	£881m
Order intake1	KPI	£3,046m	£3,398m
Order backlog1		£10.2bn	£11.6bn

-    Sales¹ of £3.7bn were 5% up over 2014, or 9% on a constant currency basis, due to higher levels of support to the Salam Typhoon aircraft now in service and higher volumes of weapon systems.

-    Underlying EBITA² of £335m (2014 £366m) is after charges totalling £53m in respect of the impairment and rationalisation in the Australian business.

-    There was an operating cash inflow³ of £164m (2014 £881m) which includes the second payment under the Salam Variation of Price agreement. However, some £200m of receivables were collected in December 2014, ahead of the contracted 2015 dates. In addition, customer advances were utilised against the Saudi aircraft training programme.

-    Order backlog¹ continues to reduce as the 2013 awards of the five-year support contracts in Saudi Arabia trade out.

1. Including share of equity accounted investments.

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

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

Operational performance

Saudi Arabia

On the Salam Typhoon programme, 12 aircraft were delivered in the year and, as at 31 December, 57 aircraft had been delivered to the Royal Saudi Air Force. Work on enhancing Typhoon's air-to-ground capability is progressing to schedule.

The Typhoon support contracts are operating well with all Key Performance Indicators meeting contractual levels.

Through the Saudi British Defence Co-operation Programme, the business continues to support the operational capabilities of the Royal Saudi Air Force (RSAF) and Royal Saudi Naval Forces. The modernisation of the RSAF's training aircraft fleet has been extended with an agreement for the supply of a further 22 Hawk aircraft, associated ground equipment and training aids. The original contract continues on schedule, with all 22 Hawk aircraft in advanced stages of production and the first aircraft having flown in September. Deliveries are due to commence in 2016. As at 31 December, a total of 46 of the 55 Pilatus PC-21 aircraft had been delivered. Training and support under five-year contracts continues.

The upgrade of Tornado aircraft and associated equipment procurement continues.

Under the Royal Saudi Naval Forces' Minehunter mid-life update programme, acceptance of the second ship is now expected in 2016 following the delayed completion of sea trials during the year. The third ship is due to be initiated into the upgrade programme in 2016. However, delivery timescales will be impacted by previous programme delays.

The planned re-organisation of the Group's portfolio of interests in a number of industrial companies in Saudi Arabia continues. Riyadh Wings Aviation Academy LLC has contracted to acquire a 49% shareholding in a Group subsidiary, Overhaul and Maintenance Company. The re-organisation supports BAE Systems' strategy to expand the customer base of its In-Kingdom Industrial Participation programme, promoting training, development and employment opportunities in line with the Saudi National Objective. As part of the re-organisation, the business plans to transfer a material proportion of its Saudi-based workforce to one of the local Saudi industrial companies. Work is ongoing to secure the necessary regulatory and stakeholder approvals to allow this to commence.

The In-Kingdom Industrial Participation programme continues to progress, with the Al Salam Aircraft Company being accredited as a repair agent for Typhoon windscreens and transparencies. Advanced Electronics Company, in which BAE Systems has a 50% shareholding, has secured further accreditations as a repair agent for Typhoon avionics equipment and produced critical avionics for use on the Hawk trainer aircraft. These capability transfer successes demonstrate BAE Systems' long-standing commitment to the development and growth of the Saudi Arabian aerospace industry, which plays a significant and increasing role in the delivery of its contracts in the country.

Australia

The second and final Landing Helicopter Dock warship, HMAS Adelaide, was accepted by the Australian customer in October and was commissioned into the fleet in December. In-service support to both Landing Helicopter Dock ships is provided by BAE Systems under a four-year contract.

Construction of ship blocks for the Air Warfare Destroyer (AWD) programme at the Williamstown shipyard continues, with production complete and acceptance achieved on 18 of the 21 contracted blocks at 31 December.

There is no contracted shipbuilding programme for the Williamstown shipyard following completion of the Landing Helicopter Dock programme in 2015 and delivery of the remaining AWD blocks in early 2016. As a result, BAE Systems announced, on 12 November, workforce reductions of up to 340 shipbuilding roles, of which 200 had been completed as at 31 December, with the remainder in the first half of 2016. Rationalisation and restructuring charges relating to these workforce reductions totalling A$37m (£18m) have been taken. In addition, a non-cash impairment charge of A$48m (£24m) has been taken against the carrying value of the Williamstown facility.

The fourth of the seven Anzac Class frigates to be modernised under the current Anti-Ship Missile Defence programme was accepted in September as planned. The fifth and sixth ships are undergoing their refits at the Henderson shipyard and are scheduled for acceptance during 2016.

BAE Systems has been selected as the Asia-Pacific regional prime contractor to undertake airframe maintenance, repair and overhaul for the F-35 Lightning II programme. This represents a significant growth opportunity and is expected to underpin the Group's aerospace sustainment activities in Australia over the next decade and beyond.

Negotiations have been completed with the Commonwealth on a revised delivery schedule for the delayed JP 2008 Phase 3F programme for enhanced satellite communications services to the Australian Defence Force.

In September, the business submitted its proposal for the multi-billion Australian dollar Land 400 Phase 2 Combat Reconnaissance Vehicle programme to the Commonwealth. The successful tenderers are participating in funded risk mitigation trials during 2016.

On 12 November, further headcount reductions were announced as part of a restructuring to improve efficiency and management costs that reduced the number of operating divisions from three to two.

Oman

The two major contracts in Oman, the Typhoon and Hawk aircraft programme and the Khareef Class corvette programme, are being undertaken by Platforms & Services (UK).

The Typhoon and Hawk programme continues to meet all contracted milestones.

The third of three Khareef Class corvettes achieved final acceptance during the year.

BAE Systems has provided a significant proportion of Oman's in-service military equipment and the Group works closely with the Omani armed forces in supporting this equipment.

The business continues to fulfil its industrial participation obligations in Oman through delivery of an agreed training and knowledge transfer programme. An expansion of this programme has been contracted and, when delivered, will satisfy all of the Group's outstanding industrial participation obligations.

MBDA

Following completion of the Meteor development programme at the end of 2014, deliveries of production-standard missiles ordered by the six partner nation customers and first export customer continue to plan.

MBDA has secured a contract, worth £89m to BAE Systems, for the UK Advanced Short Range Air-to-Air Missile (ASRAAM) development and production programme.

The German government has announced its intention to buy the Medium Extended Air Defence System (MEADS) missile defence system being developed by MBDA in partnership with Lockheed Martin. Contract signature is expected in 2016, subject to German political approval. This decision provides an opportunity for MEADS to compete for significant export opportunities worldwide.

In November, a treaty was signed between the UK and French governments under which both countries committed to principles of inter-dependency and joint sovereignty in the field of key complex weapons technology.

MBDA has been awarded weapons package orders, worth €1.1bn (£0.8bn) to BAE Systems, as part of agreed export contracts for Rafale aircraft in Egypt and Qatar.

A significant number of ground-based air defence export campaigns continue to be pursued in central Europe and the Gulf region.

Looking forward

In the Kingdom of Saudi Arabia, the Group expects to sustain its long-term presence through delivering current programmes and industrialisation, and developing new business in support of the Saudi military forces. The planned re-organisation of the Group's portfolio of interests in a number of industrial companies in Saudi Arabia is intended to increase growth prospects and reinforce an ongoing commitment to support the national objectives of local skills and technology development, increasing employment and developing an indigenous defence industry.

In Australia, the 2015 Federal Budget statement confirmed the government's commitment to increasing annual defence expenditure to 2% of Gross Domestic Product within a decade of the budget. The Group continues to reinforce its commitment to Australia and is exploring further opportunities to provide leading defence capabilities across all domains.

In Oman, the business continues to provide support to its products in service to position for future requirements. The Typhoon and Hawk aircraft programme is on track for commencement of deliveries in 2017.

MBDA continues to build on the effective partnerships it has established with its domestic customers and has secured export opportunities that underpin future growth.

Page references used above refer to the Annual Report 2015 that can be viewed on the Company's website.

Consolidated income statement

for the year ended 31 December

		2015			2014
	Notes	£m	Total £m		£m	Total £m
Continuing operations
Combined sales of Group and share of equity accounted investments	1		17,904			16,637
Less: share of sales of equity accounted investments	1		(1,117)			(1,207)
Revenue	1		16,787			15,430
Operating costs	2		(15,622)			(14,387)
Other income	4		227			174
Group operating profit			1,392			1,217
Share of results of equity accounted investments	1		110			83
Underlying EBITA1	1	1,683			1,702
Non-recurring items	1	26			-
EBITA		1,709			1,702
Amortisation of intangible assets	1	(108)			(184)
Impairment of intangible assets	1	(78)			(170)
Financial income/(expense) of equity accounted investments	5	3			(30)
Taxation expense of equity accounted investments		(24)			(18)
Operating profit	1		1,502			1,300
Financial income		241			241
Financial expense		(653)			(659)
Finance costs	5		(412)			(418)
Profit before taxation			1,090			882
Taxation expense	6		(147)			(130)
Profit for the year			943			752
Attributable to:
Equity shareholders			918			740
Non-controlling interests			25			12
			943			752
Earnings per share	7
Basic earnings per share			29.0p			23.4p
Diluted earnings per share			28.9p			23.3p

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

Note references used above are references to notes to the Group accounts in the Annual Report 2015 that can be viewed on the Company's website.

Consolidated statement of comprehensive income

for the year ended 31 December

	2015				2014
	Other reserves1 £m	Retained earnings £m	Total £m		Other reserves1 £m	Retained earnings £m	Total £m
Profit for the year	-	943	943		-	752	752
Other comprehensive income
Items that will not be reclassified to the income statement:
Remeasurements on retirement benefit schemes:
Subsidiaries	-	864	864		-	(2,023)	(2,023)
Equity accounted investments	-	21	21		-	(73)	(73)
Tax on items that will not be reclassified to the income statement	-	(261)	(261)		-	503	503
Items that may be reclassified to the income statement:
Currency translation on foreign currency net investments:
Subsidiaries	260	-	260		2772	-	2772
Equity accounted investments	(45)	-	(45)		(13)2	-	(13)2
Reclassification of cumulative currency translation reserve on disposal	20	-	20		-	-	-
Fair value (loss)/gain on available-for-sale financial assets	-	(1)	(1)		-	4	4
Amounts credited/(charged) to hedging reserve:
Subsidiaries	11	-	11		(92)	-	(92)
Equity accounted investments	(36)	-	(36)		-	-	-
Tax on items that may be reclassified to the income statement	5	-	5		19	-	19
Total other comprehensive income for the year (net of tax)	215	623	838		191	(1,589)	(1,398)
Total comprehensive income for the year	215	1,566	1,781		191	(837)	(646)
Attributable to:
Equity shareholders	216	1,541	1,757		191	(849)	(658)
Non-controlling interests	(1)	25	24		-	12	12
	215	1,566	1,781		191	(837)	(646)

1. An analysis of other reserves is provided in note 22.

2. Restated.

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 2015	87	1,249	5,061	(4,555)	1,842	35	1,877
Profit for the year	-	-	-	918	918	25	943
Total other comprehensive income for the year	-	-	216	623	839	(1)	838
Share-based payments	-	-	-	44	44	-	44
Net sale of own shares	-	-	-	1	1	-	1
Ordinary share dividends	-	-	-	(655)	(655)	(40)	(695)
Disposal of non-controlling interest	-	-	-	-	-	(6)	(6)
At 31 December 2015	87	1,249	5,277	(3,624)	2,989	13	3,002
At 1 January 2014	89	1,249	4,868	(2,825)	3,381	37	3,418
Profit for the year	-	-	-	740	740	12	752
Total other comprehensive income for the year	-	-	191	(1,589)	(1,398)	-	(1,398)
Share-based payments	-	-	-	42	42	-	42
Net purchase of own shares	(2)	-	2	(281)	(281)	-	(281)
Ordinary share dividends	-	-	-	(642)	(642)	(14)	(656)
At 31 December 2014	87	1,249	5,061	(4,555)	1,842	35	1,877

1. An analysis of other reserves is provided in note 22.

Note references used above are references to notes to the Group accounts in the Annual Report 2015 that can be viewed on the Company's website.

Consolidated balance sheet

as at 31 December

	Notes	2015 £m	2014 £m
Non-current assets
Intangible assets	8	10,117	9,983
Property, plant and equipment	9	1,698	1,589
Investment property	10	120	129
Equity accounted investments	11	250	229
Other investments		6	7
Other receivables	12	275	347
Retirement benefit surpluses	20	193	162
Other financial assets	13	107	38
Deferred tax assets	14	985	1,327
		13,751	13,811
Current assets
Inventories	15	726	690
Trade and other receivables including amounts due from customers for contract work	12	2,940	2,850
Current tax		4	7
Other financial assets	13	105	46
Cash and cash equivalents	16	2,537	2,308
Assets held for sale		20	76
		6,332	5,977
Total assets	17	20,083	19,788
Non-current liabilities
Loans	18	(3,775)	(2,868)
Other payables	19	(1,020)	(932)
Retirement benefit obligations	20	(4,694)	(5,530)
Other financial liabilities	13	(72)	(79)
Deferred tax liabilities	14	(13)	(21)
Provisions	21	(354)	(436)
		(9,928)	(9,866)
Current liabilities
Loans and overdrafts	18	(237)	(482)
Trade and other payables	19	(6,162)	(6,670)
Other financial liabilities	13	(130)	(107)
Current tax		(315)	(448)
Provisions	21	(301)	(315)
Liabilities held for sale		(8)	(23)
		(7,153)	(8,045)
Total liabilities		(17,081)	(17,911)
Net assets		3,002	1,877
Capital and reserves
Issued share capital	22	87	87
Share premium		1,249	1,249
Other reserves	22	5,277	5,061
Retained earnings - deficit		(3,624)	(4,555)
Total equity attributable to equity holders of the parent		2,989	1,842
Non-controlling interests		13	35
Total equity		3,002	1,877

Approved by the Board on 17 February 2016 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 2015 that can be viewed on the Company's website.

Consolidated cash flow statement

for the year ended 31 December

	Notes	2015 £m	2014 £m
Profit for the year		943	752
Taxation expense	6	147	130
Research and development expenditure credits		(65)	-
Share of results of equity accounted investments	1	(110)	(83)
Finance costs	5	412	418
Depreciation, amortisation and impairment	2	460	657
Profit on disposal of property, plant and equipment	2,4	(28)	(20)
Profit on disposal of investment property	2,4	(41)	(12)
Profit on disposal of non-current other investments		(1)	-
Loss on disposal of businesses	2	24	-
Fair value gain	4	-	(47)
Cost of equity-settled employee share schemes		44	42
Movements in provisions		(139)	(153)
Decrease in liabilities for retirement benefit obligations		(234)	(345)
(Increase)/decrease in working capital:
Inventories		(6)	(1)
Trade and other receivables		60	197
Trade and other payables		(542)	(622)
Cash inflow from operating activities		924	913
Interest paid		(180)	(152)
Taxation paid		(116)	(92)
Net cash inflow from operating activities		628	669
Dividends received from equity accounted investments	11	41	63
Interest received		7	7
Purchase of property, plant and equipment, and investment property		(359)	(263)
Purchase of intangible assets		(54)	(59)
Proceeds from sale of property, plant and equipment, and investment property		136	539
Proceeds from sale of non-current other investments		1	-
Purchase of subsidiary undertakings	23	(5)	(233)
Cash and cash equivalents acquired from purchase of subsidiary undertakings	23	-	3
Equity accounted investment funding	11	(8)	(2)
Proceeds from sale of subsidiary undertakings	23	34	-
Cash and cash equivalents disposed of with subsidiary undertakings	23	(13)	-
Net cash (outflow)/inflow from investing activities		(220)	55
Net sale/(purchase) of own shares		1	(281)
Equity dividends paid	22	(655)	(642)
Dividends paid to non-controlling interests		(40)	(14)
Cash inflow from matured derivative financial instruments		12	8
Cash inflow from movement in cash collateral		3	10
Cash inflow from loans		1,625	679
Cash outflow from repayment of loans		(1,135)	(398)
Net cash outflow from financing activities		(189)	(638)
Net increase in cash and cash equivalents		219	86
Cash and cash equivalents at 1 January		2,313	2,222
Effect of foreign exchange rate changes on cash and cash equivalents		5	5
Cash and cash equivalents at 31 December		2,537	2,313
Comprising:
Cash and cash equivalents	16	2,537	2,308
Cash and cash equivalents (included within assets held for sale)		-	6
Overdrafts	18	-	(1)
Cash and cash equivalents at 31 December		2,537	2,313

Note references used above are references to notes to the Group accounts in the Annual Report 2015 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 11) and pension schemes (note 20).

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 party1			Management recharges1
Related party	2015 £m	2014 £m		2015 £m	2014 £m		2015 £m	2014 £m		2015 £m	2014 £m		2015 £m	2014 £m
Advanced Electronics Company Limited	22	9		46	56		-	-		-	-		-	-
CTA International SAS	15	3		-	-		11	2		-	-		-	-
Eurofighter Jagdflugzeug GmbH	1,417	1,087		-	11		37	64		65	77		-	-
FADEC International LLC	72	74		-	-		-	-		-	-		-	-
Gripen International KB	-	-		-	-		19	15		14	14		-	-
MBDA SAS	23	22		286	90		6	6		367	403		17	17
Panavia Aircraft GmbH	53	34		47	44		2	5		-	-		-	-
Saudi Development and Training Company Limited (SDT)2	n/a	-		n/a	8		n/a	n/a		n/a	n/a		n/a	-
	1,602	1,229		379	209		75	92		446	494		17	17

1. Also relates to disclosures under IAS 24, Related Party Disclosures, for the parent company, BAE Systems plc. At 31 December 2015, £405m (2014 £453m) was owed by BAE Systems plc and £41m (2014 £41m) by other Group subsidiaries.

2. For the period from 1 January 2014 to 15 September 2014 when the Group accounted for its share of the results of SDT under the equity method, in accordance with IAS 28, Investments in Associates and Joint Ventures (revised 2011).

The Group considers key management personnel as defined under IAS 24, Related Party Disclosures, to be the members of the Group's Executive Committee and the Company's non-executive directors. Fuller disclosures on directors' remuneration are set out in the Annual remuneration report on pages 73 to 86. Total emoluments for directors and key management personnel charged to the Consolidated income statement were:

	2015 £'000	2014 £'000
Short-term employee benefits	14,831	14,383
Post-employment benefits	2,021	1,678
Termination benefits	-	1,702
Share-based payments	4,144	3,320
	20,996	21,083

Note and page references used above refer to the Annual Report 2015 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 of the Companies Act 2006 contain limits on the liability of the directors of BAE Systems plc so that their liability is solely to BAE Systems plc.

 

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