Annual Report 2023

BAE Systems plc

baesystems.com

In this report

Our vision

To be the premier

international defence,

aerospace and security

company.

Our mission

To provide a vital advantage

to help our customers to

protect what really matters.

Our purpose

To serve, supply and protect

those who serve and protect

us, in a corporate culture that

is performance driven and

values led.

Through careful long-term

sustainable management

and governance of our

business we will continue

tocreate value for our

stakeholders.

Strategic report

Overview 01–11

Our 2023 financial highlights 01

Our business at a glance 02

Our key programmes and franchises 04

Chair’s letter 06

Chief Executive’s review 08

Strategy and performance 12–45

Our strategic framework 12

Our business model 14

Our investment proposition 16

Our markets 18

Our investment in technology 20

Our stakeholders 24

Key performance indicators 26

Our financial review 28

Guidance for 2024 34

Segmental review 35

Sustainability 46–66

Our sustainability agenda 46

Environment and climate 48

Social 56

Responsible business practices 62

Non-financial and sustainability

informationstatement 66

Risk 67–79

How we manage risk 67

Our risk management framework 69

Our principal risks 70

Viability statement 78

Governance

Chair’s governance letter 80

Board of directors 81

Board and Executive Committee

diversity information 84

Governance framework 86

Applying the2018 UK Corporate

Governance CodePrinciples 88

Compliance with the 2018 UK Corporate

Governance Code provisions 90

The work of the board (s.172) 91

Nominations Committee report 94

Audit Committee report 97

Environmental, Socialand

Governance Committee report 102

Innovation and Technology

Committee report 105

Remuneration Committee report 107

Quick read summary 110

Annual remuneration report 115

Statutory and other

regulatory information 135

Financial statements

Independent Auditor’s report 142

Consolidated financial statements 152

Company financial statements 218

Additional information

Alternative performance measures 227

Other sustainability information 232

How our purpose connects to our strategy

Our strategic framework Page 12

How our purpose connects to our culture

Our stakeholders Page 24

The work of the Board Page 91

This document comprises BAE Systems plc’s annual accounts and report for the purposes of Section 423

oftheCompanies Act 2006.

The information in this Annual Report, which was approved by the Board of directors on 20 February 2024,

doesnot comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory

accounts for the year ended 31 December 2023, which contain an unmodified audit report under Section 495 of

the Companies Act 2006 (which does not make any statements under Section 498 of the Companies Act 2006),

will be delivered to the Registrar of Companies in accordance with Section 441 of the Companies Act 2006.

Please note that throughout this document graphical representation of component parts may not cast due

torounding.

BAE Systems plc Annual Report 2023

Strategic report

Overview 01–11

Our 2023 financial highlights 01

Our business at a glance 02

Our key programmes and franchises 04

Chair’s letter 06

Chief Executive’s review 08

Strategy and performance 12–45

Our strategic framework 12

Our business model 14

Our investment proposition 16

Our markets 18

Our investment in technology 20

Our stakeholders 24

Key performance indicators 26

Our financial review 28

Guidance for 2024 34

Segmental review 35

Sustainability 46–66

Our sustainability agenda 46

Environment and climate 48

Social 56

Responsible business practices 62

Non-financial and sustainability

informationstatement 66

Risk 67–79

How we manage risk 67

Our risk management framework 69

Our principal risks 70

Viability statement 78

Governance

Chair’s governance letter 80

Board of directors 81

Board and Executive Committee

diversity information 84

Governance framework 86

Applying the2018 UK Corporate

Governance CodePrinciples 88

Compliance with the 2018 UK Corporate

Governance Code provisions 90

The work of the board (s.172) 91

Nominations Committee report 94

Audit Committee report 97

Environmental, Socialand

Governance Committee report 102

Innovation and Technology

Committee report 105

Remuneration Committee report 107

Quick read summary 110

Annual remuneration report 115

Statutory and other

regulatory information 135

Financial statements

Independent Auditor’s report 142

Consolidated financial statements 152

Company financial statements 218

Additional information

Alternative performance measures 227

Other sustainability information 232

Shareholder information 236

Independent Auditor’s reasonable

assuranceReport on ESEF prepared

AnnualFinancial Report 239

Our 2023 financial highlights

Financial performance measures

defined by the Group

Sales

KPI

£25,284m

9% growth

20222021 2023

21,310

23,256

25,284

Underlying earnings before interest and tax (EBIT)

KPI

£2,682m

9% growth

20222021 2023

2,205

2,479

2,682

Underlying earnings per share (EPS)

BONUS

KPI

63.2p

14% growth

20222021 2023

47.8

55.5

63.2

Free cash flow

KPI

£2,593m

£643m higher

20222021 2023

1,864

1,950

2,593

Order intake

BONUS

KPI

£37.7bn

£0.6bn increase

20222021 2023

21.5

37.1

37.7

Order backlog

£69.8bn

£10.9bn increase

20222021 2023

44.0

58.9

69.8

Financial performance measures

derived from IFRS

Revenue

£23,078m

9% growth

20222021 2023

19,521

21,258

23,078

Operating profit

£2,573m

8% growth

20222021 2023

2,389 2,384

2,573

Basic EPS

61.3p

20% growth

20222021 2023

55.2

51.1

61.3

Net cash flow from operating activities

£3,760m

£921m higher

20222021 2023

2,447

2,839

3,760

Order book

£58.0bn

£9.1bn increase

20222021 2023

35.5

48.9

58.0

Dividend per share

30.0p

11.1% growth

20222021 2023

25.1

27.0

30.0

BONUS

75% of the UK executive directors’ annual bonuses are based ontheachievement of financial KPIs (see page 26).

KPI

References to key performance indicators (KPIs) throughout the Annual Report.

1. The definition and purpose of all performance measures defined by the Group is provided in the Alternative performance measures section on page 227.

2. Growth rates for Sales, Underlying EBIT and Underlying EPS are on a constant currency basis (i.e. current year compared with prior year translated at current year

exchange rates). The comparatives have not been restated. All other growth rates and year-on-year movements are ona reported currency basis.

3. International Financial Reporting Standards.

4. For 2021, underlying EPS was 50.7p including a one-off tax benefit of £94m resulting from agreements reached regarding the exposure arising from the April 2019

European Commission decision regarding the UK’s Controlled Foreign Company Regime and the impact of the UK tax rate adjustment.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

At BAE Systems, we provide some of the

world’smost advanced, technology-led

defence, aerospace and security solutions.

We are aworkforce of 99,800

highly skilled people in more than 40 countries.

Workingwith our customers and local partners, wedevelop, engineer, manufacture

andsupport products and systems that deliver military capability, protect national

security, and keep critical information and infrastructure secure.

We maintain leading positions in major defenceand security markets around the

world– including the US, UK, the Kingdom of Saudi Arabia and Australia – as well

asestablished positions in a number of other international markets.

We focus our

operations in

five

key sectors:

Our business at a glance

1. As at 31 December 2023 and including share of equity accounted investments.

2. Sales is defined in the Alternative performance measures section on page 227.

3. The Group has five operating sectors which, together with HQ, make

itssixoperating segments as defined by IFRS 8 Operating Segments.

2023 sales

£25,284m

Total employees

99,800

Sales

by destination

A US 42%

B UK 26%

C Kingdom of Saudi Arabia 11%

D Australia 4%

E Other international markets 17%

Employees

by location

A US 31,600 31%

B UK 45,700 46%

C Kingdom of Saudi Arabia 6,700 7%

D Australia 5,700 6%

E Other 10,100 10%

Sales

by sector

1 Electronic Systems 22%

2 Platforms & Services 15%

3 Air 32%

4 Maritime 22%

5 Cyber & Intelligence 9%

Employees

by sector

1 Electronic Systems 17,500 17%

2 Platforms & Services 11 ,900 12%

3 Air 26,000 26%

4 Maritime 27,500 28%

5 Cyber & Intelligence 11,000 11%

6 HQ/Other 5,900 6%

2023 revenue

£23,078m

Our key programmes and franchises Page 04

SALES

EMPLOYEES

BAE Systems plc Annual Report 2023

Overview

Our markets Page 18 Our sustainability agenda Page 46 Our financial review Page 28 Segmental review Page 35

Electronic Systems

Electronic Systems comprises the Group’s US- and

UK-based electronic solutions, including electronic

warfare systems, navigation systems, electro-optical

sensors, military and commercial digital engine

andflight controls, precision guidance and seeker

solutions, next-generation military communications

systems and data links, persistent surveillance

capabilities, space electronics and electric drive

propulsion systems.

Segmental review Page 36

Platforms & Services

Platforms & Services, with operations in the US,

Sweden and the UK, manufactures and upgrades

combat vehicles, weapons and munitions, and

delivers services and sustainment activities, including

naval ship repair and the management and operation

oftwo government-owned ammunition plants.

Segmental review Page 38

Maritime

Maritime comprises the Group’s UK-based

maritime and land activities, including major

submarine, ship build and support programmes,

as well as our Australian business.

Segmental review Page 42

Cyber & Intelligence

Cyber & Intelligence comprises the

US-basedIntelligence & Security business

andUK-headquartered Digital Intelligence

business and covers the Group’s cyber security

activities for National Security, Central

Government and Government Enterprises.

Segmental review Page 44

Air

Air comprises the Group’s UK-based air build and

support activities forEuropean and international

markets, US programmes, development of Future

Combat AirSystems and FalconWorks

, alongside

our business in the Kingdom ofSaudi Arabia and

interests in our European joint ventures: Eurofighter

and MBDA.

Segmental review Page 40

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

We have strong technological

and programme diversity

across our sectors.

Our key programmes and franchises

Defence electronics

Design, manufacture and support of

electronic systems across a range of US and

other allied nations’ military programmes,

including a leadership position in the

electronic warfare market. Our presence on

awide range of US fixed and rotary wing

platforms, a number of which are coming

into service, and a strong demand for

capability and solutions to defeat increasingly

sophisticated threats, are expected to provide

this franchise with a solid platform for the

coming years.

Commercial avionics

equipment

Design, manufacture and support of

avionicsequipment across multiple

commercial aircraftplatforms, including

engine and flightcontrols, and cabin and

cockpit systems, as well as aftermarket

support services. We are a leading supplier

ofengine controls for General Electric and

amajor supplierof flight control electronics

forBoeing and other manufacturers.

Weapon systems

andmunitions

Design and manufacture of naval gun

systems, munitions, torpedoes, radars,

navalcommand and combat systems, artillery

systems, missile launchers and, through our

37.5% interest in MBDA, missiles and missile

systems. We operate and manage two

complex US Army ammunition plants that

produce energetics for insensitive munitions

and propellant grains.

Aircraft

Prime contracting, systems integration, rapid

engineering, manufacturing, maintenance,

repair and upgrade, and military training

foradvanced combat and trainer aircraft.

BAESystems has a significant workshare

onthe world’s largest defence programme,

F-35 Lightning II, which includes design

andmanufacture of sub-assemblies in

theUK, including the aft fuselage and

empennage, and provision of equipment

inthe US, including the electronic warfare

suite. Production levels are at full-rate and

expected to be maintained for over a decade,

based on a programme of record of more

than 3,000 aircraft.

Manufacture of Typhoon major units and

final assembly of aircraft. Expansion of the

capabilities of the aircraft with the E-Scan

radar and ongoing development of new

technologies aligned with the UK Combat

AirStrategy and capabilities required for

theGlobal Combat Air Programme

(GCAP).Typhoon manufacturing is

currentlyunderpinned by orders from

Qatar,Germany and Spain which will

ensurecontinuity of production.

Air support and training

Provision of support to operational capability,

including maintenance, support and training

for Typhoon aircraft in service with air forces

in the UK, Kingdom of Saudi Arabia, Qatar

and Oman. Under the Saudi British Defence

Co-operation Programme, delivery of

contracts for labour, logistics and training,

training aircraft (including Hawk) and

upgrades to Tornado aircraft. Contracts to

support Hawk aircraft across 14 countries

and support for the F-35 Lightning II fleet

around the globe, including in-country

support in the UK and Australia.

Space

Leading capabilities in radiation-hardened

electronics for spacecraft and satellites.

Ourorbital expertise, combined

withnext-generation ground resiliency

anddata analytics solutions, helps to keep

assets performing effectively in the harsh

environments of space. Following the

acquisition of In-Space Missions in 2021,

weare one of a small number of British

companies with the capability to design,

buildand operate Low Earth Orbit satellites.

The acquisition of Ball Aerospace will add

significant additional capabilities inthe

design, build and operation of satellites

andsatellite systems.

Ball Aerospace

In August, we announced aStock

Purchase Agreement to acquire the

US-based Ball Aerospace business,

aleading provider of spacecraft, mission

payloads, optical and antenna systems,

from Ball Corporation for $5.5bn

(£4.4bn).The acquisition completed

inFebruary 2024.

www.baesystems.com/article

Sales

by key programme (%)

Electronic Systems

A Defence electronics 65%

B F-35 Lightning II 15%

C Commercial

avionics equipment 11%

D Commercial other 6%

E Space 3%

Platforms & Services

A Combat vehicles 52%

B US naval ship repair 18%

C Munitions 15%

D Weapon systems 15%

Air

A Typhoon 36%

B Tornado 22%

C Weapons Systems 19%

D F-35 Lightning II 14%

E Other 9%

Maritime

A Submarines 47%

B Complex warships 22%

C UK naval support 12%

D Munitions 5%

E Other 14%

Cyber & Intelligence

A US Government 68%

B UK and other

governments 30%

C Commercial 1%

D Other 1%

1. Sales is defined in the Alternative performance

measures section on page 227.

BAE Systems plc Annual Report 2023

Overview

Submarines

Design and manufacture of seven Astute

Class nuclear-powered attack submarines

forthe Royal Navy. The first four Astute Class

submarines are in operational service with

theRoyal Navy, while the fifth boat exited

ourBarrow shipyard to commence sea trials

in February 2023. The remaining two boats

are atan advanced stage of build and the

final boat is expected to enter service in the

mid-2020s. Design and manufacture of

fourDreadnought Class nuclear-powered

submarines to carry the UK’s Trident ballistic

missiles. Manufacture of the first three

Dreadnought Class boats is underway, with

production on the programme to continue

into the 2030s. Early design and mobilisation

activities are underway on the SSN-AUKUS

programme, which will deliver a replacement

for the Astute Class.

Naval ship repair and support

Provision of naval ship repair and

modernisation services in the US and UK,

together with support to the navies of the

US, UK and Australia, at home and on

deployment. In the US, we have facilities

located on the Atlantic and Pacific coasts.

Inthe UK, we support the operation of

HMNaval Base Portsmouth on behalf of the

UK Ministry of Defence. Our key customers in

the US, UK, Australia and Canada are looking

to extend and modernise their fleets in the

coming years.

Complex warships

Design and manufacture of eight Type 26

frigates for the Royal Navy. The first four

frigates are under construction, with the

firstType 26 expected to be delivered in

themid-2020s. Contract signed in 2018 with

the Australian Government that provides the

framework for the design and manufacture

of Hunter Class Frigates, with construction

commencing during 2023 on the first

schedule protection block following successful

completion of the Preliminary Design Review.

Provider of the warship design for the

Canadian Surface Combatant programme.

Sustainable technology

Recognised provider of electric drive systems

for lowand zero emission propulsion systems

with an extensive installed base on urban

transit buses. We are leveraging our existing

product portfolio and advancing sustainable

vehicle mobility, efficiency and capability for

arange of applications in public transit,

maritime, air and military markets.

Uncrewed and future

airsystem capabilities

Development of future air system

capabilities,including joint investment

withthe UK Government and industry

inanext-generation combat air system

underthe Tempest programme, which

waslaunched in 2018 in support of the

UKCombat Air Strategy. The Tempest

programme is progressing, with the

development of a new flying combat air

demonstrator, set to fly within the next

fouryears. Together with our partners,

wearecurrently working on more than

60technology demonstrations under

aninitial Concept and Assessment Phase

contract. In 2022, The governments of

theUK, Italy and Japan announced their

intention to work together to build on the

progress ofthe Team Tempest partnership

under GCAP.

Combat vehicles

In the US, we build and upgrade a number

oftracked combat vehicles including: the

Bradley Fighting vehicles, M109 self-propelled

howitzers, Armored Multi-Purpose Vehicles

(AMPVs) and M88 recovery vehicles, and

wemanufacture amphibious combat

vehicles(ACVs) for the US Marine Corps

andinternational customers. The Hägglunds

business in Sweden builds, upgrades and

supports the CV90 and BvS10 tracked

combat vehicles. In the UK, weupgrade,

buildand support vehicles for the British

Army through our joint venture with

Rheinmetall, RBSL.

Cyber security

andintelligence

Delivery of a broad range of intelligence,

security and synthetic training services to

enable military, intelligence and civilian

branches of the US Government to recognise,

manage and defeat threats. Support to UK

and overseas governments and government

agencies in their intelligence missions. The

heightened threat environment and more

sophisticated technology are leading to

increased government cyber spending in

markets including the US, UK and Australia,

and we are well placed to support our

customers in these markets.

AUKUS

In March 2023, further announcements

were made as part of the AUKUS

trilateralagreement between Australia,

the UK and the US. Australia and the UK

will operate SSN-AUKUS as their

submarines of the future, with funding of

£3.95bn awarded from the UK Ministry

of Defencefor the next phase of the

UK’snext-generation nuclear-powered

attack submarine programme.

www.baesystems.com/article

Global Combat Air Programme

Ministers from Italy, Japan and the UK

signedan international treaty to develop

an innovative stealth fighter under GCAP

inDecember and confirmed that the joint

GCAP government headquarters will be

based in the UK. Following the industry

collaboration agreement announced in

September, as the UK’s industry lead,

wecontinue to work closely with our

partners Mitsubishi Heavy Industries

inJapan, and Leonardo in Italy, to

determine the future joint business

construct, which will also be

headquartered in the UK.

www.baesystems.com/article

Armored Multi-Purpose Vehicle

moves to full-rate production

Following prior funding for early order

materials, in August, the US Army moved

forward on the AMPV programme, with

cumulative funding of $797m (£641m)

tobegin full-rate production. We look

forward to continuing to partner with

theUS Army on this critical programme.

www.baesystems.com/article

Photo: US Army

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Chair’ s letter

Dear Shareholders

This is my first letter to you as Chair since

taking over from Sir Roger Carr after the

AGM in May last year. It has been a dynamic

and rewarding year in which the Company

has continued to perform strongly, both

financially and operationally. During 2023,

wehave sadly seen geopolitical instability

increase and, as one of the world’s largest

defence contractors, BAE Systems has

continued to play a leading role in supporting

our government customers in the elevated

threat environment.

First impressions

I have very much enjoyed getting to know

thebusiness better, visiting many sites and

meeting colleagues across the business. It is a

privilege to chair such an important Company

that, in my view, has often understated its

achievements and unique qualities. One of

my strongest impressions has been the

incredible sense of purpose that our people

have across the Company. They understand

the importance of the role that we play in

national defence. “To serve, supply and

protect those who serve and protect us” is

aphrase I have heard often and it clearly

defines what we do. This purpose is integral

to our culture and values.

BAE Systems has a critical role to play in

defence and cyber security in our core markets

in the UK, US, Australia and the Kingdom

ofSaudi Arabia and in other countries where

we operate through government relationships,

such as in Ukraine. The case for defence is

very clear; investment in defence is required

to help to grow geopolitical stability and

prosperity, and it is also needed to protect

countries and citizens from threats, and

protect free trade. Thedefence sector also

delivers economic prosperity, through

creating jobs, building skills and investing

incommunities, as well asdeveloping new

technologies with variedapplications.

Technology is at the heart of much of what

we do; we continue to build on our portfolio

of products for air, sea and land and also

develop cutting-edge technologies fit for

thechallenges of a digital world where

multi-platform communication is key.

Under the strong leadership of Charles

Woodburn and the rest of the executive

team, BAE Systems has evolved into a

forward-looking, technology-led defence

Company, with a unique international

customer base. We have a strong base

fromwhich we are driving what we expect

tobe a period of sustained top-line growth.

Our management continues to focus intently

on operational excellence, especially in the

execution of our key programmes.

Progressing our strategy

2023 has been a busy year for the business

with significant agreements on SSN-AUKUS

andGCAP that will underpin the Company’s

long-term prospects. We announced the deal

for Ball Aerospace, a leading company in the

military and civil space domain, our largest

ever M&Atransaction. This acquisition will

enable us to accelerate our growth in the

expanding space market. We have also

continued to support our key customers

intheir response to the invasion of Ukraine,

and in their other activities.

Against this backdrop of strategic progress,

we have delivered another year of strong

financial performance with a record order

book, 9% sales growth and profitability

underpinned by good operational

performance across all sectors, and strong

cash flow. This has continued our good

trackrecord and is delivering on our

value-compounding model.

As we expand to deliver new programmes,

like SSN-AUKUS and GCAP, it is critical that

we develop the right skills in our employee

base. Iam proud that, in 2023, we had

c.5,500 graduates and apprentices in training

in the UKalone, and we are one of the

largest private sector apprentice and graduate

hirers in the UK. We continue to develop new

engineering, manufacturing and training

facilities for our expanding workforce, and

toinvest in the local communities where

wehave major operations.

We remain focused on developing world-

class future technologies to support our

customers’ needs, with total R&D spending

increasing year-on-year.

Our ESG priorities dovetail with our overall

mission. We are aware of the impact that our

activities have on the environment, backed

upby data we gather, and we remain focused

on our journey to Net Zero. As one of the

UK’s largest manufacturers, and with

operations inover 30 states in the US, we

have a major social and economic impact in

both countries. All of our activities take place

within a clear governance framework led by

the Board.

As one of the world’s

largestdefence contractors,

our technology, capabilities

and global footprint ensure

weplay a leading role in

supporting our government

customers in meeting the

elevated threat environment.

BAE Systems plc Annual Report 2023

Overview

A fundamental responsibility for any Board is

planning for orderly management succession.

I am very much enjoying working with

Charles and his management team. However,

all companies must have resilience and be

able to maintain momentum through

management change. I am working with

theBoard to refresh our succession planning

processes to ensure we identify potential

andtalent internally and externally.

Board changes

The composition and evolution of our Board

are important and activity is focused on

ensuring we continue to be well positioned

tosupport the business in what should be

aperiod of sustained growth, even as the

Board evolves.

Sir Roger Carr, who retired as Chair in May

2023, had led the Board for over nine years.

There have already been many tributes paid

to Sir Roger and the legacy he has left here.

Iwould like to thank him again on behalf

ofthe Company for all he achieved. His

experience, knowledge and passion for

whatwe do were evident to all who met

himand we wish him the best for the future.

We also sadly said farewell to Chris Grigg,

ourSenior Independent Director (SID), at

theend of 2023 after nearly a decade on

theBoard. I am personally grateful to Chris

for extending his tenure to provide continuity

through the Chair transition, and would like

to thank him for the outstanding contribution

he has made on our Board. I am pleased

thatNicole Piasecki has agreed to take on

therole of SID in addition to chairing the

Remuneration Committee. As a significant

proportion of our turnover and shareholder

base is in the US, it seems timely to have a

UScitizen as SID.

I am delighted that Angus Cockburn joined

the Board at the end of 2023. Angus brings

deep financial and commercial expertise

tothe Board from his executive career

(seepage 82 for more detail).

Finally, I would like to thank all of our

colleaguesfor their contribution to our

strongperformance this year. The dedication

and skills of our workforce are at the heart

ofthe Company’s culture and success.

Cressida Hogg CBE

Chair

Capital allocation

Financial and operational discipline has

contributed to strong performance and

allowed the Board to balance investing for

long-term growth with allocating capital for

shareholder returns. The ongoing share

buyback programme and dividend payments

distributed significant capital to shareholders

through the year. Capital allocation remains

akey focus for the Board and is regularly

discussed in our strategic planning and

budget approval sessions.

With the business well positioned for the

future, the Board has recommended a final

dividend of 18.5 pence per share, making

atotal dividend of 30.0 pence per share

forthefull year. This is anincrease of 11.1%

on last year and represents the 20th year

ofdividend growthfor the Company.

Governance

Good governance is fundamental to the

long-term success of the Company and is

covered in more detail in the annual report

onpages 80 to 140.

A change of Chair allows for a proper

reviewof the governance structures and

processes already in place. Overall, our

existinggovernance practices are robust

andcontinue to evolve. A key ongoing

project is refreshing our approach to risk

management and assurance, in line with

changes in governance standards.

Across my site visits, I have been impressed

bythesense of mission and purpose amongst our

employees, and the positive role we play in the

communities we operate in.

Cressida Hogg CBE

Chair

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Chief Executive’s review

2023 saw another stand-out year of order flow on

newand existing programmes, renewals on incumbent

positions and a strong opportunity pipeline. These

underpin our confidence and visibility for good top-line

growth in the coming years, while we continue

reinforcing our value-compounding model with a

sharpfocus on operational performance and disciplined

capital allocation.

Overview

I am pleased to report that BAE Systems

delivered another year of strong operational

and financial performance in 2023, despite

continued global supply chain disruptions

andhighinflation.

These pressures are starting to recede and

wehave entered 2024 with a compelling

competitive position, thanks to our portfolio

and geographic diversity, and multiple new

business opportunities, including the

acquisition of Ball Aerospace – all of which

point toanother productive year for BAE

Systems andour shareholders.

2023’s successes were undoubtedly driven

byour people, their unwavering focus on

ourpurpose of protecting those who protect

us, and a values-led culture, committed to

sustainable business practices, inclusion, a

robust governance structure and high ethical

standards. The global events of recent years

have reinforced the essential role of the

defence industry in helping governments

protect their countries and citizens.

2023 operational performance

Overall, we have made strong operational

progress and advanced the strategic

objectives we have been pursuing for

thepastseveral years.

Our focus on operational excellence continues

to benefit our customers and shareholders,

especially as we execute on complex,

long-duration programmes like Dreadnought,

Type26and Hunter Class frigates, Typhoon

and F-35 jets, electronic warfare systems,

combat vehicles, and many other

programmes. This relentless focus on

delivering for our customers has positioned

the Group as a trusted supplier of advanced

technology solutions and industrial

capabilities to help customers achieve their

criticalnational and global security missions.

2023 financial performance

Our key financial measures of order

intake,sales, underlying EBIT, underlying EPS

and free cash flow all increased, amidst

ahigh inflation environment. This was only

possible because of the excellent work of

ouremployees on programme execution,

ourdiscipline on contracting and meaningful

internal efficiency efforts.

On a constant currency basis, we grew

orderbacklog by 21%, sales by 9% and

underlying EPS by 14%. We delivered a

record free cash flow of £2.6bn for the year

and, as a result, exceeded our stated

three-year free cash flow target for 2021

to2023.

This strong set of results was enhanced

byour ongoing share buyback programme.

In2023, we repurchased £561m worth of

ourshares, or 1.9% of our outstanding

sharecapital.

Building an operational

andfinancialtrack record

In 2021, we laid out how we would build

ona period of transition and our good

performance from 2018 to 2020. It centred

around building a track record of good

quality operational and financial performance

on which customers and shareholders could

consistently rely. We delivered against all

theoperational areas in the scorecard,

whichhas led to strong financial performance

over the three years from 2021 to 2023 with

sales growth of 20%, margin expansion of

80bps, cash conversion of 100% and total

shareholder returns of £4.2bn.

With strong momentum behind us from our

last three years of delivery, a record order

backlog and our largest ever acquisition

completed, we look forward to the next three

years with confidence. In many aspects, our

ambitions for the coming years are a

continuation of the strategy we have been

BAE Systems plc Annual Report 2023

Overview

executing, with the foundations for delivery

built on:

• strong operational performance and

contracting discipline;

• investing appropriately to support growth

and our customers’ priorities; and

• looking to deepen partnerships and

collaborations.

Delivery against these ambitions, coupled

with the acquisition of Ball Aerospace

whichis set to be additive to our top-line

growth, margin expansion and cash

conversion outlook, means we are well

positioned to deliver a compelling and

predictable value-compounding model

forour stakeholders.

Balance sheet strength

We ended 2023 with a strong balance

sheet,featuring a cash position of £4.1bn,

netdebt (excluding lease liabilities) of £1.0bn,

and a net pension position that remains in

anaccounting surplus. Our capital allocation

remains consistent and is focused on

underpinning the Group’s long-term strength

and expected growth. We prioritise investing

in the business for the long term through

research and development (R&D), aswell

asacquisitions in high-growth and high-

returnparts of the business. Our capital

expenditure (capex) is targeted to ensure

oursystems and facilities are modern,

deliveran effective working environment

andprovide the capacity needed to support

our growth outlook.

I am pleased

toreportthat

BAESystems

deliveredanother

year of

strongoperational

andfinancial

performance

in 2023.

Charles Woodburn CBE

Chief Executive

Returns to shareholders

£1,418m

Total shareholder returns since 2021

£4.2bn

Order backlog

£69.8bn

Strong

consistent

programme

performance

Top-line growth

Since 2021, we have grown sales by 20%

onaconstant currency basis.

Margin expansion

We have increased margins from 10.3%

in2021to10.6% in 2023, driven by:

– Improvement in programme performance

acrossthe portfolio.

– Inflation management and strong supply

chainperformance.

– Operational efficiencies andsimplification.

Strong cash conversion

We have generated £6.4bn of free cash flow

inthethree years to December 2023.

We anticipate strong cash conversion to continue,

forecasting free cashflow of in excess of £5bn for

the next threeyears from 2024 to 2026.

Higher return on capital

employed(ROCE)

We have increased profitability, with underlying

EBITincreasing 30% on a constant currency basis

over three years since 2021. We have boosted

efficiency through our careful capital allocation,

resulting in a higher ROCE for our investors.

ROCE is a key metric in driving executive remuneration.

Focused capital allocation

We have applied a clear, consistent and careful

capital allocation across the business.

– We have continued to invest in our people,

growing to 99,800 employees at the end of

2023from 89,600 inJanuary 2021, including

ourshare of equity accounted investments.

– We have applied significant investment in

upgrading and improving facilities across our

sitesto ensure our processes are efficient and

weare able to deliver operational excellence.

– We continue to invest in future technologies.

Ourtotal R&D spend across the three years

totheend of 2023 was £5.9bn.

– We continue to identify and pursue value-

enhancing acquisitions in alignment with our

Groupstrategy.

Following ratings upgrades from S&P Global and

Fitch in 2022, as well as being placed on positive

outlook by Moody’s, we have maintained our

stronginvestment grade credit ratings.

Rating Outlook Category

Moody’s Investors Service

Baa2 Positive Investment grade

Standard & Poor’s Ratings Services

BBB+ Stable Investment grade

Fitch Ratings

BBB+ Stable Investment grade

Efficiency

and

simplification

in working

Secure

further

opportunities

and wider

market base

Further

investment in

technology

Portfolio

shaping

forvalue

creation

Accelerate

our

sustainability

agenda

Our ambitions 2021–2023

Financial outcome from delivery against our ambitions

Attractive shareholder returns

– As at 31 December 2023, we have returned £4.2bn

through dividends and sharerepurchases under

announced share buyback programmes since 2021.

– We continue to target paying dividends in line

with the Group’s policy of long-term sustainable

cover of around two times underlyingearnings.

1. See calculation on page 32.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

1. Backlog for Cyber & Intelligence is generally for one year with an incumbency position following.

Pipeline/incumbent positionOrder backlog Opportunity

Electronic Systems (ES)

Electronic Combat (including F-35)

ES Defence other

ES Commercial

Platforms & Services

M109

AMPV

ACV

US Ship Repair

US Ordnance & Weapons

Hägglunds & Bofors

Air

Tempest/GCAP

F-35 build and support

Typhoon production

UK Typhoon support

Kingdom of Saudi Arabia support

MBDA

Maritime

Dreadnought

SSN-AUKUS

Type 26

Australia Hunter Class

Munitions (UK)

Dates reflect position

at 1 January each year

2024

2025

2026

2027

2028

2029

2030

2040

Chief Executive’s review continued

We are also committed to returning

valuetoshareholders in accordance with

ourcapital allocation policy through a

dividend, which has increased for 20 years

ina row, and share buybacks. Reflecting

this,in August, we announced a further

three-year share buyback programme

ofupto £1.5bn to commence after the

completion of the current programme.

Highly relevant capabilities

As one of the world’s largest defence

companies, our technologies, capabilities

andglobal footprint position BAE Systems

asa leader in helping customers meet the

elevated threat environment of today and

tomorrow. Executing on our ambitious

product and technology strategy, the

Groupcontinues to design, develop and

manufacture cutting-edge products –

acrossthe domains of air, sea, land, cyber

andspace – that our customers count on.

Ourexceptional portfolio is enhanced by

enabling technologies including artificial

intelligence, autonomy, synthetic

environments and cyber defence, ensuring

we remain at the forefront of national

security-related innovation. In addition to our

defence portfolio, our commercial aviation

product lines are recovering as more

passengers return to flying. Demand for our

low and zero emission propulsion systems

also grew, with opportunities to take these

applications into the defence arena, as well

asmaritime and air.

Our market differentiation

Our diverse product and services portfolio,

combined with our global footprint and

engagement in many of the world’s largest

national defence markets, are key and

differentiating strengths. We see good

long-term growth and significant

opportunities inour US, UK, European,

Middle Eastern, Australian and Asia-

Pacificbusinesses.

Most of the countries where we operate

haveeither announced budget increases

orare planning increased spending to

addressthe elevated threat environment.

While governments continue to face global

economic and fiscal pressures, commitment

to defence spending in our major markets

remains robust.

Please read more about our markets on

page18.

Our multi-decade programmes and growing global opportunity pipeline

BAE Systems plc Annual Report 2023

Overview

Our long-term visibility

With our record order backlog and

programme positions, as illustrated

inthechart on page 10, we have a high level

ofvisibility of our revenues for many years

tocome. The order backlog is, in many

cases,just a subset of the true programme

length and value, with many of our key

programmes running well into the next

decade. The current visibility has the potential

to be even further enhanced as we have a

growing global opportunity pipeline, driven

by our capabilities and marketdifferentiation.

Portfolio evolution to support

thelongterm

During the year, three significant events have

positively enhanced thebusiness portfolio

relevance for the longterm.

• Firstly, further detail on the AUKUS

trilateralagreement between Australia,

theUK and the US was announced in

March 2023 and has significant future

potential for BAE Systems. We have already

secured £3.95bn offunding intheyear for

the next phase of the UK’snext-generation

attack submarineprogramme.

• Secondly, GCAP, formed in 2022, saw

ministers from Japan, the UK and Italy sign

an important treaty in December 2023

inthe shared design and development of

next-generation fighter aircraft, reinforcing

momentum and the strong trilateral

co-operation between the partners.

• Thirdly, in August 2023, we announced

theacquisition of Ball Aerospace, a leading

space, defence technology andtactical

missiles company, which webelieve has

highly relevant mission-critical capabilities

for our customers’ futureneeds. The

acquisition completed in February 2024.

Investing for growth

To meet the business’s growth outlook, we

areincreasing our investments in people,

technologies and facilities. We boosted our

global workforce by 6,700 employees

compared to 2022. Given the longduration

of many of our programmes, we put a special

emphasis on early careers and community

outreach to ensure we hire, develop and

retain the best talent. In 2023, we increased

recruitment of UK apprentices and graduates

by 37% compared to 2022.

We also continue to develop and modernise

our facilities, making progress in building

capacity for the future in munitions,

shipbuilding, submarines, combat vehicles

and electronics.

Technology and innovation are central to

ourstrategy and we increased Group R&D

expenditure by 14% compared to 2022.

Our investments in core franchises and

ournext-generation priorities, such as:

space;autonomy; sustainability; advanced

manufacturing; and multi-domain and

digitalintegration, are driven by the evolving

threat landscape. At a tactical level, the

conflict in Ukraine ishighlighting the

importance of a number ofthese key

technologies, especially autonomy, synthetic

training, digital andmulti-domain capabilities,

while also reinforcing the critical need for

munitions andmaintaining legacy capabilities.

We are driving innovation through the

research labs embedded in our business

sectors, including FASTLabs

™

in the US,

RedOchre Labs in Australia, and now via the

FalconWorks

organisation in our Air sector.

These hubs are agile innovation engines

aimed at delivering bold breakthrough

technologies to keep our customers ahead

ofthe challenges they face. They also foster

collaborative partnerships with academia

andother organisations to bring even greater

levels of creative and diverse thinking into

BAESystems. Read more about our

investment in technology on page 20.

Our sustainability agenda

Recent global events continue to

demonstratethe need for strong defence

andsecurity in the face of aggression by

nation states. At BAE Systems, we provide

critical capabilities and support to our

government customers and their allies tofulfil

their primary obligations to keep citizenssafe,

as well as enabling important economic and

social contributions through the provision of

sustainable high-quality jobs.

In line with our Group strategic business

priorities, we put a significant focus on

recruitment, skills and education to

ensurethe future talent pipeline. A key

enabler to this is a positive and inclusive

workplace and we continued employee

engagement through our employee

resourcegroups and introduced new

wellbeing programmes. Please read more

on pages 46 to 66.

Sustainability is one of our focus areas

fortechnology innovation in the Group.

Ourambition is to improve the sustainability

of our products without compromising

performance, even enhancing it

wherepossible.

Executive Committee changes

After long and successful careers with

theCompany, two Executive Committee

members retiredat the end of the year.

OurAir SectorManaging Director, Cliff

Robson, has been succeeded by Simon

Barnes, who previously led our business in

theKingdom of Saudi Arabia. Inour Digital

Intelligence business, Managing Director

David Armstrong hasbeensucceeded

byAndrea Thompson, who previously

ledourAir Sector’s Europe and

Internationalbusiness.

Summary

As you’ll see throughout the pages of

thisreport, 2023 has been a year of real

progress for theGroup. We delivered a

strongoperational and financial performance,

moved forward on highly significant

long-term strategic programmes with

GCAPandAUKUS, increased R&D spend

andcapex, grew our workforce by a net

6,700 employees and announced the

$5.5bnacquisition of Ball Aerospace to

enhance our space portfolio, which

completed in February 2024.

On behalf of all of my BAE Systems

colleagues, I’m proud to report that the

fundamentals of the business are strong,

theoutlook is positive and our team is

focusedon our values and purpose –

“toserve, supply and protect those who

serve and protect us”. We are well positioned

to help our national government customers

keeptheir citizens safe and secure in an

uncertain world. For shareholders, our record

order backlog, position on major programmes

and our continued focus on operational

excellence and financial discipline, provide a

high level of visibility for sales growth, margin

expansion, cash generation and capital

returns in the years to come.

Thank you for your support of the Group

andour strategy for value creation. We look

forward to another productive and rewarding

year in 2024 for all our stakeholders.

Charles Woodburn CBE

Chief Executive

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Our strategic framework

Our vision

... is to be the premier international defence,

aerospace and security company.

Our mission

... is to provide a vital advantage to help our customers to protect what really matters.

Our strategy

... is comprised of six key long-term areas of focus that will help us to achieve our vision and mission.

Itiscentred on maintaining and growing our core franchises and securing growth opportunities through

advancing our three strategic priorities whilst demonstrating our Company Behaviours in all that we do.

Our strategic priorities

... provide the link between our longer-term strategy and near-term

businessobjectivesforallouremployees.

Our sectors

Our values: Trusted, Innovative and Bold

Drive operational

excellence

Electronic

Systems

Page 36

Platforms

&Services

Page 38

Air

Page 40

Maritime

Page 42

Cyber &

Intelligence

Page 44

Continuously improve

competitiveness and efficiency

Advance and further

leverageour technology

Sustain and grow our

defencebusiness

• Deliver on our commitments

effectively and efficiently

• Develop our offerings to meet the

future defence and security needs

Continue to grow our business

inadjacentmarkets

• Take our capabilities into adjacent

attractive markets

• Develop dual-use opportunities

delivering civil solutions to leverage

back to meet challenges for our

defence customers

Develop and expand our

international business

• Mature our international activities,

broadening our offerings to our

established customers

• Develop relations with additional

customers

Inspire and develop adiverse

workforce to drive success

• Ensure we diversify our thinking

andharness the full potential of

ourpeople

• Create an environment and

proposition in which our people

willthrive

Enhance financial performance

and deliver sustainable growth

in shareholder value

• Seek opportunities to drive

efficiency,standardisation

andsynergies

• Identify opportunities for higher-

margin offerings

Advance and integrate our

sustainability agenda

• Emphasise the vital role we play in

protecting countries and civilians

andsupporting our communities

• Progress the delivery of our

decarbonisation strategy

BAE Systems plc Annual Report 2023

Strategy and performance

Our strategy in action

BAE Systems Hägglunds

With over 60 years of experience in tracked vehicles, BAE Systems

Hägglunds has built an enviable portfolio of combat vehicles.

Asatrusted supplier, we have experienced accelerated demand

from European nations for vehicles and upgrades in our Sweden-

based business. In recent years, Hägglunds has secured notable

awards including winning Slovakia’s Infantry Fighting Vehicle

competition with the CV90, the Czech Republic contract for

CV90s in seven variants, a three-nation joint procurement for

BvS10s for Sweden, Germany and the UK, and the US Army’s

competition forits Cold Weather All-Terrain Vehicle programme

with Beowulf. To deliver profitable growth while meeting this

surge in demand, the Hägglunds team is maintaining focus on

operational excellence. We are optimising our own manufacturing

capabilities and skilled workforce, while striking the right sourcing

balance through robust industrial co-operation and partnering to

grow smartly, build strong margin performance, and ramp

operations to fulfil our customer commitments.

New Glasgow ship build hall

We have started construction on a new ship build hall in Glasgow,

Scotland, which will enable us to build two Royal Navy warships

under cover simultaneously. The new facility, together with a new

Applied Shipbuilding Academy, is part of a £300m investment

programme which will transform the way we design and build

warships on the River Clyde and create more capacity for

potentialfuture contracts.

Designed to accommodate up to 500 workers per shift, the new

ship build hall will improve working conditions for our colleagues

and help ensure adverse weather conditions do not impact our

shipbuilding operations.

It will also enable a greater level of equipment outfit, before

eachship moves to the dry dock for testing, commissioning and

acceptance, and will support a quicker delivery of the Type 26

frigates to the Royal Navy.

Azalea™

We are developing our first multi-sensor satellite cluster which

isdesigned to operate in Low Earth Orbit to deliver high-quality

information and intelligence in real time from space to defence

customers. Known as Azalea

™

, the group of satellites will use

arange of sensors to collect visual, radar and radio frequency

data, which will be analysed by on-board machine learning

on-edge processors to deliver intelligence securely from orbit.

TheAzalea

™

cluster is designed to deliver timely, actionable

intelligence for military operations and disaster response. Unlike

conventional, single-purpose satellites, the cluster is designed

tobe reconfigured while in orbit; this is designed to enable it to

deliver future customer missions and to extend the lifecycle of

thesatellites. The programme is well positioned to support the

UKGovernment’s Defence Space Strategy, which named Earth

observation as a priority area to help protect and defend UK

interests, a sovereign capability which Azalea

™

could provide.

Drive operational excellence

Continuously improve competitiveness

and efficiency

Advance and further leverage

ourtechnology

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Our unique strengths

and resources provide

opportunities to create

sustainable value for

our stakeholders.

Our business model

Our people

Our culture values inclusion and diversity

andrewards integrity and merit so that

everyone can fulfiltheir potential. We are

committed tonurturing talent and developing

highly-skilled people. We are training the

nextgeneration of employees and business

leaders to be able to drive innovation and

solve complex challenges.

Our technology

We focus on technology innovation and

engineering excellence, prioritising and

investing in next-generation R&D programmes

to deliver competitive solutions to meet our

customers’ needs, now and in the future.

The core activities we undertake to create value for stakeholders

Our activities are undertaken with a clear, consistent and careful capital allocation.

– We have established positions

onlong-term programmes

– We build strong and collaborative

relationships with our customers

– Our position as a trusted supplier

allows us to identify emerging trends

and opportunities for growth

Identifying

customerneeds

– Technology and innovation underpin

our strategy and the development

ofour products and services

– We partner with academic and

industrial leaders todevelop new

technologies that support our future

product strategies

– We have a clear focus for our R&D

spend, and that ofour customers,

aligned to future product and

servicesstrategies

Research & development

– We focus on value for our customers

while effectively managing risk

– We maintain a record of delivery

oncomplex projects

– We develop partnerships with

anetwork of suppliers supporting

economic prosperity and development

Bidding and contracting

The value we create

Through careful long-term sustainable management and governance of our business

wewillcontinue to create value for our stakeholders.

Customers

Our largest customers are governments,

butwe also sell to commercial businesses

and other large prime contractors. We never

lose sight of the users of our products and

services and the critical work they do to

keep us safe. We take on and solve some

oftheir most complex and challenging

engineering and technology projects to

givethem a competitive edge and help

them to protect what matters most.

Money spent on R&D

£2.3bn

(2022: £2.0bn)

Apprentices and graduates

across the Group

5,500

(2022: 4,500)

Environment

We acknowledge the significant and lasting

impacts of climate change. Our goal is to

carry out a long-term strategy to reduce

theimpact of our activities, supply chain

and products on the climate by using our

world-class engineering capabilities and

cutting-edge technologies. We continue

tomake progress on our target of achieving

net zero greenhouse gas (GHG) emissions

(Scope 1 and 2) across our operations

by2030.

Employees

We support high-value jobs in our business

and in our supply chains. This includes direct

employment as well as indirect employment

in our supply chain and jobs supported by

theconsumer spending of our employees

and supply chain.

Communities

We contribute to the economic prosperity

ofthe places where our people live and

work. In addition to the high-value jobs

wesustain, supporting the communities

inwhich we operate and causes that have

meaning to our business is vitally important

to us and our employees.

BAE Systems plc Annual Report 2023

Strategy and performance

Responsible operations

andsocialimpact

We take pride in managing our operations

responsibly and our ambition is to have a

responsible and sustainable supply chain

across our global business. We cannot

achieve this alone, therefore it is important

that we collaborate and partner with

suppliers to make a positive business impact.

This is essential to achieving our target of

netzero GHG emissions (Scope 1 and 2)

across our operations by 2030.

Our governance framework

We are accountable for all that we do and

our robust governance framework sets out

how we do business. Together with our

Codeof Conduct, which requires our

employees to conduct business in an ethical

way, it enables us to earn and maintain the

trust of our stakeholders.

Our partners and key relationships

We recognise the important contribution

provided by our suppliers and partners

andwe maintain close relationships with

them to help us create best-in-class,

cost-effective products and services.

– Weprovide engineering expertise

indeveloping cutting-edge

productsand services

– Working with our customers, we

develop products designed to

minimise environmental impacts

during service and at end of life

– Our products are designed and

developed in a way that provides

forfuture flexibility with the ability

toupgrade in an agile manner

Design and developing

– We focus on operational excellence

with safety as a priority

– We continuously invest in advanced

manufacturing techniques

andfacilities

– We manage complex projects

andcollaborations across global

supply chains

Advanced manufacturing,

commissioning and

integration

– We provide competitive services that

add value for our customers

– We develop technical expertise, which

is acquired through product design

and development

– We use flexibility and responsiveness

to maximise availability of our

customers’ products

Services, sustainment

and upgrade

Reduction in GHG emissions

(Scope 1 and 2)

-11.0%

(2022: –9.6%)

Total contributed to local, national

and international causes

£11.3m

(2022: £11.5m)

Investors

We have a strong track record of delivering financial returns for investors and, through

thecareful long-term sustainable management and governance of our business, we are

wellplaced to continue to generate good returns.

Total shareholder returns

£1,145m£1,145m

£2,735m£1,590m

£4,153m£1,418m2023

2022

2021

Dividends

Value of shares repurchased Cumulative

Our investment proposition Page 16

2. The full value of our contribution to communities for 2023 was £11,267,109 (2022 £11,504,152). Deloitte has provided independent limited assurance in accordance

with the International Standard for Assurance Engagements 3000 (ISAE 3000) and Assurance Engagements on Greenhouse Gas Statements (ISAE 3410) issued by the

International Auditing and Assurance Standards Board (IAASB). Deloitte’s full unqualified assurance opinion, which includes details of the selected metrics assured, can

be found at baesystems.com/annual-report.

1. This excludes the increase in value of shares. See calculation on page 32.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

We have a growing global

opportunity pipeline.

Our diverse geographic

footprintsupports us in

pursuingexcellent

opportunitiesacross all sectors

ascountries around theworld

face up to the multi-faceted

threat environment.

Read more on Page 9

26% sales

– Astute and Dreadnought submarine build

– SSN-AUKUS submarine design and future build

– Naval ship build and support

– Typhoon build and support

– F-35 (aft fuselage) and support

– GCAP/ Tempest

– Digital Intelligence

– Munitions

42% sales

– Electronic warfare

– Precision strike

– C4ISR

– Intelligence & security

– Combat vehicles

– US ship repair

– Munitions

– Space

Middle East

15% sales

– Kingdom of Saudi

Arabiasupport

– Qatar Typhoon and Hawk

– Kuwait and Oman

Europe and other international

13% sales

– Eurofighter

– MBDA

– Hägglunds/Bofors (CV90, BvS10, ARCHER)

– US Foreign Military Sales

Japan

– GCAP

– US Foreign

Military Sales

Australia

4% sales

– Hunter Class Frigates

– SSN-AUKUS

– Naval support

– Air support (Hawk, F-35)

– C4ISR

1. Total dividend for the year comprises the interim dividend of 11.5p and final dividend of 18.5p.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

BAE Systems maintains leading positions in major defence and security markets

around the world – in the US, UK, Europe, Middle East and Asia Pacific. We are

not only one of the world’s largest defence and security companies, but are one

of the most geographically diverse, providing us with a competitive advantage.

Our markets

BAE Systems’ global defence market position

Top ten global defence contractors’ revenue ($bn)

1. Lockheed Martin

2. RTX

3. Northrup Grumman

4. Aviation Industry Corporation of China

5. Boeing

6. General Dynamics

7. BAE Systems

8. China North Industries Group Corporation Limited

9. L3Harris Technologies

10. China South Industries Group Corporation Limited

Source: Defense News Top 100 for 2023 (based on 2022 numbers). Exchange rate applied to BAE Systems is $1.24/£1.

Supporting our customers’

evolvingneeds

Our strategy, as shown on page 12, is focused

onproviding a vital advantage to our customers

around the world through advanced technologies,

innovation and agility, global industrial capacity,

and responsiveness. In particular, we have built

strong positions aligned with our core defence

platforms to support our customers in our

principal markets who have shown a significant

and sustained commitment to their defence and

security, and support for their allies. We have

established strong and enduring relationships

inthese markets and are recognised as playing

akey role in the industrial capability of each

ofthese countries.

Our unique global position

andcapabilities

We have a strong position in the US through the

Special Security Agreement and are the leading

defence contractor in the UK and Australia.

InEurope, we have a considerable presence

through our Swedish combat vehicle and artillery

business, our role on Eurofighter, our 37.5%

shareholding in MBDA and our content on US

foreign military sales. We have a long-established

position in the Middle East, and through GCAP

weare forging strong links with Japan.

In addition, our diverse portfolio of capabilities

inthe air, sea, land, cyber and space domains

provides us with a comprehensive offering for

ourcustomers around the world, making us

oneof the broadest and most geographically

diverse major defence companies.

Our market positions and discriminating

capabilities are aligned with enduring

globaldefence priorities, to include our

customers’requirements to operate in

jointall-domainenvironments.

Programme diversity and longevity

The Group’s wide diversity of capabilities,

products and programmes means we are

notheavily reliant on a small number ofkey

programmes or franchises. Additionally, our order

backlog of £69.8bn includes major programmes

that are well positioned to extend beyond their

current funded backlog for many years, and in

some cases, multiple decades.

Response to increasing

threatenvironment

Our business continues to evolve and respond

tothe geopolitical and technological trends

shaping our customers’ defence andsecurity

priorities now and in the future.

Ourdemonstrated excellence in complex

engineering, developing cutting-edge

technologies and seeking innovative solutions

enables us torespond to requirements for

greateragility, global reach, and advanced

technology products and services.

Growth aspirations

In response to significantly elevated global

tensions and the acute threat environment,

manycountries around the world continue to

announce defence and security budget increases.

The need to re-stock and upgrade equipment

ishighly relevant to our portfolio and presents

opportunities around the world.

Factors likely to impact

futureperformance

Business risks facing the Group are reported in

theprincipal risks section of this report (pages

70to 77). In relation to our market positions and

future performance, the major risks would bein

relation to political changes in alliances, defence

spending outlook and defence export control

regimes. At the operational level, performance of

products and services and adherence to delivery

schedules could impact ourmarket positions with

customers and competitor pricing or new

entrants could alsohave an impact.

BAE Systems plc Annual Report 2023

Strategy and performance

Value of the top global defence markets accessible for business by the Group

US and Canada Existing programmes Opportunities

$848bn

defence market

The US continues to be the single

largest defence market in the world.

We are a top ten defence prime

contractor in the US, and in Canada

we have a long history of supporting

the Canadian Armed Forces.

– Electronic warfare

– Precision strike

– C4ISR

– Intelligence & security

– Combat vehicles

– US ship repair

– Munitions

– Space

– Canadian Surface Combatant

– Precision munitions

– Combat vehicles

– Munitions restocking

– Electrification – ground andair

– Space, autonomy andcyber

– US Foreign Military Sales

– Maritime support

$68bn

defence market

As the largest defence company

inthe UK, we have strong and

enduring relationships with

theUKMinistry of Defence

andourdomestic supply chains.

– Astute and Dreadnought

submarine build

– SSN-AUKUS submarine

design andfuture build

– Naval ship build and support

– Typhoon build and support

– F-35 (aft fuselage) and support

– GCAP/Tempest

– Digital Intelligence

– Munitions

– MBDA

– Domestic and

exportpartnerships

– Space, autonomy andcyber

– Munitions restocking

– Sustainable technologies

Europe

$330bn

defence market

In Europe, we are meeting the

increased demand for advanced

military equipment across all

domains, as countries are

transitioning away from older-

generation systems and

recapitalising with modern,

moreadvanced air-, land- and

sea-based systems.

– Eurofighter

– MBDA

– Combat vehicles/artillery –

CV90,BvS10, ARCHER

– US Foreign Military Sales

– Precision munitions

– GCAP

– Combat vehicles/artillery –

CV90, BvS10, ARCHER

– US Foreign Military Sales –

electronic systems

– US Foreign Military Sales –

combat vehicles/artillery/

precision weapons

– MBDA domestic and exports

– Eurofighter domestic

andexports

– Precision munitions

Middle East

$148bn

defence market

The Kingdom of Saudi Arabia

continues to be a leading military

power in the Middle East and

oneofthe largest defence

marketsglobally. We also continue

tosupportother customers in

Oman, Kuwaitand Qatar.

– Kingdom of Saudi Arabia

support

– Qatar Typhoon and Hawk

– Kuwait and Oman

– Typhoon

– Support and training

– Upgrades and defence

infrastructure programmes

– Cyber intelligence

Asia Pacific

$265bn

defence market

As the largest defence company in

Australia, we have a strong presence

across all domains and are growing

as the country’s defence budget

increases. In the wider Asia-Pacific

region, we are a supplier to a

number of armed forces, both

directly and through joint ventures.

– Hunter Class Frigate

– GCAP

– US Foreign Military Sales

– Fast jet support

– Ship support

– C4ISR

– SSN-AUKUS – pillar 1 and 2

– GCAP

– US Foreign Military Sales –

Electronic Systems

– US Foreign Military Sales –

combat vehicles/artillery/

precision weapons

– MBDA exports

– Cyber intelligence

– Australian defence exports

Source: Jane’s Defence Budgets (basedon2023 total defence budgets).

1. Includes NATO countries, Sweden and Ukraine, but excludes UK as shown separately.

2. Includes Egypt, Kuwait, Oman, Qatar, Kingdom of Saudi Arabia and UAE.

3. Includes Australia, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

The speed of change in technology today is greater than ever before. We need to develop

our own technologies, leverage our investments and cultivate strategic partnerships with

organisations, both inside and beyond the sector, to deliver the most compelling capability

to our customers.

Our investment in technology

Focus areas

We align our technology

development to key strategic

themes, which supports

growth in today’s core

franchises and tomorrow’s

emerging capabilities.

Digital integration across

military and security domains

Integration across land, sea, air, space and

cyber domains is becoming essential for

military operations, so this is a key pillar

ofour current technology plan. While

BAESystems has been digitally integrating

naval vessels and combat jets for decades,

more recently we have started building

asuiteof products and services designed

attheir core to share data and work

seamlessly together. These include

uncrewedground, sea and air vehicles, as

well as battlefield networks and synthetic

environments to share information, assist

human decision-making and enable joint

command and control.

We have taken an open systems approach,

using standards-based architecture, modular

design and incorporated translation layers

atevery boundary within the system.

Thisallowscustomers to flexibly deploy our

capabilities, making them easier to integrate

with existing capabilities and equipment from

other suppliers. For example, we have already

integrated oursystems with third-party

products such asSentinel’s LR70 uncrewed

airvehicle anda third party’s fast interceptor

boat. Our aim is tohelp our customers

achieve integration among their procured

products, no matter who supplies them.

In 2023, our next-generation battlefield

network was selected for the British Army’s

Trinity programme, which will replace its

existing Falcon network in 2026. Trinity

willsignificantly increase the robustness

andbandwidth of the network, allowing

more data to be transferred and greater

control over how individual nodes interact.

Itwill enable UK military personnel to interact

more effectively with allies when operating

asasingle nation or part of an international

coalition across multiple battlefield domains.

Project OdySSEy – integrated

synthetic training

Military training is being transformed by

integration and synthetic environments.

Wehave developed Project OdySSEy,

bringing together SMEs and technical

experts, such as Bohemia Interactive

Simulations, with engineers in our Air sector

to deliverasingle synthetic environment

enabling military forces inthe air, land, sea,

space and cyber domains to train as one.

Synthetic training is becoming increasingly

important, as the modern battlespace

hasevolved to a position where threats are

often responded to by multi-nation

coalitions and training operations are now

largely conducted alongside allies located

around the globe. In the real world, such

joint training presents an extraordinary

logistical challenge, involving more time,

resources and high costs as well as

environmentally harmful exercises.

Leveraging a digital environment provides

asecure and sustainable platform for joint

training exercises which nations can

‘plug-and-play’ and test the actual tactics

they would deploy in a real-life situation.

www.baesystems.com/arti cle

BAE Systems plc Annual Report 2023

Strategy and performance

Artificial Intelligence

andautonomy

While not a new area for BAE Systems,

technological developments and increased

computing power have allowed us to apply

Artificial Intelligence (AI) in more areas,

fromdesign and manufacturing to enabling

new levels of autonomy in military platforms

and services.

We are investing in AI research, both in-house

and with our strategic university partners.

AtCranfield University, we have contributed

to the development of anew course in

Applied AI, ensuring it is relevant to the

defence and aerospace industry. Through this

course and sponsorship of PhD placements

atthe university, we are developing systems

that can dynamically plot optimal routes for

uncrewed vehicles, through complex and

changing threat environments. One such

example is a project to find safe landing areas

for autonomous air vehicles during hazardous

search and rescue missions, removing

humans from this dangerous task.

At Manchester University, our AI data science

accelerator is exploring autonomous navigation

using a combination of sensors without

usingGPS, which can’t always be relied on

incontested military environments. We are

using data from NASA’s openCAESAR

initiative, building models of our complex

engineering systems and allowing us to

validate that design rules are being followed

throughout millions of lines of code.

Our battlefield-ready Electronic Warfare (EW)

systems are working towards a future with

AI, such as in the Eagle Passive Active

Warning Survivability System (EPAWSS),

which our BAESystems, Inc. team delivers.

EPAWSS implements ‘cognitive’ EW to detect,

identify, analyse and jam previously unknown

threats, something that previous EW systems

could not do without returning to base.

Cognitive EW is one step closer to integrating

AI into anEW system.

The Defense Advanced Research Project

Agency has also contracted with our

USbusiness to develop new technology

allowing advanced automated signals

processing – vital for navigation, target

detection and communication – on much

smaller platforms than is currently possible.

We use our advanced electronics skills

tosignificantly reduce the size, weight

andpower requirements for these

computation-heavy operations.

AI is used to inform the design and

development process of the Future Combat

Air System. It is also used to support

collaborative research and development.

Ourintention is to further integrate our

digitalengineering data, helping us monitor

the entire engineering lifecycle. This will

meana change to one part of the design

canbe assessed more quickly for any

impacton other systems, rather than waiting

for a time- and cost-consuming cycle of

manual iterations.

Autonomous products for air,

landand sea

In 2023, we unveiled several new

productsat the world’s largest defence

show, the Defence and Security

Equipment International (DSEI) event.

Weare designing these products to

navigate autonomously as well as operate

as part of a multi-domain force. There are

clear benefits to uncrewed systems, as

they can take on a range of dangerous jobs

that would otherwise need to be done

bya human. We are actively supporting

ongoing work by our customers to establish

appropriate principles and policies for the

use of autonomous systems in defence, to

ensure meaningful and context-appropriate

human involvement and compliance with

applicable national and international law.

www.baesystems.com/arti cle

Space

In the US, we are developing, manufacturing

and deploying state-of-the-art, radiation-

hardened circuits to support missions of

national importance across defence, space,

intelligence, research and commercial

applications. In February 2024, we completed

our Ball Aerospace acquisition, which will

redefine our position in the space domain.

Our shared culture of innovation, combined

capabilities and diverse portfolios will serve

toadvance our growth strategy andenhance

our position to address the global trends of

an increased focus on the space domain, and

rising concerns about global warming and the

need for civil space systems to improve our

understanding of itsimpacts.

In 2022, we announced the intention to

launch our first multi-sensing multi-satellite

cluster, Azalea

™

. The Azalea

™

cluster will

usearange of sensors to collect radar and

radio frequency data to deliver high-quality

information and intelligence to military

customers. Unlike conventional intelligence

satellites, Azalea

™

can be reconfigured whilst

in orbit; it will also analyse the data it collects

on board the satellites in space, sending

down a more complete intelligence picture

directly to end-users. This will put intelligence

in users’ hands much more quickly, since

itavoids large volumes of data being

downloaded to earth for analysis before use.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

New autonomous products include:

Our investment in technology continued

T600 heavy lift uncrewed air system (UAS)

BAE Systems and Malloy Aeronautics (which was acquired by the

Group on 31 January 2024) have collaborated on demonstrating

the heavy lift capability of the T-600 heavy lift UAS and, in 2023,

announced that it had successfully carried and released a 200kg

inert Sting Ray training variant torpedo during a large NATO

exercise, known as REPMUS (Robotic Experimentation and

Prototyping with Marine Uncrewed Systems). The success of this

sea flight mission atsea demonstrates the potential and versatility

of this capability.

www.baesystems.com/arti cle

The ‘Nautomate

’ autonomous control system

Nautomate

is an intelligent autonomous control system for

small-and medium-sized surface and sub-sea vessels, as exhibited

onathird-party P38 Fast Interceptor Boat at DSEI. Nautomate

brings smart autonomous platforms and mission controls with

theability to host various mission modules, such as a non-lethal

arrest system to disable enemy boats.

As an example of the utility of this system, a surface platform

couldbe tasked to autonomously pursue and disable an enemy

craft,allowing human team mates toapproach more cautiously

andwith greater advantage.

www.baesystems.com/arti cle

Advanced manufacturing

Engineering and manufacturing is at the

heart of what we do, from the size and

complexity of nuclear submarines through

tosmall uncrewed air vehicles and aircraft

components. We are always looking for

technologies that can help us be more

efficient in manufacturing, as well as in the

delivery of tools and techniques to protect

the health and safety for our workforce.

Inour Air business sector, in the North West

of England, we are investing in digitalising

thewhole design and production process

fornew combat aircraft.

We are developing a digital platform to

combine our design, manufacturing and

support engineering processes to happen

simultaneously, rather than concurrently for

our future Air products. Thismeans that if a

design engineer makes achange in one area,

the impact of that change can be assessed

immediately across the full engineering

lifecycle, rather than waiting for specialist

engineers to translate it.

We are also researching entirely new

techniques with our university partners, such

as wire and arc additive manufacturing to

create titanium structures that have bespoke

mechanical properties. This also has the

advantage of significantly reducing wastage

during manufacturing, as well as creating

components that could not be made any

other way.

We are planning to use AI in 2024 to improve

our manufacturing efficiency. For example,

inour Australian shipyard, where we are

currently building the Hunter Class frigate,

wehave proven the usage of a highly

complex simulation to assess more than

17 million ways to build the ship, simulating

all identified processes involved down to

individual work stations. The success of

thissimulation has paved the way to use

AIinthe next iteration of the software.

M113 Optionally Crewed Combat Vehicles (OCCVs)

In 2023, significant progress was made by the Land Autonomy

team in BAE Systems Australia. Inpartnership with the Australian

Army and academia, the team demonstrated multiple M113 OCCVs

operating autonomously moving into critical locations, sweeping

and searching an area for targets and executing a logistics mission.

The event showcased the maturity of the Trusted Autonomous

Ground Vehicle for Electronic Warfare (TAGVIEW) programme,

which aims to deliver mission management, sensors and software

integration, and allow an autonomous vehicle to manoeuvre

independently in an obstacle-filled environment.

BAE Systems plc Annual Report 2023

Strategy and performance

Sustainability

Like our customers, we are committed to reducing the carbon footprint of our own operations and the products we provide. We have included

some specific technology examples here and you can find a full overview on page 46.

A grand challenge to create more efficient

maritimevessels

We are working with Strathclyde University and the University

ofSouthampton, in the UK, to research how we can improve

theenergy efficiency of warships, pull through new technology,

and model the through-life costs of carbon, so that we can help

customers make more informed decisions about future upgrades.

We will also look at sustainable fuels, more efficient engines

andAI-controlled support systems.

www.baesystems.com/arti cle

Collaborating on a newelectricaircraft

We are collaborating with Heart Aerospace, a Swedish electric

airplane maker, to define the battery system for Heart’s ES-30

regional electric airplane. The battery will be the first of its kind to be

integrated into an electric conventional take-off and landing regional

aircraft, allowing it to efficiently operate with zero emissionsand low

noise. Heart Aerospace chose us for our extensiveexperience in

developing batteries for heavy-duty groundapplications, as well

asdeveloping safety-critical control systems foraerospace.

The ES-30 aircraft will be powered by four electric motors and has

an all-electric range of 200 kilometres, an extended reserve hybrid

range of 400 kilometres with 30passengers and the ability to fly

upto800 kilometres with 25 passengers.

www.baesystems.com/arti cle

PHASA-35

solar powered flight

PHASA-35

, our High Altitude Pseudo Satellite (HAPS) platform,

completed its first stratospheric flight, soaring to more than

66,000 feet before landing successfully. Designed tooperate above

the usual weather systems and conventional air traffic, ithas the

potential to provide a persistent and stable platform forvarious

roles including ultra-long endurance intelligence, surveillance and

reconnaissance, as well as security.

It also has the potential to be used in the delivery of non-defence

services, such as communications networks including 4G and 5G

as an alternative to traditional airborne and satellite systems.

www.ba esy stems.com/article

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Understanding and exceeding the expectations of our stakeholders is critical to the long-term

sustainability ofour business and the vital role we play in helping our customers to protect people,

information and nations.

1. Relates to the UK, Australia and Kingdom of Saudi Arabia businesses.

Our stakeholders

Stakeholders What’s important to them Why we engage How we engaged in 2023

Our people

Employees of BAESystems

More information Page 56

– Safety and wellbeing

– Career progression,

trainingand development

– Remuneration, reward

andrecognition

– Diversity, equity and inclusion

(DEI)

– How we work together

– Business conduct

– Decarbonisation programme

– Contribution to the

communities where wework

The safety, wellbeing, skills,

capabilities and commitment

ofour people are critical to

ensuring the long-term

sustainability of our business

and delivering the innovation

needed to solve our customers’

complex challenges.

Effective engagement enables

our employees to contribute

toimproving business

performance and helps us

tocreate an environment in

which everyone is safe, valued

and can fulfil their potential.

– Surveys and insight sessions

– In-person and virtual meetings, briefings, conferences,

toolbox talks, safety stand-downs, events and listening

forums at all levels

– Regular leadership updates through videos and events

throughout the year (including in relation to financial

and business performance)

– Digital channels including our Employee App, intranet,

email and TV systems

– Engagement forums with trades unions in Australia

andthe UK and labour unions in the US

– Launched a renewed employee resource group (ERG)

framework, including a series of inclusion events

throughout the year

Our customers

andend-users

Governments and their

procurement bodies,

largeprimecontractors

andcommercial businesses

The people who use our

productsand services, often

members of the armed forces

andsecurity services

More information Page 20

– Value for money

– Trust

– Quality of our products

andservices

– Risk management

– Timely delivery

– Safety and wellbeing

– Supporting operational

capability and operability

– Reducing product

GHGemissions¹

– Reliability of our teams

torectify issues quickly

Understanding our customers’

needsand challenges is

centralto our strategy and

howand where we invest in

technologies and infrastructure.

Our end-users protect people,

information, infrastructure

andnations. Delivering on

ourcustomer commitments

iscritical to our mission to

protect those who protect

usand drives our focus on

operational excellence.

– Participated in major events including the DSEI

exhibition in the UK and the Association of the United

States Army exposition in the US

– International summits, like the Shangri-La Dialogue

(Singapore), provided strategic access to key customers

and stakeholders

– Bespoke technology event series launched providing

anopportunity to engage customers around evolving

capability requirements

– Customer meetings, programme reviews, site visits

andprogramme milestone events

– Close working with end-users at customer facilities,

bases and sites

– Regular dialogue with senior military leaders as well as

senior ministers and political officials in our key markets

Our suppliers

The companies we work

withtodeliver products and

services toourcustomers

More information Page 65

– Labour and skills requirements

– Cost of materials

andoperations

– Terms of trade

– Timely payment

– Sustainable sourcing

– Supply chain resilience

andcontinuity of supply

– GHG emissions and

decarbonisation agenda¹

Our suppliers and an effective,

efficientand sustainable supply

chain are essential to enable

usto deliver forour customers

and end-users.

Engaged suppliers perform

atamuch higher level,

knowingthey are regarded

asvalued partners and critical

tomutual success.

– Direct engagement with our suppliers, including at

majortrade exhibitions and industry conferences such

asDSEI, DPRE and JOSCAR Live in the UK and a

bespoke supply chain event in Australia

– This enabled us to maintain close relationships to help

ensure continuity of supply, more proactively mitigate

supply chain disruptions arising from global events and

support our suppliers by providing extended demand

visibility and expertise to find mutual solutions to

identified supply challenges

– We shared our expectations on the topic of

sustainability with our suppliers

Our partners

Other industry companies, trade

bodies or academic institutions

with whom we work

More information Page 15

– R&D investment

– Product and service

development

– Collaboration on low-

emission products

– Developing common

standards, including and

approach to reduce industry

GHG emissions¹

– Access to market and

customer opportunities

– Sharing best practices and

common standards, including

on ESG issues

We benefit from collaborating

with others toaddress

industry-wide challenges and

develop technologies, products

and services for our customers.

– Extensive engagement with university partners in

Australia and the UK, including joint research projects,

hackathons and an annual PhD conference

– Funding of projects at UK catapult centres to facilitate

R&Dcollaboration with industry, government scientists

and academia

– Maintained regular dialogue with industry partners,

think tanks, trade bodies and customers around

challenges that require a multi-partner approach,

including evolving global events, multi-domain

integration, resilient use of space for intelligence

andcommunications, and sustainability

BAE Systems plc Annual Report 2023

Strategy and performance

Stakeholders What’s important to them Why we engage How we engaged in 2023

Our investors

Investors who provide capital

tothebusiness

More information Page 16

– Profitability, growth

potential and cash

generation

– Capital allocation and

shareholder returns

– Operational performance

– Quality of management

– ESGconsiderations

– Share price performance

A strong investor base and

continued access to capital is

critical to the long-term success

of the Group. It is important

toensure the owners of our

shares and potential investors

have a full understanding of

our business, including the

strategy, growth potential

andrisks as well as the overall

performance of the business

inorder to make informed

investment decisions.

– Comprehensive investor programme comprising a

mixture of in-person and virtual engagements in the

UK,US and other key international markets

– Engagements included management and Investor

Relations meetings, attendance at investor conferences,

bank-led Q&A sessions and major trade shows,

includingDSEI, the Paris Airshow and the Indo-Pacific

Maritime Exposition

– Held a capital markets event at our Hägglunds

businessin Sweden and launched a virtual technology

event series

– Revamped investor pages on the BAE Systems website

tomake information more easily accessible

Our communities

The people who live where

weworkand charitable

organisations we support

More information Page 56

– Employment and

economiccontribution

– Education outreach and

skills development,

especially for young people

– Community engagement

and delivering meaningful

local impact

– Support for our armed

forces’ communities,

including veterans and

military families

We are committed to the

communities in which we

operate. In many locations

where we have major sites

weare one of the largest

employers in the area and have

a responsibility to support the

local communities where our

people live and work both

economically and socially.

As a leading defence and

security company, we are

dedicated to supporting

members of our armed forces’

communities and strengthening

the STEM pipeline.

– Commissioned an independent report into our annual

contribution to the UK economy

– Extensive education outreach programme, including

science, technology, engineering and mathematics

(STEM) ambassadors in key markets, school roadshows

inthe UK and sponsorship of the international FIRST

Championship in the US

– Continued support for local communities through

sponsorships, donations and employee volunteering,

including a local community hub supporting charities

and voluntary organisations in the South of England

andBeacon summer camps for disadvantaged children

in Australia

– Sustained partnerships with armed forces charities,

including Legacy’s centenary torch relay in Australia

andRoyal British Legion’s Poppy Appeal in the UK

Our regulators

Governmental bodies

thatoverseeindustry

orbusinessactivities

More information Page 62

– Relevant laws

andregulations

– Appropriate compliance

programmes

We maintain constructive

dialogue and relationships

withthose who oversee the

regulations which can impact

our business.

– Open and constructive engagement with various

regulators, including meetings and discussions with

UK,US and Australian regulators in support of efforts

todrive efficient compliance, improve bilateral and

multilateral defence trade co-operation and support

ourlicensing strategy

– Participation in industry association initiatives to work

with regulators to the same end

– Regulator participation in our internal training events

and conferences, and support from us as speakers

orparticipants at external conferences and

engagementevents

Our pension

schememembers

Members and trustees

ofourpensionschemes

More information Page 91

– Member benefits

– Pension scheme

fundingposition and

investmentstrategy

– Group performance

We are committed to fulfilling

our obligations to current

andformer employees in our

pension schemes. Our Trustees

engage with scheme members

regularly to ensure they are

informed about how we

continue to do so and

ensurethat they have access

toall the information they

needto manage their

pensionarrangements.

– Continued to engage with our UK members via

dedicated pensions websites, ensuring they have access

to key scheme documents and pensions information

– Newsletter made available to all members to keep

themupdated andengaged in their pension planning

– Consultations in 2023 with members of our schemes

with defined contribution benefits which resulted in

achange in provider for their pension provisions

We also engage with other non-profit organisations and public interest groups who have a focus on business or defence and security issues

to address factors that can impact ourbusiness and how we operate.

Section 172 statement

For the year ended 31 December 2023, in accordance with the requirements of Section 172(1) of the Companies Act 2006, the directors

consider that they have acted in good faith and in a manner most likely to promote the success of the Company for the benefit of its

members as a whole, having regard to stakeholders and other certain factors, including standards of business conduct and the impact

ofitsoperations on the environment and local communities.

More information in support of this statement, including key matters considered and decisions made by the Board during 2023 Page 91

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Our KPIs are aligned to business strategy and are used toactively monitor performance.

Key performance indicators

Links to executive remuneration

Executive directors’ annual and long-term

incentives are assessed using a combination of the

Group’s main performance indicators and other

objectives designed to meet the Group’s strategy.

Metrics, which are both financial and non-financial,

as well as the achievement of personal objectives

for annual remuneration, are determined and

weighted according to business priorities and

maybe structured as targets to be achieved, or

underpins which, if not achieved, would reduce

payouts. 75% of annual incentive targets relate to

financial metrics aligned with long-term earnings

and cash targets. The non-financial element is

based on a combination of personal performance

objectives that provide a clear line of sight to our

strategic objectives including those in relation to

ESG, safety measures and DEI.

Remuneration report Page 107

Links to strategy

Financial

Sales

Purpose

Enables management to monitor

the revenue of both the Group’s

own subsidiaries as well as

recognising the strategic

importance in its industry of

itsequity accounted investments,

to ensure programme

performanceis understood

andinline with expectations.

2023 £25,284m

2022 £23,256m

2021 £21,310m

Progress in 2023

Sales increased 9%, on a constant currency

basis,with all our operating segments seeing

anincrease in sales in the year. For more details

onsegmental performance see pages 35 to 45.

Underlying EBIT

Purpose

Provides a measure of operating

profitability, excluding one-off

events or adjusting items that

arenot considered to be part

oftheongoing operational

transactions of the business, to

enable management to monitor

the performance of recurring

operations over time, and which

iscomparable across the Group.

2023 £2,682m

2022 £2,479m

2021 £2,205m

Progress in 2023

Underlying EBIT increased 9%, on a constant

currency basis. We saw increases across all

operating segments, with the exception of

Cyber&Intelligence which decreased, as expected,

asa result of the additional investments being

made in the business around space and multi-

domain networking.

Underlying EPS

Purpose

Provides a measure of the Group’s

underlying performance, which

enables management to compare

the profitability of the Group’s

recurring operations over time.

2023 63.2p

2022 55.5p

2021 47.8p

Progress in 2023

Underlying EPS increased 14%, on a constant

currency basis. The main driver behind the increase

in the year was the increase in underlying EBIT

combined with the effect of share repurchases.

Formore detail on the movement in underlying

EPSin the year see page 30.

Sustain and grow our

defencebusiness

Continue to grow our business

inadjacentmarkets

Develop and expand our

international business

Inspire and develop adiverse

workforce to drive success

Enhance financial performance

and deliver sustainable growth

inshareholder value

Advance and integrate our

sustainability agenda

Our financial review Page 28

BAE Systems plc Annual Report 2023

Strategy and performance

Non-financial

Recordable accident rate (per 100,000 employees)

Purpose

We are committed to

continuouslyimproving health

andsafety standards across the

business. Our accident rate is

usedto assess workplace safety

improvements and ensure our

safety efforts are aligned to

theworking environment.

2023 424

2022 485

2021 496

Progress in 2023

The overall safety performance of our operations

improved with our recordable accident rate

reducing by 12.6%. The majority of this

improvement related to a reduction in recordable

injuries within our US business. However, the

number of major injuries, our measure of severity,

increased by 25%, from 32 to 40 during 2023.

Thiswas most marked within our Maritime sector.

To address this we have reviewed the controls

around our significant safety risks.

Percentage change in Scope 1 and 2 GHG emissions

Purpose

Our roadmap to support our

targetof achieving net zero

GHGemissions (Scope 1 and 2)

across our operations by 2030

isunderpinned by an annual

targettoreduce operational

GHGemissions by 4.2%.

2023 –11.0%

2022 –9.6%

2021 –4.5%

Progress in 2023

In support of our ambition to have net zero GHG

emissions (Scope 1 and 2) across our operations by

2030, global GHG emissions have reduced 11.0%

during the year. Scope 1 emissions have fallen

5.1%, while scope 2 emissions have fallen 13.4%.

This was driven by a reduction in electricity and

gasconsumption asa result of factors such as

production variances, efficiency improvements

andoperational controlchanges.

Free cash flow

Purpose

Provides a measure of cash

generated by the Group’s

operations after servicing debt

andtax obligations, available

foruse in line with the Group’s

capital allocation policy.

2023 £2,593m

2022 £1,950m

2021 £1,864m

Progress in 2023

Free cash flow increased by £643m, driven by

thestrong order flow in the year which generated

anumber of advanced customer payments.

Order intake

Purpose

Allows management to monitor

the order intake of the Group’s

own subsidiaries, as well as its

strategically important equity

accounted investments,

providinginsight into future

years’sales performance.

2023 £37.7bn

2022 £37.1bn

2021 £21.5bn

Progress in 2023

Order intake remained strong in 2023, and was

£0.6bn higher than 2022. Order intake across

theAir and Maritime segments accounted for

over50% of order intake for the year, reflecting

anumber of significant awards from the

UKMinistry of Defence for SSN-AUKUS and

Dreadnought (Delivery Phase 3), as well as

therenewal of Salam Typhoon support for

theSaudi Arabian Government. Read more

onorder intake for the year on page 31.

Net debt (excluding lease liabilities)

Purpose

Allows management to monitor

indebtedness of the Group,

toensure the Group’s capital

structure is appropriate and

capitalallocation policy decisions

are suitably informed.

2023 £(1,022)m

2022 £(2,023)m

2021 £(2,160)m

Progress in 2023

During the year, net debt (excluding lease

liabilities)has reduced by £1,001m to £1,022m.

Thekey driver behind this was the increased

freecashflow, resulting in cash of £4,067m

(2022£3,107m) at 31 December 2023.

1. The definition and purpose of all performance measures defined by the Group is provided in the Alternative performance measures section on page 227.

2. For 2021, underlying EPS was 50.7p including a one-off tax benefit of £94m resulting from agreements reached regarding the exposure arising from the April 2019

European Commission decision regarding the UK’s Controlled Foreign Company Regime and the impact of the UK tax rate adjustment.

Our sustainability agenda Page 46

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Our financial review

Full-year performance summary

Strong demand has resulted in a record order

intake of £37.7bn, pushing our order backlog

to £69.8bn.

On a constant currency basis, we delivered

sales growth of 9%, surpassing our guidance

expectations, with all sectors delivering above

the expected ranges. A key feature of sales

growth was the acceleration of activities on

Dreadnought, which accounted for around

aquarter of the overall Group growth in the

year, and contributed to a 22% increase in

Maritime sector sales.

Our profitability, in the form of underlying

EBIT, rose by 9% on a constant currency

basis, to just under £2.7bn. Margins were

steady as improvements in the Air sector and

our Platforms & Services business offset the

margin headwind presented by the higher

submarines activity which trades at a

regulated profit.

Underlying EPS grew by 14% as the increase

in underlying EBIT was further complemented

by higher interest income and the impact of

the ongoing share buyback programme.

We had high cash conversion of our

underlying EBIT to free cash flow of £2.6bn,

driven by increased profitability and a net

increase in customer advances of c.£1bn.

Wecontinued to invest in the business, as

capex exceeded depreciation by c.£0.3bn.

We continued to follow our disciplined capital

allocation policy and returned £1.4bn to

shareholders through dividends and the

ongoing share buyback programme. We have

announced another increase in our dividend

taking it to 30.0p for 2023, marking our 20th

year in a row of increased dividends.

2024 Group guidance¹

The Group guidance for the year incorporates

the acquisition of BallAerospace and the

reduction in the Group’s shareholding in Air

Astana following its initial public offering,

which both completed in February 2024.

Sales for the Group are expected to increase

between 10% to 12%.

Underlying EBIT is expected to improve by

11% to 13%.

We expect underlying EPS to increase 6%

to8%, largely as a result of the higher

interest expense, following the Ball Aerospace

acquisition, and an increased UK corporation

taxrate.

Free cash flow in 2024 is expected to be

greater than £1.3bn as cash advances

received in 2023 will start to unwind.

Group guidance can be found on page 34.

We have delivered strong financial performance

withtop-line growth, margin expansion and high

cashconversion. Our record order intake of £38bn

increases our order backlog to £70bn, positioning

uswellfor the future.

In a time of ever-growing

geopolitical tension, our

teams have delivered at

record levels to protect

those who protect all of us.

Across the board, our

financial metrics show the

results of their hard work.

Brad Greve

Chief Financial Officer

2023 full-year performance

againstguidance

Sales growth

Underlying EBIT

6% 8%

Underlying EPS

10% 12%

14%

Free cash flow

>£1,800m

£2,593m

2023 guidance range

Compared to guidance provided at

the Half-year Results in August 2023,

atan exchange rate of $1.24:£1

1. While the Group is subject to geopolitical and otheruncertainties, the following guidance is provided on current

expected operational performance. Our guidance uses the same exchangerate we averaged in 2023 of $1.24:£1.

BAE Systems plc Annual Report 2023

Strategy and performance

Group income statement

Sales for the year were £25.3bn

(2022£23.3bn) representing growth,

onaconstantcurrency basis

, of 9% with

allsectors delivering growth in the year.

Maritime recorded sales of £5.5bn (2022

£4.6bn) which was an increase of 22%,

onaconstantcurrency basis, and accounted

fornearly 47% of the overall Group’s sales

growth; submarines activity accounted for

around 25%.

Electronic Systems recorded sales of £5.5bn

(2022 £5.1bn) equating to growth of 9%,

ona constant currency basis. This was led

bycontinued recovery in the commercial

business across both civil aviation and power

and propulsion, along with gains in electronic

combat systems.

Our Platforms & Services sector posted sales

of £3.9bn (2022 £3.7bn), with growth of 8%

on a constant currency basis. Our Hägglunds

business accounted for almost two thirds of

the sector’s growth. Across the Platforms &

Services portfolio, nearly 600 vehicles were

delivered in the year.

TheAir sector recorded sales of £8.1bn

(2022£7.7bn), representing growth of 4%

ona constant currency basis. Thesector saw

increased activity in MBDA and higher air

support volumes, while the future combat

airprogramme continued to gain pace with

activity more than doubling in 2023.

Sales in the Cyber & Intelligence sector grew

to£2.3bn (2022 £2.2bn), an increase of

6%on a constant currency basis. Growth

was 9%, on a constant currency basis, after

adjusting for the impact of the disposal

ofthefinancial crime detection business in

2022. TheUS Intelligence & Security business

grew10%, primarily as a result of increased

classified, sustainment and systems

integration work, while outside the US we

saw a sharp increase inNational Security

cyber sales.

Revenue was £23.1bn (2022 £21.3bn), with

growth during the year of 9%, on a reported

currency basis, reflective of the same drivers

behind the increase in sales for the year

excluding the impact of MBDA in Air.

Underlying EBIT was up 9% to £2,682m

(2022 £2,479m), on a constant currency

basis. The Maritime sector reported

underlying EBIT of £425m (2022 £356m)

following a year of strong sales growth,

withmargins reflecting the regulated profit

environment on the Dreadnought

programme.

Our Electronic Systems sector grew

underlying EBIT to £878m (2022 £838m),

anincrease of 5% on a constant currency

basis. Margin of 16.1% was within the

guidance range and reflected lower pension

recoveries in the US, marginally offset by an

increase in higher margin commercial activity.

Platforms & Services reported underlying

EBITof £354m (2022 £326m), with margins

increasing to 9.0%. The growth reflected

thestrong operational performance in our

Hägglunds and Ship Repair businesses in

theyear.

Our Air sector reported underlying EBIT

of£949m (2022 £849m), increasing margin

to 11.8%. The growth inthe year reflected

thehigher sales and riskretirement.

Finally, Cyber & Intelligence reported

underlying EBIT of £199m (2022 £232m),

adecrease of 14% on a constant currency

basis. Margin of 8.6% was in the guided

range and represented additional investment

in the business in space and multi-domain

networking.

Operating profit increased 8%, to £2,573m

(2022 £2,384m), on a reported currency

basis. On an operating sector basis this

reflected the same drivers as underlying EBIT.

Other differences are discussed below (also

see the reconciliation of underlying EBITto

operating profit on page 227).

Underlying net finance costs were £211m

(2022 £246m), a decrease of £35m. Of this,

costs of £231m (2022 £230m) related to the

Group and income of £20m (2022 costs of

£16m) related to the Group’s share of equity

accounted investments. The improvement in

underlying net finance costs largely reflected

the increase in interest rates applied to

surplus cash during the year.

Financial performance measures as defined by the Group

2023

£m

2022

£m

Sales

KPI

25,284 23,256

Return on sales 10.6% 10.7%

Underlying EBIT

KPI

2,682 2,479

Underlying net finance costs (211) (246)

Underlying tax expense (472) (422)

Underlying profit for the year 1,999 1,811

Attributable to:

Non-controlling interests 83 83

Equity shareholders 1,916 1,728

Financial performance measures as defined by IFRS

2023

£m

2022

£m

Revenue 23,078 21,258

Return on revenue 11.1% 11. 2%

Operating profit 2,573 2,384

Net finance costs (247) (395)

Tax expense (386) (315)

Profit for the year 1,940 1,674

Attributable to:

Non-controlling interests 83 83

Equity shareholders 1,857 1,591

This has been delivered by focusing on:

• strong operational performance allowing

for risk retirement;

• effective supply chain management;

• proactive portfolio actions; and

• business efficiency initiatives.

Return on sales

2023 10.6%

2022

10.7%

2021 10.3%

1. Current year compared with prior year translated at current year exchange rates. The comparatives have not been restated,

2. The definitions and purpose of all performance measured defined by the Group is provided in the Alternative performance measures section on page 227.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Our financial review continued

Adjusting items

2023

£m

2022

£m

Profit on business disposal – 94

Acquisition-related costs (20) (16)

Gain related to settlements and past service

costonpensionschemes 60 13

Adjusting items 40 91

Net finance costs were £247m (2022

£395m), a decrease of £148m. Excluding the

£35m improvement in underlying net finance

costs, all other net finance costs recorded

again of £113m. This was largely the result

ofthe £41m interest income on the Group’s

pension surplus (2022 cost of £37m on

pension deficit position at the start of the

year). The balance of the improvement was

the result of foreign exchange gains on its

USdollar-denominated borrowings, largely

being offset by losses on the remeasurement

of financial instruments principally held to

manage the Group’s exposure to interest

ratefluctuations.

Underlying EPS increased to 63.2p (2022

55.5p), or 14% on a constant currency basis.

This is largely driven by the improved

underlying profit for the year as set out on

page 29, as well as the benefit from the

ongoing share buyback programme which

accounted for 1.5p of the increase.

Underlying tax expense of £472m

(2022£422m), was an increase of £50m

reflecting the higher underlying pre-tax

profits. Theunderlying effective tax rate

was19% (2022 19%).

Tax expense of £386m (2022 £315m), was

an increase of £71m reflective of the increase

in the UK’s corporation tax rate in the year

and the Group’s pre-tax profits.

Basic EPS increased 20% to 61.3p

(202251.1p) also reflective of the increased

profitability of the Group for the year

andthebenefit of the ongoing share

buybackprogramme.

Adjusting items in 2023 totalled a net

gainof £40m (2022 £91m) mainly comprising

afinal settlement gain on a US pension

annuity buy-out of £60m. 2022 was mainly

comprised of a £94m gain on the disposal

ofthe financial crime detection business

inDigital Intelligence.

Reconciliation of underlying EBIT to operating profit

2023

£m

2022

£m

Underlying EBIT

KPI

2,682 2,479

Adjusting items 40 91

Amortisation of programme, customer-related and other intangible assets (111) (110)

Impairment of intangible assets (5) (1)

Net finance income/(costs) and tax expense of equity accounted investments (33) (75)

Operating profit 2,573 2,384

Earnings per share (EPS)

As defined by the Group 2023 2022

Underlying profit for the year attributable to equity shareholders £1,916m £1,728m

Underlying EPS

KPI

63.2p 55.5p

As defined by IFRS

Profit for the year attributable to equity shareholders £1,857m £1,591m

Basic EPS 61.3p 51.1p

Movement underlying EPS (pence)

55.5

(0.2)

1.5

5.8

0.8

(0.2)

63.2

2022

FX Share

repurchases

Tax Underlying

EBIT

Underlying

net finance costs

2023

BAE Systems plc Annual Report 2023

Strategy and performance

Free cash flow of £2,593m (2022 £1,950m)

was an increase of £643m on the prior year.

Operating business cash flow of £3,218m

(2022 £2,552m) was an increase of £666m.

Net cash flow from operating activities

was £3,760m (2022 £2,839m), an increase

of£921m. In addition to the increased

profitability of the Group, there was a net

inflow of c.£1bn from customer advances.

Net cash flow from investing activities

was an outflow of £541m (2022 £422m).

TheGroup received cashin the year of

£134m from dividends received from equity

accounted investments, offset by an

increased cash outflow of £272m in relation

to capex investment in property, plant and

equipment and intangible assets. This is

reflective of theadditional investments within

our sites tosupport future programme

delivery, such as the shipbuilding facilities in

Glasgow to support Type 26 construction,

Order intake, at £37.7bn, was up £0.6bn

onthe prior year, leading to a record order

backlog of £69.8bn. Air recorded the

highestorder backlog at 31 December 2023,

reflecting significant orders in MBDA and

theKingdom of Saudi Arabia during the

year.The order backlog in Maritime also

remains high reflecting the submarine and

ship build programmes.

Order intake

KPI

20%

2023

£37.7bn

29%

18%

(2022 £37.1bn)

Order backlog

16%

2023

£69.8bn

38%

30%

13%

(2022 £58.9bn)

Order book

19%

2023

£58.0bn

31%

35%

13%

(2022 £48.9bn)

munitions sites in both the UKand US and

construction of the modern shiplift and

land-level repair complex at our Jacksonville,

Florida shipyard.

Net cash flow from financing activities

was an outflow of £2,188m (2022 £2,333m),

a decrease of £145m. Cash returns to

shareholders, through dividend and share

repurchases, decreased £172m to £1,418m.

Although dividends increased, the value of

share repurchases was lower. This year also

saw a cash inflow from draw-down of loans

of £162m, from the private placement to

fundthe shiplift at our Jacksonville, Florida

shipyard. 2022 saw a £400m cash outflow in

respect of bond repayments which were due.

The net cash outflow in respect of derivative

financial instruments was £196m (2022 cash

inflow of £328m) reflective of hedging

against foreign exchange movements on

theUS dollar-denominated borrowings.

Details of awards in the year are included

inthe segmental reviews on pages 35 to 45,

but the three largest orders driving the order

intake in the year were:

– In Maritime, funding of £3.95bn was

awarded by the UK Ministry of Defence for

the next phase of the UK’s next-generation

nuclear-powered attack submarine

programme, SSN-AUKUS.

Foreign exchange translation primarily

arises in respect of the Group’s US dollar-

denominated cash holdings.

Cash and cash equivalents of £4,067m

(2022 £3,107m) are held primarily for the

repayment of debt securities, pension funding

when required, payment of the 2023 final

dividend, funding of further share

repurchases under the up to £1.5bn share

buyback programme announced in July 2022

and management of working capital. In

completing the $5.5bn (£4.4bn) acquisition

ofBall Aerospace on 16 February 2024,

theGroup paid $1.5bn (£1.2bn) in cash

anddrew down $4.0bn (£3.2bn) of debt

funding in settlement of the transaction.

– In Maritime, we also secured an order

intake of £2.4bn for the continued Delivery

Phase 3 activity on the Dreadnought Class

submarine programme.

– In Air, we renewed the Government-to-

Government Typhoon support services in

the Kingdom of Saudi Arabia for a further

five years through to the end of 2027,

valued at £3.7bn.

Cash flow

As defined by the Group

2023

£m

2022

£m

Free cash flow

KPI

2,593 1,950

Operating business cash flow 3,218 2,552

As defined by IFRS

Net cash flow from operating activities 3,760 2,839

Net cash flow from investing activities (541) (422)

Net cash flow from financing activities (2,188) (2,333)

Net increase in cash and cash equivalents 1,031 84

Cash and cash equivalents at 1 January 3,107 2,917

Effect of foreign exchange rate changes on cash and cash equivalents (71) 106

Cash and cash equivalents at 31 December 4,067 3,107

Orders

As defined by the Group As defined by IFRS

Electronic Systems

Platforms & Services

Air

Maritime

Cyber & Intelligence

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Our financial review continued

Net debt (excluding lease liabilities)

Components of net debt

2023

£m

2022

£m

Cash and cash equivalents 4,067 3,107

Debt-related derivative financial instruments (net) 22 112

Loans – non-current (4,432) (5,189)

Loans and overdrafts – current (679) (53)

Net debt (excluding lease liabilities)

KPI

(1,022) (2,023)

The Group’s net debt (excluding

leaseliabilities) at 31 December 2023

was£(1,022)m,a net decrease of £1,001m

from theposition at the start of the year.

Thiswasprimarily as a result of strong free

cashflowperformance, partially offset

byshareholder returns through dividends

andshare repurchases.

For details of maturity of the Group

borrowings see note 21 on page 189.

Non-current loans have decreased by

£757m during the year as the $800m 3.8%

bond due for repayment in 2024 is now

classified as a current loan; this movement

was partially offset by draw-down of the

$200m private placement to fund the

Jacksonville, Florida, shiplift which is

repayable in 2050.

Current loans have increased by £626m

during the year reflecting the $800m 3.8%

bond maturing in October 2024.

Movement in net debt (excluding lease liabilities) (£m)

(2,023)

3,218

(625)

(1,418)

(174)

(1,022)

31 December

2022

2,000

1,000

–

1,000

–

2,000

Operating business

cash flow

Interest

and tax

Shareholder

returns

Other 31 December

2023

Free cash flow

£2,593m

Shareholder returns of £1,418m (2022

£1,590m) comprised both dividends of

£857m (2022 £802m) and share repurchases

of£561m (2022 £788m). Dividends paid

represent the 2022 final dividend and the

2023 interim dividend. During 2023, we

repurchased 59m shares under the up

to£1.5bn share buyback programme

announced in July 2022 (2022 107m

sharesunder the 2022 and 2021 share

buyback programmes).

Other movements includes foreign

exchange on the Group’s US dollar-

denominated cash and borrowings, offset

bytheir associated derivatives, and dividends

paid to non-controlling interests.

BAE Systems plc Annual Report 2023

Strategy and performance

Balance sheet

2023

£m

2022

£m

Intangible assets 12,099 12,644

Property, plant and equipment, right-of-use assets and investment property 5,003 4,723

Equity accounted investments and other investments 916 886

Working capital (5,468) (4,119)

Lease liabilities net of finance lease receivables (1,396) (1,582)

Group’s share of IAS 19 post-employment benefits surplus 229 646

Net tax assets and liabilities 474 363

Net other financial assets and liabilities (112) (138)

Net debt (excluding lease liabilities)

KPI

(1,022) (2,023)

Net assets 10,723 11,400

Intangible assets of £12.1bn (2022 £12.6bn)

was a decrease of £0.5bn on the prior year,

driven by the foreign exchange impact of the

Group’s US dollar-denominated goodwill.

Property, plant and equipment, right-

of-use assets and investment property

was£5.0bn (2022 £4.7bn), an increase of

£0.3bn. Property, plant and equipment

increased by a net £0.4bn reflecting capex

spend across the business of£0.8bn, offset

by depreciation and foreign exchange

adjustments.

Equity accounted investments and

otherinvestments was £916m (2022

£886m). The Group’s share of profits of

equity accounted investments during the

year, which was offset by dividends paid,

resulted ina net gain of £45m at the end

ofthe year.

Working capital saw a £1.4bn decrease,

inaggregate, mainly reflecting an increase

inadvanced funding from customers on

anumber of contracts.

Lease liabilities, net of finance lease

receivables, was £1.4bn (2022 £1.6bn) with

no new significant lease agreements entered

into during the year.

The Group’s share of the net IAS 19

post-employment benefits surplus

was£0.2bn (2022 £0.6bn), net of a 35%

withholding tax of £0.4bn. The decrease

inthe net surplus of £0.4bn largely reflects

afall in the discount rate applied to the UK

schemes at 31 December 2023. Details of the

Group’s post-employment benefit schemes

are provided in note 24 tothe Consolidated

financial statements on page 191.

Exchange rates

Average 2023 2022

£/$ 1.244 1.236

£/€ 1.150 1.173

£/A$ 1.874 1.778

Year end

£/$ 1.275 1.203

£/€ 1.154 1.127

£/A$ 1.868 1.773

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Guidance for 2024

After a strong financial year for 2023, we look forward to continued top-line growth with increased return on sales and good free cash delivery

againstour rolling targets. Guidance is provided on the basis of an exchange rate of $1.24:£1, which is in line withthe actual 2023

exchangerate, therefore guidance is the same for both reported and constant exchange rates.

The Group guidance for 2024 incorporates the acquisition of Ball Aerospace² and the reduction in the Group’s shareholding in Air Astana

following its initial public offering, both of which completed in February 2024. See note 34 on page213.

Segmental guidance

The following table provides guidance by segment, aligned to the Group guidance.

Year ended 31 December 2024 Expected sales Expected Return on sales

Electronic Systems³

Up 32% to 34% c.15%

Platforms & Services

Up 5% to 7% 10% to 11%

Air

Up 3% to 5% 11% to 12%

Maritime

Up 6% to 8% c.8%

Cyber & Intelligence

Up 3% to 5% 8% to 9%

In 2024, the HQ reporting segment is expected to be an expense of c.£155m (2022 expense of £123m) reflecting the reduction in the Group’s

shareholding in Air Astana in February 2024 (see note 34 on page 213).

Three-year free cash flow guidance

Actual Forecast

2022 2023 2024 2025 2026

2022–2024 in excess of £5.5bn

previously in excess of £5bn

£2.0bn £2.6bn >£1.3bn

2023–2025 in excess of £5bn

previously £4.5bn – £5.5bn

£2.6bn >£1.3bn

2024–2026 in excess of £5bn

>£1.3bn

1. While the Group is subject to geopolitical and other uncertainties, the following guidance isprovided on current expected operational performance. The guidance

isbasedon the measures used to monitor the underlying financial performance of the Group. See the Alternative performance measures section on page 227.

2. Guidance incorporates the acquisition of Ball Aerospace from the 16 February 2024.

3. The acquired Ball Aerospace business will be reported through the Electronic Systems segment.

4. Underlying EBIT as percentage of Sales.

5. In addition to the free cash flow above, the Group received proceeds of c.£0.2bn from the reduction in the Group’s shareholding in AirAstana. The cash flow impact of

business acquisitions and disposals is excluded from the Group’s definition of free cash flow.

Sensitivity to foreign exchange rates: the Group operates in a number of currencies, the most significant of which is the US dollar. As a guide,

a5 cent movement inthe £/$exchange rate will impact Sales by c.£500m, Underlying EBIT by c.£70m and Underlying EPS by c.1.3p.

Free cash flow target for 2024

>£1.3bn

2023: £2,593m

Underlying EBIT

expected to increase in the range of

11% to 13%

2023: £2,682m

Underlying EPS

expected to increase in the range of

6% to 8%

2023: 63.2p

Sales

expected to increase in the range of

10% to 12%

2023: £25,284m

Underlying finance costs

£350m to £375m

Non-controlling interests

c.£80m

Effective tax rate

c.21%

BAE Systems plc Annual Report 2023

Strategy and performance

The Group reports its performance through six reporting segments.

Segmental review

Financial performance measures

defined by the Group

Financial performance measures

derived from IFRS

Year ended 31 December 2023

Sales

£m

Underlying

EBIT

£m

Return

on sales

Operating

business

cash flow

£m

Order

intake

£bn

Order

backlog

£bn

Revenue

£m

Operating

profit

£m

Return on

revenue

Net cash

flow from

operating

activities

£m

Order

book

£bn

KPI KPI KPI

Electronic Systems

Page 36

5,458 878 16.1 811 6.7 8.9 5,456 806 14.8 961 7.6

Platforms & Services

Page 38

3,922 354 9.0 426 7.7 11.5 3,842 373 9.7 624 11.1

Air

Page 40

8,058 949 11.8 1,669 11.0 27.2 6,517 948 14.5 1,808 18.5

Maritime

Page 42

5,536 425 7.7 291 10.1 21.3 5,391 423 7.8 629 20.4

Cyber & Intelligence

Page 44

2,321 199 8.6 204 2.5 2.0 2,321 179 7.7 261 1.4

471 (123) (183) 0.4 – 10 (156) (128) –

Deduct Intra-group

(482) (0.7) (1.1) (459) (1.0)

Deduct Tax

(395)

Total

25,284 2,682 10.6 3,218

37.7 69.8 23,078 2,573 11.1 3,760 58.0

We use financial performance measures as defined by the Group to monitor the underlying financial performance of the Group’s reporting

segments. The definitions and purposes of these Alternative performance measures can be found on page 227. Reconciliations from

these measures to the financial performance measures derived from IFRS are provided in our Alternative performance measures section on

pages 227 to 231.

1. The definition and purpose of all performance measures defined by the Group is provided in the Alternative performance measures section on page 227.

2. HQ comprises the Group’s head office activities, together with a 49% interest in Air Astana as at 31 December 2023.

3. Tax is managed on a Group-wide basis.

4. At a Group level, the key cash flow metric is free cash flow (see Alternative performance measures on page 227). In2023, free cash flow was £2,593m (2022 £1,950m).

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Electronic Systems, with 17,500

employees, comprises the

Group’s US-and UK-based electronic solutions, including

electronic warfare systems, navigation systems, electro-optical

sensors, military and commercial digital engine and flight

controls, precision guidance and seeker solutions, next-

generation military communications systems and data links,

persistent surveillance capabilities, space electronics and electric

drive propulsion systems.

Electronic Systems

Electronic Combat Solutions designs, builds

andsupports integrated electronic warfare

systems for platform prime and government

customers, and is a trusted mission systems

provider for all three electronic warfare missions:

electronic attack; electronic protection; and

electronic support.

Countermeasure & Electromagnetic Attack

Solutions provides next-generation threat

detection, countermeasure and attack solutions

that deliver full-spectrum electronic warfare

capabilities to enhance mission survivability.

Precision Strike & Sensing Solutions designs

andmanufactures state-of-the-art systems and

technology that enable our customers to execute

their precision strike missions.

C4ISR Systems provides actionable intelligence

through innovative technical solutions for

airborne persistent surveillance, secure

communications, identification systems, signals

intelligence, underwater and surface warfare

solutions, and space resiliency.

Controls & Avionics Solutions develops and

produces electronics for military and commercial

aircraft, including fly-by-wire flight controls,

fullauthority digital engine controls, power

management solutions, cabin management

systems and mission computers.

Power & Propulsion Solutions delivers

propulsionand power management

performance with innovative electrification

products and solutions that advance vehicle

mobility, efficiency and capability.

– The Compass Call programme is executing

contracts valued at more than $1bn (£0.8bn)

focused on the cross-decking of prime

mission equipment to the new EA-37B

aircraft whilesustaining and upgrading

theexisting EC-130H fleet. We successfully

delivered the first of ten EA-37B aircraft

tothe US Air Force for formal combined

developmental and operational testing.

Thenext-generation system evolves the Air

Force’s electromagnetic attack capabilities

and is targeted to initially field in 2024.

– Our Eagle Passive Active Warning Survivability

System (EPAWSS) programme completed

Design Verification and Qualification

Testing enabling Initial Operational Test

andEvaluation by the US Air Force.

– Our Advanced GEOINT Systems team was

selected by a customer in the Asia-Pacific

region to provide our Geospatial

eXploitation Products

™

(GXP

) software

asa key component of its large-scale

Geospatial Intelligence implementation.

The delivery of this software, comprised

ofadvanced imagery exploitation, analytics,

and data fusion software tools, further

solidifies our industry-leading position

andenables future expansion to allies

around the globe.

– The Navigation & Sensor Systems team

continues to execute a contract with Space

Systems Command to develop an M-Code

Increment II Miniature Serial Interface GPS

receiver for ground embedded applications

with next-generation Application Specific

Integrated Circuit technology valued at

more than $278m (£224m).

Strategic and order highlights

– In addition to a successful test event,

conducted in January 2023, of the

Advanced Precision Kill Weapon System

(APKWS

) that demonstrated new

capabilities for critical mission sets in

support of US and allied forces, the

APKWS

laser-guidance kit programme

continues to execute under an Indefinite

Delivery, Indefinite Quantity contract with

awards worth $590m (£476m) in 2023,

including international orders.

– Building on our position in energy and

power management, weannounced a

collaboration with Heart Aerospace to

define the battery system forHeart’s

ES-30regional electric airplane, and Eve

AirMobility selected us toprovide an

advanced energy storage system for its

electric vertical take-off andland aircraft.

– Our Power & Propulsion Solutions business

was selected for North America’s largest

battery electric bus award, meaning our

Gen3 system will power up to 1,229 Nova

Bus battery electric buses in Quebec, Canada.

Operational performance

We continued to experience strong demand

across our customer base for electronic

systems, as evidenced by our 2023 order

generation. We continued to manage supply

chain constraints effectively in 2023 and

sawstability and easing in some areas.

Wesupported existing customers on key

electronic warfare and precision guided

munition programmes, while pursuing

andmaturing new opportunities.

In our commercial businesses, with airline

traffic and business travel increasing, there

isstronger demand for Original Equipment

Manufacturer (OEM) deliveries and

aftermarket services. Clean air regulations

continue to drive the transportation

industrytowards alternative energy sources,

like our propulsion solutions.

Operational highlights

– The F-35 Lightning II programme completed

deliveries on Lot 15 electronic warfare (EW)

systems and has delivered a cumulative

total of over 1,400 EW systems. We are

also supporting the Block 4 modernisation

efforts under multiple contracts, including

a recent contract for future Lot 17/18

production worth $491m (£395m), and

continue to demonstrate high performance

under a five-year Performance Based

Logistics contract for F-35 sustainment.

BAE Systems plc Annual Report 2023

Strategy and performance

Financial performance

measuresderivedfrom IFRS

2023 2022

Revenue £5,456m £5,057m

Operating profit £806m £747m

Return on revenue 14.8% 14.8%

Cash flow from

operating activities £961m £860m

Order book £7.6bn £6.7bn

Financial performance measures

asdefined by the Group

2023 2022

Sales

KPI

£5,458m £5,057m

Underlying EBIT

KPI

£878m £838m

Return on sales 16.1% 16.6%

Operating business

cash flow £811m £650m

Order intake

KPI

£6.7bn £5.4bn

Order backlog

£8.9bn £8.1bn

– Through our Data Link Solutions joint

venture with Rockwell Collins, Inc. we were

selected by the US Navy to provideour

Firenet

™

small form factor Multi-functional

Information Distribution System Joint

Tactical Radio which enables in-network

communication for smaller platforms. This

award continues to build onour portfolio

of next-generation full-spectrum

communication systems.

Looking forward

– Our Electronic Systems sector remains

positioned for growth in the medium term,

as the team continues to address current

and evolving priority programmes from

itsstrong franchise positions and long-

standing commitment to research

anddevelopment.

– We maintain a diverse portfolio of defence

and commercial products and capabilities

for US and international customers, and

expect to benefit from applying innovative

technology solutions to defence customers’

existing and changing requirements,

building on our significant roles on

F-35Lightning II, F-15 upgrades, M-Code

GPS upgrades and classified programmes,

as well as a number of precision

weaponproducts.

– Over the longer term, we are poised to

build on our technology strengths in

emerging areas of demand, including

precision weaponry, space resilience,

hyper-velocity projectiles, autonomous

platforms, and the development of

multi-domain capabilities.

– In our commercial portfolio, we continue to

leverage our leading electric drive propulsion

capabilities to address growing demand for

low and zero emission solutions across an

increasing number of civil platforms, with

opportunities to migrate these technologies

to defence applications.

– We continue to invest in our people,

R&Dand facilities to ensure capacity and

resources are in place to capitalise on the

positive outlook across our defence and

commercial markets.

– The acquisition of Ball Aerospace will

provide further access to the growing

spacedomain, C4ISR and missile and

munitions markets.

– Sales of £5.5bn increased 9%

, led by

continued recovery in the commercial

aviation business acrossboth civil aviation

and power and propulsion, along with

gains in electronic combat systems.

– Underlying EBIT grew 5%

, generating

areturn on sales of 16.1%, within

theguided range. This reflected the

absorption oflower pension

recoveriespartially offsetby higher

commercial activity.

– Operating business cash flow was

£811mand reflects improved working

capital management.

1. Including share of equity accounted investments.

2. Constant currency basis.

Sales analysis: Defence and commercial

A Defence 83%

B Commercial 17%

Sales by domain

A Air 87%

B Maritime 3%

C Land 10%

Sales by line of business

A Electronic Combat 29%

B C4ISR Systems 22%

C Controls & Avionics 16%

Precision Strike & Sensing 15%

E Countermeasure & Electromagnetic Attack 14%

F Power & Propulsion 4%

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Platforms & Services, with 11,900

employees, with operations

inthe US, Sweden and UK, manufactures and upgrades

combat vehicles, weapons and munitions, and delivers services

and sustainment activities, including naval ship repair and the

management and operation of two government-owned

ammunition plants.

Platforms & Services

Combat Mission Systems focuses on a portfolio

of tracked combat vehicles, amphibious vehicles,

naval weapons, artillery systems, advanced

weapons and precision munitions for the

USmilitary and international customers.

Ordnance Systems is the operator of the

USArmy’s Holston and Radford ammunition

facilities under government-owned, contractor-

operated agreements, and focuses on explosives,

propellants and facility modernisation.

US Ship Repair is a major provider of

non-nuclearship repair, modernisation,

overhauland conversions to the US Navy

andother government and commercial

maritimecustomers across three US sites

ontheAtlantic and Pacific coasts.

BAE Systems Hägglunds focuses on

thetrackedvehicle market for Swedish

andinternational customers.

BAE Systems Bofors, based in Sweden,

providesadvanced landandmaritime

weaponsand precision-guided munitions.

Weapon Systems UK is a provider

ofland-basedartillery systems, sustainment

andservices, primarily for the M777 towed

ultra-lightweight howitzer.

FNSS, the Turkish land systems business

inwhichBAE Systems holds a 49%

interest,produces and upgrades tracked

andwheeled military vehicles for Turkish

andinternational customers.

In our support services operations,

modernisation and maintenance activities

continue in our US shipyards for the US Navy’s

non-nuclear fleet. We secured a ten-year

contract, with a ceiling value of $8.8bn

(£7.1bn), to continue operating the US Army’s

Holston Army Ammunition Plant, and we

continue to operate and modernise the

Radford Army Ammunition Plant into 2026.

Operational highlights

– Our Hägglunds business continued to

buildits order book, with a large order

ofthe CV90 vehicle in seven variants from

the Czech Republic, and grow its portfolio

through strong strategic investments and

apartnership with Norway’s Ritek AS to

produce two new variants for the Swedish

Armed Forces.

– The UK Government selected ARCHER

forits interim mobile artillery solution

requirement through a Government-to-

Government agreement with Sweden.

– Our US shipyards were recognised for

Safety Leadership, and the Holston Army

Ammunition Plant received the US Army

Materiel Command’s Excellence in

ExplosiveSafety Award.

– We started construction on a modern

shiplift and land-level repair complex at

ourJacksonville, Florida, shipyard that is

expected to be operational in early 2025.

However, in response to lower demand

forPacific-coast ship repair services

throughout the year, wescaled back

theworkforce at our San Diego shipyard

bynearly 500 positions.

Strategic and order highlights

– We secured a ten-year contract, with

aceiling value of $8.8bn (£7.1bn), to

continue operating the US Army’s

HolstonArmy Ammunition Plant.

– We secured a $797m (£641m) contract

with the US Army to continue production

ofthe AMPV, with additional options for

apotential total contract amount of $1.6bn

(£1.3bn). Thisaward brings the AMPV into

full-rateproduction.

– We secured multiple contracts exceeding

atotal value of $870m (£700m) for the

continued production of the Bradley A4.

These awards will move more than 270

vehicles through our production lines

andextend production into 2026.

– The Czech Republic awarded Hägglunds

acontract to produce 246 CV90 MkIV

infantry fighting vehicles in seven

differentvariants. The contract is valued

at$2.2bn (£1.8bn).

– Following the joint procurement agreement

between Sweden, Germany and the UK,

Germany purchased an additional 227

ultra-mobile, protected, all-terrain BvS10s

valued at c.$400m (£322m). This

investment from Germany will extend

deliveries through to 2030.

Operational performance

In response to a changing global landscape

that is prioritising defence spending to

enhance and replenish capabilities, we remain

focused on meeting increased customer

demand for our products and services,

including munitions, tracked combat vehicles,

artillery systems and support services.

In the US, our Combat Mission Systems

teamis producing at heightened volumes

across multiple programmes, drawing on

ourextensive manufacturing network and

engineering capability spanning the US,

including expanded operations at our

York,Pennsylvania, site to enable increased

production of Armored Multi-Purpose Vehicles

(AMPVs) and Amphibious Combat Vehicles

(ACVs) to match customer requirements.

Theteam continues to support critical vehicle

modernisation programmes, and the AMPV

entered the full-rate production phase during

the second half of the year as the next-

generation replacement for the M113.

Our BAE Systems Hägglunds team continued

to build its order book with a large order

ofthe CV90 MkIV infantry fighting vehicles

inseven different variants from the Czech

Republic. Ongoing build and upgrades

continue for the current fleet of CV90s for a

number of nations. Hägglunds has also seen

a renewed interest in Arctic operations, leading

to additional sales of our BvS10 all-terrain

family of combat vehicles. Additionally, the

team secured a strong partner to bring

theBvS10 to the Indian market.

BAE Systems plc Annual Report 2023

Strategy and performance

Financial performance

measuresderivedfrom IFRS

2023 2022

Revenue £3,842m £3,598m

Operating profit £373m £322m

Return on revenue 9.7% 8.9%

Cash flow from

operating activities £624m £633m

Order book £11.1bn £7.7bn

Financial performance measures

asdefined by the Group

2023 2022

Sales

KPI

£3,922m £3,688m

Underlying EBIT

KPI

£354m £326m

Return on sales 9.0% 8.8%

Operating business

cash flow £426m £525m

Order intake

KPI

£7.7bn £5.7bn

Order backlog

£11.5bn £8.1bn

– Our Weapon Systems UK team secured a

five-year contract to follow from a previous

ten-year programme for the delivery of

M777 support services for the US, Australia

and Canada with theinitial year funded at

$17m (£14m). Following M777

deployments to Ukraine and increased

interest from armies around the world,

Weapon Systems UK also secured a

contract from the US Army to produce

M777 superstructures for spares and

repairs through the foreign military sales

(FMS) process. This effectively brings the

M777 towed lightweight howitzer back

into production.

– We remain a critical provider of Army

combat vehicles with our current franchises

of AMPV, M109A7, M88 and Bradley

vehicles, though we were not selected to

participate in the follow-on phases of the

US Army’s Optionally Manned Fighting

Vehicle programme.

Looking forward

– We continue to focus on increased

long-term demand from the US and

international customers. The uplift in

European and allied countries’ defence

spending is in addition to our strong order

backlog on key franchise programmes,

including the AMPV, M109A7 self-

propelled howitzer, Bradley upgrades,

M88HERCULES recovery vehicle and

theUS Marine Corps’ ACV.

– There is a significant pipeline of future

business opportunities for the CV90 and

BvS10 from our Hägglunds business, as well

as for artillery systems and munitions from

ourBofors business.

– We continue to manage and operate

theUS Army’s Radford and Holston

ammunition plants, and focus on key

modernisation activities.

– We will maintain our strong position

onnaval guns, missile launch programmes,

and submarine programmes, as well as

USNavy ship repair and modernisation

activities where the business has invested

incapitalised infrastructure and our

facilities in key home ports.

– Sales were £3.9bn, an increase of 8%

OurHägglunds business accounted

forthe majority of the sector’s growth,

with significant gains also recorded in

ourShip Repair business.

– Operating business cash flow was

£426m,reflecting significant advanced

funding from customers partially offset

bycapital expenditure, predominantly

inShip Repair.

– Order intake of £7.7bn reflects a number

of significant awards in the year, but

primarily relates to the Czech Republic

award for 246 CV90 MkIV infantry

fighting vehicles worth $2.2bn (£1.8bn).

1. Including share of equity accounted investments.

2. Constant currency basis.

Sales analysis: Platforms and services

A Platforms 53%

B Services 47%

Sales by domain

A Air 1%

B Maritime 28%

C Land 71%

Sales by line of business

A Combat Mission Systems 49%

B US Ship Repair 17%

C Ordnance Systems 14%

D BAE Systems Hägglunds 11%

E BAE Systems Bofors 4%

F Weapon Systems UK 3%

G FNSS 2%

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Air, with 26,000

employees, comprises the Group’s UK‑based

airbuild and support activities for European and international

markets, US programmes, development of Future Combat

AirSystems and FalconWorks

, alongside our business in

theKingdom of Saudi Arabia and interests in our European

jointventures: Eurofighter and MBDA.

Air

Our UK-based business includes UK and

international programmes for the production

ofTyphoon combat aircraft, support, training

andupgrades for Typhoon and Hawk, support

and upgrades for Tornado, and development

ofnext‑generation combat air technologies

anddefence information systems, as well as

theUK‑based F‑35 Lightning II manufacture,

engineering development and support activity.

In the Kingdom of Saudi Arabia, we provide

operational capabilitysupport to the Kingdom’s

air and naval forces through UK‑Saudi

government‑to‑government programmes.

TheSaudi British Defence Co‑operation

Programme and Salam Typhoon project

providefor multi‑year contracts between

thegovernments.

MBDA is a leading global prime contractor

ofmissiles and missile systems across the air,

maritime and land domains.

solar aircraft, with successful stratospheric

flight trials taking place in June.

– We continue to deliver services under

thefive-year SBDCP, with the Tornado

Support Service providing anenhanced

andmodernised solution forthe Royal

Saudi Air Force.

Strategic and order highlights

– Additional UK Ministry of Defence funding

of £143.5m was awarded in the second

half of the year, taking the total funding

awarded in 2023 toc.£800m, to advance

the concepting and technology of the

next-generation combat aircraft to 2025.

– On GCAP, a trilateral collaboration

agreement between BAE Systems,

Leonardo SpA (Italy) and Mitsubishi Heavy

Industries (Japan) is now in place to enable

collaboration and sharing of information

towards the next phase of activities.

– We secured a further £535m of funding for

European Common Radar System (ECRS)

Mk2 Radar development for the Typhoon

weapon system. The Royal Air Force of

Oman has elected not to renew the current

support arrangements for its Typhoon fleet.

Discussions around our rolein providing a

level of support to theRoyal Air Force of

Oman continue.

– We secured the Lightning Air System

National Capability Enterprise (LANCE)

contract in March, which extends our

leadership of UK F-35 support at RAF

Marham until the end of2027.

– Following the completion of the previous

five-year Salam Typhoon support contract

on 31 December 2022, we reached

anagreement with the Saudi Arabian

Government to continue to provide these

services for another five years through

tothe end of 2027, valued at £3.7bn.

– Through FalconWorks

, the Air sector

continues to invest in promising new

andinnovative technologies for the

future,including the development of

electric aircraft products with a number

ofpartners.

– MBDA secured significant orders through

2023, in particular in air defence, maritime

and land domains. These include

production of medium-range ASTER B1

&B1NT missiles for use across the Italian

and French armed forces, from the Polish

Armament Agency to supply Launchers

andCommon Anti-Air Module Missiles

(CAMM) for Poland’s PILICA+ Air Defence

upgrade programme. It also won orders for

SAMP/T NG newgeneration ground-based

air defence systems for the Italian Air Force,

and for theMid-Life Upgrade of the air

defence systems of the French and Italian

Horizon class frigates.

– MBDA is also supporting GCAP and

signeda collaboration agreement with

Mitsubishi Electric to work towards a

weapons and effectors solution in support

of the design ofthe GCAP core platform.

Operational performance

We continue to work with our customers

tosupport their existing platforms and

provide new enhanced capabilities. Deliveries

of Typhoon to Qatar continue, alongside

support to the in-service fleet. Inthe

Kingdom of Saudi Arabia, our support for

Typhoon has been extended for a further

five-year term. In our US Programmes

division, weare focused on delivery execution

across all production lines with 162 F-35 aft

fuselages completed in 2023. The formation

of our new FalconWorks

organisation and

ongoing progress on the future combat air

activities are important to future growth as

we invest in our people, facilities and

cutting-edge technologies.

Operational highlights

– Activity on our Qatar Typhoon and Hawk

programmes continued with ten further

Typhoon deliveries in the year, and a total

of 18 aircraft now in service with the Qatar

Emiri Air Force.

– On the future fighter programme, we

continue work on developing the UKflying

demonstrator to fly within four years. The

programme is focused on key technology

areas of flight simulation, aerodynamic

engine testing, and crew escape.

– Our FalconWorks

organisation, formed

during the year to develop and bring to

themarket new products and technologies,

is leading the development and testing of

PHASA-35

, our persistent high altitude

BAE Systems plc Annual Report 2023

Strategy and performance

Sales analysis: Platforms and services

A Platforms 5 1%

B Services 49%

Sales by domain

A Air 92%

B Maritime 5%

C Land 3%

Sales by line of business

A Kingdom of Saudi Arabia 33%

B European and International Markets 29%

C MBDA 18%

D US Programmes 15%

E Future Combat Air System 5%

Financial performance

measuresderivedfrom IFRS

2023 2022

Revenue £6,517m £6,286m

Operating profit £948m £809m

Return on revenue 14.5% 12.9%

Cash flow from

operating activities £1,808m £1,202m

Order book £18.5bn £17.4bn

Financial performance measures

asdefined by the Group

2023 2022

Sales

KPI

£8,058m £7,698m

Underlying EBIT

KPI

£949m £849m

Return on sales 11.8% 11.0%

Operating business

cash flow £1,669m £1,140m

Order intake

KPI

£11.0bn £14.0bn

Order backlog

£27.2bn £24.4bn

Looking forward

– The UKFuture Combat Air System is a key

element of the UK Combat Air Strategy

which enables long-term planning and

investment in a key strategic part of the

business, ensuring we have a long-term

combat aircraft design, development and

manufacturing capability.

– We will continue to focus on ensuring that

deliveries of Typhoon aircraft and support

are made in line with agreed customer

milestones. Future Typhoon production

andsupport sales are underpinned by

existing contracts and discussions continue

to secure potential further contract awards

for Typhoon.

– Production of the rear fuselage assemblies

for the F-35 has reached full rate levels and

is expected to be sustained at approximately

150 to 160 aft fuselages to be completed

annually. The business plays a significant

role in the F-35 sustainment programme in

support of Lockheed Martin and support

volumes should increase as the number

ofjets in service continues to increase.

– In the Kingdom of Saudi Arabia, the

In-Kingdom Industrial Participation

programme continues to make good

progress consistent with our long-term

strategy, whilst supporting the Kingdom’s

National Transformation Plan and Vision

2030. Our in-Kingdom support business is

expected to remain stable underpinned by

long-standing contracts that are expected

to be renewed every five years, while we

continue to support development of a

Future Combat Air Partnership between

the Kingdom of Saudi Arabia and the UK.

– MBDA has a strong order backlog and

development programmes continue

toimprove the long-term capabilities of

thebusiness in air, land and sea domains.

MBDA continues to be well placed

tobenefit from increased defence

spendingin Europe and internationally.

– Sales were £8.1bn, an increase of 4%²,

driven by increased activity in MBDA

andhigher air support volumes, while

thefuture combat air programme

continues to gain pace with activity

morethan doubling in 2023.

– Return on sales of 11.8% reflects

goodoperational performance and

riskretirement.

– Operating business cash flow of £1.7bn

reflects the timing of customer advances

and down payments from recent awards.

– Order backlog reached £27.2bn, following

an order intake of £11.0bn in the year.

Significant orders include agreement

ofafurther five-year Salam Typhoon

support contract, valued at £3.7bn, as

well as multiple awards in MBDA across

both theimport and export markets.

1. Including share of equity accounted investments.

2. Constant currency basis.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Maritime, with 27,500

employees, comprises the Group’s

UK‑based maritime and land activities, including major

submarine, ship build and support programmes, as well

asourAustralianbusiness.

Maritime

Maritime programmes include the construction

of seven Astute Class submarines for the Royal

Navy, as well as the design and production of the

Royal Navy’s four Dreadnought Class submarines

and eight Type 26 frigates. The Maritime portfolio

also offers in‑service support, including the

delivery of training services and providing

worldwide engineering support to the Royal

Navy’s Portsmouth‑based surface flotilla on

behalf ofthe UK Ministry of Defence, as well as

the design and manufacture of combat systems,

torpedoes and radars.

Land UK’s munitions business designs,

developsand manufactures a comprehensive

range of munitions products for a number

ofcustomers including our main customer,

theUKMinistry of Defence.

Rheinmetall BAE Systems Land (RBSL) – our

UK‑based jointventure with Rheinmetall –

specialisesin the design, manufacture

andsupport of military vehicles used by the

BritishArmy and international customers.

LandUK also develops and manufactures

cased‑telescoped weapons through our

CTAInternational joint venture.

In Australia, the business primarily delivers

upgrade and support programmes for customers

in the defence and commercial sectors across

theair, maritime and land domains. This

includesthe Jindalee Operational Radar Network

(JORN) upgrade. The business is also delivering

the Hunter Class Frigate Programme. Services

contracts include the provision of sustainment,

training solutions andupgrades.

– The UK Type 26 programme continues and

construction is underway on the first four

City Class Type 26 frigates, with a focus on

skilled and experienced resource availability,

including within the supply chain. HMS

Glasgow isprogressing through the key

stages ofoutfit, test and commissioning,

while HMS Cardiff is being prepared to

enter the water for the first time in 2024.

Following steel cut in June 2021,

HMSBelfast continues steelwork

construction, while the initial unit

construction for HMS Birmingham began

inApril and is well underway.

– In Australia, the Hunter Class frigate

programme continues to make strong

progress towards a production

contractforBatch 1. During the year,

construction commenced on the first

schedule protection block at Osborne

NavalShipyard in South Australia and

theprogramme successfully completed the

Preliminary Design Review. Alongside this,

we continue the upgrade and sustainment

of Australia’s Anzac Class frigates at pace.

Construction has also commenced on

facilities at our Williamtown site to support

F-35 maintenance activities.

– The new £2.4bn 15-year contract with

theUK Ministry of Defence, the Next

Generation Munitions Solution (NGMS),

commenced on 1 January 2023. Building

on this, we secured additional orders for

the supply of munitions to the UK Ministry

of Defence worth over £400m, to

significantly increase the production

ofvitaldefence stocks.

– Development and investment activity

acrossour munitions business continues.

Over £200m is being invested, including

two new machining lines in Washington

(Tyne and Wear).

Strategic and order highlights

– We secured an order of £2.4bn forthe

continued Delivery Phase 3 activity on the

Dreadnought Class submarine programme.

Construction of the first three boats is

underway at Barrow-in-Furness, Cumbria.

Aceremony took place in February 2023

tomark the official steel cuton the third

submarine, HMS Warspite.

– During the year, Australia, the UK and

theUS announced the pathway for

Australia toacquire nuclear-powered

submarines as part of the AUKUS

programme. The nations will deliver

atrilaterally developed submarine based

onthe UK’s next-generation Astute

replacement design. Australia and the

UKwill operate SSN-AUKUS, as it will

beknown, incorporating technology from

all three nations. Our submarines business

has secured an order intake of £3.95bn to

enable the programme to transition into

the detailed design phase and commence

procurement of long-lead items and

supporting infrastructure.

Operational performance

Our major maritime platform programmes

continue to progress, with sea trials

commencing for HMS Anson, the fifth Astute

Class submarine, as well as the start of

construction of both the third Dreadnought

Class submarine, HMSWarspite, and the

fourth Type 26 frigate, HMS Birmingham.

TheHunter Class Frigate Programme (HCFP)

in Australia has achieved key milestones and

we continue to meet customer delivery

andsupport requirements in both Munitions

and Maritime Services. Ongoing investments

inour facilities and our people will help

ensure we can support increasing customer

demand and, with the future potential

ofAUKUS, the sector is well positioned

forfuture growth.

Operational highlights

– In February, HMS Anson left our

Submarines site in Barrow-in-Furness,

Cumbria, to begin seatrials with the Royal

Navy. She joins HMSAstute, HMS Ambush,

HMS Artful and HMS Audacious at their

operational base, HM Naval Base Clyde, in

Faslane. Theremaining submarines in the

Astute Class – Agamemnon and Agincourt

– are atan advanced stage of construction.

BAE Systems plc Annual Report 2023

Strategy and performance

Financial performance

measuresderivedfrom IFRS

2023 2022

Revenue £5,391m £4,484m

Operating profit £423m £352m

Return on revenue 7. 8% 7.9%

Cash flow from

operating activities £629m £418m

Order book £20.4bn £16.6bn

Financial performance measures

asdefined by the Group

2023 2022

Sales

KPI

£5,536m £4,598m

Underlying EBIT

KPI

£425m £356m

Return on sales 7.7% 7.7%

Operating business

cash flow £291m £235m

Order intake

KPI

£10.1bn £9.7bn

Order backlog

£21.3bn £17.2bn

– We continue investing in our people and

facilities to better enable us to deliver on

our customer commitments and secure the

long-term future for complex shipbuilding

in Glasgow. Construction of a new ship

assembly hall in Govan is well underway,

and the new Applied Shipbuilding Academy

in Scotstoun is planned to open in 2024.

– In Australia, we continued to invest innew

products and opportunities and unveiled

Strix

™

, a vertical take-off and landing

(VTOL) uncrewed aerial system, RAZER,

alow-cost precision guided munition,

andshowcased the Guided Missile Frigate,

an evolution of the Hunter Class.

– In June, we secured a ten-year contract

worth £270m to support the RoyalNavy’s

three main radar systems. Under the

contract, our engineers will provide

maintenance to existing radars, alongside

technology upgrades to systems already

inuse, and those being installed onthe

new Type 26 frigates under construction

inGlasgow, UK.

Looking forward

– Our Submarines business is executing

across Astute, Dreadnought and

SSN-AUKUS. Investment continues in the

facilities at our Barrow-in-Furness, Cumbria,

shipyard to provide the capabilities to

deliver these long-term programmes.

– In the UK, shipbuilding sales are

underpinned by the manufacture of

Type26 frigates and our capabilities

acrossWarship Support, Underwater

Weapons, Radar and Maritime Training.

– The Australian Defence Strategic Review

confirmed the acquisition of conventionally

armed, nuclear-powered submarines as

part of the SSN-AUKUS programme

andthe Australian Government’s

commitment to continuous naval

shipbuilding. Our Australian business

iswellpositioned to respond to future

opportunities this creates.

– Additionally, the Australian business has

long-term sustainment and upgrade activities

in maritime, air, wide-area surveillance,

missile defence and electronic systems.

– As the UK Ministry of Defence’s long-term

strategic partner for munitions supply,

wecontinue to focus our operations in

support of the UK Ministry of Defence

andthe UK’sNATO allies, as well as other

customers. To support this, investment

continues across our facilities and

infrastructure alongside recruitment

activities to support increased demand.

– Sales of £5.5bn were up 22%²,

duetoaccelerated funding on the

Dreadnought programme.

– Operating business cash flow of

£291misafter capital investment in

shipbuilding facilities in Glasgow and

theMunitions business in Glascoed.

– Order intake of £10.1bn in the year

haspushed order backlog to £21.3bn,

primarily driven by the award of £3.95bn

for the next phase of SSN-AUKUS as well

as additional funding of £2.4bn for the

continued activity on Dreadnought.

Sales analysis: Platforms and services

A Platforms 67%

B Services 33%

Sales by domain

A Air 4%

B Maritime 8 7%

C Land 9%

Sales by line of business

A Submarines 46%

B Naval Ships 29%

C Australia 18%

D Land UK 7%

1. Including share of equity accounted investments.

2. Constant currency basis.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Cyber & Intelligence, with 11,000

employees, comprises

theUS‑based Intelligence & Security business and

UK‑headquartered Digital Intelligence business, and covers

theGroup’s cyber security activities for national security,

centralgovernment and government enterprises.

Cyber & Intelligence

Intelligence & Security is made up of three

US‑based business units.

Air & Space Force Solutions provides the US Air

Force, US Space Force and combatant commands

with innovative systems engineering and

integration solutions to modernise, maintain, test

and cyber‑harden aircraft, radars, strategic missile

systems, mission applications and information

systems that detect, deter and dissuade national

security threats.

Integrated Defense Solutions provides the

USArmy and Navy with systems engineering,

integration, and sustainment services for critical

weapons systems, C5ISR (Command, Control,

Computers, Communications, Cyber, Intelligence,

Surveillance and Reconnaissance) and cyber

security that enhance mission effectiveness.

Oursolutions are deployed across platforms

andnetworks in the air, maritime, land and

cyberdomains.

Intelligence Solutions provides innovative

mission‑enabling solutions and services to

intelligence and federal/civilian agencies, as

wellas the provision of cost‑effective synthetic

training and simulation software products and

components for global defence applications.

Digital Intelligence provides cyber,

intelligenceand security expertise to help

protectnations, businesses and citizens.

Ourservices, solutions and products span

customers in law enforcement, national

security,central government and government

enterprises, critical national infrastructure,

telecommunications, military and space.

– Our businesses continue to deliver strong

performance on existing contracts with

theUSNavy, US Army, US Air Force and

federal/civilian agencies – including a

$699m (£562m), five-year contract for

operations, maintenance and management

services for the US Army’s Defense

Supercomputing Resource Center and

a$478m (£384m), five-year contract to

support weapon systems on USand UK

submarine classes.

– The Wargaming Capability (WGC)

programme conducted a successful

operational demonstration test event of

ourwargaming system in June. The event

consisted of test case and scenario

execution demonstrating abroad range

ofwargaming activities and resulted in a

successful pass from the US Marine Corps.

The success of this test event allows the

WGC team to continue moving forward

toa production-ready capability with

anticipated initial operating capability

in2025.

– In Digital Intelligence, investments in

newproducts for space and international

markets continue to progress well and

allmajor external projects are delivering

well against schedules.

Strategic and order highlights

– In Intelligence & Security, we secured

taskorders, in March, valued at $457m

(£367m) tosupport critical mission

operations foragovernment customer.

– In December, Germany’s Bundeswehr

acquired a BISim VBS4 enterprise licence.

The enterprise licence provides the

Bundeswehr with full access to BISim’s

easy-to-use, whole-earth virtual and

constructive desktop trainer and simulation.

– Through collaboration between the

Airsector and the Intelligence & Security

business, PHASA-35

successfully

demonstrated its ability toachieve

stratospheric flight, and Intelligence &

Security was subsequently awarded a US

Army Space and Missile Defense Command

contract that provides opportunities over

afive-year period to undertake military

utility demonstrations through the

integration ofsensor payloads operating

onboard thePHASA-35

aircraft.

– In June 2022, the US Air Force awarded

theIntegration Support Contract (ISC) 2.0

re-compete to BAE Systems with an

18-year period of performance and

$12bn(£10bn) total contract ceiling.

TheISC 2.0 contract award was protested,

andthe Government Accountability

Office(GAO) sustained portions of the

protest in October 2022. The Air Force

istaking corrective action to address the

GAO issues, and we continue to support

the ISCprogramme under a $652m

(£524m) contract extension received

inJanuary 2023.

Operational performance

Our Intelligence & Security business

hasperformed well in 2023, supporting

government customers across the

USDepartment of Defense, federal agencies

and civilian organisations with innovative,

mission-enabling solutions. We continue

tofocus on cultivating a strong pipeline of

qualified business opportunities across our

US-based business units – Air & Space Force

Solutions, Integrated Defense Solutions,

andIntelligence Solutions.

In Digital Intelligence, we have stepped

upour investment in the business for

futuregrowth. During the year, we opened

anew site in Manchester to broaden our

footprint and enable the business to

accessthe wider labour market. We have

alsoinvested in talent recruitment and

development through training academies to

generate skillsets which are in short supply.

Operational highlights

– As we continue to address the growing

modelling & simulation and synthetic

training markets, BAE Systems-owned

PitchTechnologies was realigned from

Platforms &Services toour Intelligence &

Security business. Theaddition of Pitch

builds on the 2022 acquisition of Bohemia

Interactive Simulations (BISim) as we

address the increased demand for

innovative and cost-effective training

andsimulation software products.

BAE Systems plc Annual Report 2023

Strategy and performance

Financial performance

measuresderivedfrom IFRS

2023 2022

Revenue £2,321m £2,205m

Operating profit £179m £291m

Return on revenue 7.7% 13.2%

Cash flow from

operating activities £ 261m £191m

Order book £1.4bn £1.4bn

Financial performance measures

asdefined by the Group

2023 2022

Sales

KPI

£ 2,321m £2,205m

Underlying EBIT

KPI

£199m £232m

Return on sales 8.6% 10.5%

Operating business

cash flow £204m £154m

Order intake

KPI

£2.5bn £2.4bn

Order backlog

£2.0bn £2.1bn

– In Digital Intelligence, we are making

positive progress in expanding our

multi-domain communications footprint

inthe UK defence sector. We have also

securedanumber of multi-year deals

withCentralGovernment and National

Securitycustomers.

Financial performance

– Sales increased by 6%

, to £2.3bn, with

both the UKand US businesses seeing

increased operations in the year. Growth

was 9%

after adjusting for the divestment

ofthe financial crime detection business

in2022.

– Underlying EBIT was down 14%², delivering

a return on sales, as expected, of 8.6%

following additional investment in the year

in space and multi-domain networking,

and higher recruitment and facilities costs.

– Order backlog has remained steady

againstthe prior year, with a book-to-bill

ratio of 1.1.

Looking forward

– Our Intelligence & Security team maintains

a strong pipeline of qualified business

opportunities and is seeing an increase in

demand driven by global security threats,

even with some delays in Department of

Defense procurements.

– The outlook for our US Government

services sector in Intelligence & Security is

robust with theopportunity for mid-term

growth, thoughmarket conditions remain

highly competitive and continue to shift

inresponse to government priorities.

– The modelling, simulation and synthetic

training environment markets in theUS and

internationally support a positive outlook

for our BISim and Pitch Technologies teams,

and we continue to expand our wargaming

capabilities to new markets and customers.

– In Digital Intelligence, where our

capabilities are well aligned to UK defence,

security and digital budgets, we continue

torecruit talent and invest in our people

through our training academies and a new

facility in Manchester, in the North West

ofEngland.

– In the space domain, our Digital

Intelligencebusiness is focusing

ondelivering our Azalea

™

programme

todevelop and build Low Earth Orbit

satellites for the defence market.

– Sales increased by 6%

, to £2.3bn, with

both the UKand US businesses seeing

increased operations in the year. Growth

was 9%

after adjusting for the divestment

ofthe financial crime detection business

in2022.

– Underlying EBIT was down 14%²,

delivering a return on sales, as expected,

of 8.6% following additional investment

in the year in space and multi-domain

networking, and higher recruitment and

facilities costs.

– Order backlog has remained steady against

the prior year, with a book-to-bill

ratio

of1.1.

Sales by business

A Digital Intelligence 30%

Intelligence & Security:

B Intelligence Solutions 30%

C Integrated Defence Solutions 22%

D Air & Space Force Solutions 18%

Sales by domain

A Air 29%

B Maritime 14%

C Land 11%

D Cyber 4 6%

Sales by customer

A US Government 68%

B UK and other governments 30%

C Other 2%

1. Including share of equity accounted investments.

2. Constant currency basis.

3. Ratio of Order intake to Sales.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

We are committed to playing our part in creating a secure and sustainable future

Our sustainability agenda

Sustainability plays an increasingly important

role; it is embedded into our strategic

framework and aligns with our purpose –

“toserve, supply and protect those who

serve and protect us”. We innovate, engineer

and deliver products and services that help

governments keep people safe around the

world and strengthen international stability.

At the same time, our business supports

theeconomic growth of nations through

high-quality, well-compensated, sustained

employment and a global network of

suppliers. We are committed to development

of our employees, including both their skills

and career advancement, and to investment

in the communities and regions where

weoperate.

With business growing at an accelerated

pace, it is critical that we continue to attract,

retain and develop the diverse and top talent

who will ensure we fulfil our mission. We must

ensure that our culture is inclusive, providing

an environment where employees feel valued,

supported, listened to and are able to grow

both personally and professionally.

In 2023, along with progressing programmes

related to our core foundations, we continued

to focus on leveraging our strengths and

capabilities to make progress on the four

pillars of our sustainability agenda and make

the most material contributions in the future.

Our four pillarsare:

• Addressing climate risks

• Furthering ideas, innovation and technology

• Creating opportunity for people

andcommunities

• Achieving success through partnering

We recognise that we are part of a complex

ecosystem of stakeholders, and that progress

requires changing behaviours, aligning

expectations and partnering with others.

Westart with our customers and their

decarbonisation programmes and social

impact objectives – and we must work

together with the support andinvolvement

ofouremployees, suppliersand communities.

We engage with these different stakeholders

groups onour plans and roadmaps, in

addition tolistening to their perspectives

onour sustainability approach.

Commitment from all levels

Sustainability is driven from the top down

byour Chief Executive and integrated

throughout the business from our strategic

framework, our governance systems and

policies, to the integrated financial planning

process and business review cycles.

Cross-functional and cross-sector steering

groups provide expertise and oversight

andour assurance framework and Internal

Audit regularly assess our compliance with

policies and processes.

Our Board Environmental, Social and

Governance Committee provides oversight,

input and assurance of the Group’s agenda

and progress, including approving theESG-

related objectives and targets that form part

of our executive incentives.

At each meeting, the Committee receives

input from both senior management

andtheGroup’s subject matter experts.

TheCommittee routinely reviews data

andparticipates in site visits and meetings

toengage directly with employees and

heartheir views. This dialogue enables

theCommittee to reflect employee

perspectives in boardroom discussions.

In addition, we have established a number

ofemployee groups which discuss and

consider various sustainability topics and

provide feedback to the Group ESG, Culture

& Business Transformation Director.

Clear and open two-way communication

from the boardroom, through the executive

team and across all our sites encourages our

employees at all levels of the business

interms of understanding the organisation

and their role within it and to be proud

ofwhat we are doing.

1. References to ‘sustainable’ and/or ‘sustainability’

(across pages 46 to 66 inclusive) may refer to

arange of environmental and/or social and/or

economic business practices, unless otherwise

described within a particular statement.

2. Deloitte has provided independent limited assurance

in accordance with the International Standard for

Assurance Engagements 3000 (ISAE3000) issued

by the International Auditing andAssurance

Standards Board (IAASB) over the selected metric.

Deloitte’s full unqualified assurance opinion, which

includes details of the selected metrics assured,

canbe foundat baesystems.com/annual-report.

3. https://universumglobal.com/.

2023 highlights

Having established our approach and key goals in 2022, this year we focused onincreasing

awareness internally and executing our plans and roadmaps.

Here are the key highlights at a glance.

Environment

– Scope 1 and 2: reduced future emissions

byagreeing Power Purchase Agreements

with energy suppliers that will provide

renewable energy to help us meet

energydemand in the UK.

– Scope 3 product-related emissions: we

arepartnering with the Royal Navy and

Rolls-Royce to trial alternative fuels in

navalvessels by blending currently

availablefuels (see page 55).

– In the UK, we have engaged with suppliers

responsible for 45% of the Group’s UK

supply chain emissions and provided them

the tools to measure and monitor their

emissions.

– In the US, we continue to execute

onavariety of sustainability efforts

andinitiatives.

Social

– 29% of the Executive Committee

arefemale.

– £11,267,109

contributed to the

communities inwhich we live and work,

inaddition tothe regions and countries

inwhich weoperate.

– In the UK, the Group was ranked second

byfemale engineers in the Most Attractive

Employers list by Universum

, up from

24thin 2022.

– In the US, we were recognised as Military-

Friendly for a 13th consecutive yearand

awarded ‘Best for Vets’ for a

10thconsecutive year.

Responsible business practices

– We continued to support transparency

andunderstanding of our sustainability

agenda and governance framework.

– We updated our global Code of Conduct

toinclude changes to our internal processes

and policies for roll-out during 2024.

– In the UK, we continued to progress

ourworkstreams on improving due

diligence on modernslavery.

– We sustained robust corporate governance

in linewith our Operational Framework.

BAE Systems plc Annual Report 2023

Sustainability

A responsible defence company

Sustainability embedded in our strategic framework

Underpinned by core foundations

Safety, health and wellbeing

Accountability and transparency

Robust ethicsand governance

Diversity, equity and inclusion

Product trading,quality and safety

Early careers

Environmental impact management

Addressing

climate risks

Furthering ideas, innovation

and technology

Creating opportunity for

people and communities

Achieving success

through partnering

Responsible business practices

Covers: Anti-bribery, anti-corruption and ethics

programmes; Improving industry standards; Human

rights; Cyber security; and, Responsible supply chain.

Social

Covers: Creating opportunity for people

andcommunities; and achieving success

throughpartnering.

– Workplace environment

– Education and skills

– Community investment

– Armed forces support

Environment and climate

Covers: Addressing climate risks; furthering ideas,

innovation and technology; and achieving success

through partnering.

– Decarbonisation strategy

– Environmental stewardship

– Biodiversity and nature

Pillars accelerating our ambitions

–opportunities to advance and

integrate our sustainability agenda

How we report

Read more Page 62

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Our decarbonisation strategy supports delivery of our Group strategic framework, mitigating our impact on

climate change by decarbonising our operations and working towards a net zero value chain by supporting

ourcustomers’ transition. We strive to mitigate the impacts we have on the environment while adapting our

operations and products to thewider challenges and risks presented by climate change.

Environment and climate

Climate change is one of the great global

challenges of our time requiring us all to act

together. Like other industries, the defence

industry is supporting the transition to a

global decarbonised economy, while

prioritising a safe and reliable defence

capability for our customers.

Many defence platforms are energy

intensive,with the majority of emissions

resulting from upstream procured products

and downstream activities covering

customeruse and military deployment.

Globally, the total carbon footprint of

thedefence sector, including government

activities, is approximately 520 MtCO

eachyear or 1% of global man-made GHG

emissions

. Defence platforms are designed to

be in service fordecades while retaining the

ability tooperate across different

geographical regions, with different climatic

conditions andinfrastructure, and alongside

our allies. So we must work in partnership

withourcustomers to understand their

futurerequirements.

For us, climate resilience includes the

assessment of the physical and strategic

impacts of our own sites and operations

andthe ongoing development of a wider

decarbonisation strategy that addresses

climate-related risks and opportunities to:

– achieve our target of net zero GHG

emissions (Scope 1 and 2) across our

operations by 2030;

– support our customers on their climate

goals by developing energy efficient

products and services whilst maintaining

military operational advantage;

– develop the skills and capabilities of our

employees to drive innovative solutions for

energy management and efficiency across

our operations and the product lifecycle;

– seek to mitigate adverse environmental

impacts and be good stewards of the

environment in the locations where we

operate; and

– work with our local communities

tosupport sustainability initiatives.

Our decarbonisation strategy includes

ourtarget of:

– achieving net zero GHG emissions across

our operations (Scope1and 2) by 2030

– we aim to dothisby reducing our

emissions as aminimum in line with

the1.5°C pathway²;and

– working towards a net zero value

chainby2050.

For the UK, Australia and Kingdom of

SaudiArabia businesses, net zero means

reducing ouremissions by following a

Paris-aligned pathway, supporting efforts in

limiting global warming to well-below 2°C

above pre-industrial levels and pursuing

efforts to limit warming to1.5°C.

Once our emissions have been reduced as

much as practicable, we will consider the use

of offsets to decarbonise our operations by

2030. We are working to minimise exposure

to offsets and will develop aresponsible

strategy to implement asappropriate.

1. Roland Berger – Defence Zero Volume 1: Military emissions and potential solutions and https://asd-europe.org/climate-change-and-defence.

2. Following a Paris-aligned pathway, supporting efforts in limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit warming

to1.5°C – https://unfccc.int/process-and-meetings/the-paris-agreement.

Analysis of emissions for Defence companies – adapted from Boston Consulting Group Review 2022

Scopes

ofdefence

industry-

emissions

20–30% of defence emissions >65% of defence emissions5–10% of defence emissions

Scope 3 upstream Scope 3 downstream

Procured products, transport

of supplies, travel

Transport of products, usage of

sold products, product disposal

Scope 2

Electricity, heat

for manufacture

Scope 1

Operations

BAE Systems plc Annual Report 2023

Sustainability

Decarbonising our operations

Our target is to be net zero across our

operations (Scope 1 and 2) by 2030 by

reducing operational GHG emissions

year-on-year by 4.2%, in line with a Paris-

aligned pathway, limiting warming to 1.5°C,

over ten years (against a baseline year of 2020),

with a 90% reduction in GHG emissions

being achieved by 2050. Ifthe year-on-year

reduction target of 4.2%is not met during

any given year, the year-on-year reduction

targets for subsequent years will be adjusted

to deliver the overall reduction target.

We will achieve our net zero targets through

a variety of different instruments including

engagement on power purchase agreements

(PPAs), investing in renewable and other

energy efficiency measures and switching

tolower carbon fuels where practicable.

Ourroadmap to 2030 estimates that the

reduction associated with each of these is

approximately 75% through renewables,

15% through energy efficiency measures

and10% through fuel switch opportunities.

During 2023, we progressed activities related

to our emissions reductions levers. Our overall

operational GHG emissions (Scope 1 and 2)

have reduced by 11% compared to 2022, this

is driven by reductions in electricity and gas

consumption as a result of factors such as

production variances, efficiency improvements

and operational control changes.

A key element of our net zero ambition

isincreasing the proportion of renewable

energy across our sites. The nature of

ouroperations will continue to require a

significant amount of energy for current

demand and the predicted growth in our

business over the coming decade. During

2023, we proactively pursued renewable

energy development opportunities including

investment in power purchase agreements

(signed during 2023) for a new wind farm

development and a number of solar projects

across our UK enterprise. These projects

willbe completed in Q4 2026 and 2024

respectively. These projects are expected to

provide energysecurity and certainty for our

future operations and also increase the overall

renewable energy generation across the

UKfrom 2024 onwards.

Site consolidation, new-build and

refurbishment projects provide further

opportunities for us to optimise and reduce

our energy consumption. Robust data on

building efficiency and infrastructure is a key

enabler to achieve this. We have building

information management systems in place

across a number of our sites, we are extending

them further and also establishing common

building standards across geographies.

During 2023, we updated the steam delivery

network at our munitions site in the UK,

invested in new and more energy efficient

office locations in the US andconsolidated all

of our Head Office administration buildings

inthe UK.

Across our business we are seeking, where

possible, to switch to low carbon alternatives

to heat our buildings. In the US, we

continueto explore efficiencies in heating

and cooling operations to reduce energy

andsubsequent impacts.

We continue to mature our assessment

andmanage the climate-related physical

risksand impacts across our global facilities,

implementing improvement recommendations,

including investment to improve facilities.

Our decarbonisation strategy and activities

related to our emissions reduction levers

areembedded in our sectors’ five-year

business plans and we are assessing the

impact of our predicted business growth

toensure our energy and infrastructure

strategies are aligned to our decarbonisation

pathways. Our Group-level policies and

processes have been revised to include

ourdecarbonisation ambitions and to

strengthen our climate resilience.

Our in-year and long-term incentives are

aligned to the Group achieving a 4.2%

operational GHG emissions reduction

targetyear-on-year.

KPI

In-year reduction of GHG emissions (Scope 1 & 2)

ACHIEVED

-11.0%

GHG emissions data

1 Emissions from activities which

BAESystemsowns orcontrols (Scope 1)

107,360

113,089

54,204

55,686

Total gross Scope 1

and 2 emissions

350,817

394,271

108,660

116,059

2 Emissions from the electricity, natural gas

andsteam purchased for BAE Systems’ use

(Scope 2 – location-based)

243,457

281,182

54,456

60,374

3 Emissions from employee business travel

included in (Scope3)

114,030

62,519

44,261

20,999

Global

tonnes CO

e UK tonnes CO

e 2022 figures

Read more – Other sustainability information/GHG methodology statement Page 234

Product sustainability guidance for our UK, Australia and Kingdom of Saudi Arabia businesses

Managed impact

Our products, as part of their

design, manufacture, use and

disposal have managed

impact on the environment

Operational resilience

Our products are

resilient to changes in

the environment in

which they will operate

Energy and

materialresilience

Our products consider

energy and material

resilience

GHG emissions

We are working towards

making our products net

zero with respect to GHGs

1. Relevant reporting period 1 November 2022 to 31 October 2023.

2. Deloitte has provided independent limited assurance in accordance with the International Standard for

Assurance Engagements 3000 (ISAE 3000) and Assurance Engagements on Greenhouse Gas Statements

(ISAE 3410) issued by the International Auditing and Assurance Standards Board (IAASB). Deloitte’s full

unqualified assurance opinion, which includes details of the selected metrics assured, can be found at

baesystems.com/annual-report.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Decarbonising our operations continued

Environment and climate continued

Value chain transition

We recognise that our value chain contributes

to our total GHG emission footprint beyond

that of our Scope 1 and 2 emissions. We

acknowledge the importance of continuing to

partner and collaborate with our customers

and suppliers to reduce emissions by 2050.

According to external studies, approximately

65%

of defence industry emissions come

from downstream customer use of products/

platforms. To address this requires

collaboration with our customers and across

the wider defence sector while recognising

that operational performance and capability

must always take precedence.

In Australia, the Kingdom of Saudi Arabia

andthe UK, we are undertaking a

programme ofwork to understand the

GHGprofile of material product types.

Thiswill help us understand how to further

progress the efficiency of our products,

research and develop alternate solutions

andidentify how we can support future

customer decisions and investment in

productupgrades and development.

Thiswork will support our customers’

decarbonisation transition.

We are innovating to drive decarbonisation

ofproducts and services, and reduce the

dependency on fossil fuels. This will be

achieved by:

– Energy optimisation

– Alternate fuels

– Developing electrification programmes

During 2023, we launched product

sustainability guidance for our UK, Australia

and Kingdom of Saudi Arabia businesses

toembedsustainability criteria across our

Lifecycle Management Framework. The

guidance gives a framework to consider

theimpact of design choices, throughout

aproduct’s lifecycle, on Scopes 1, 2 and 3,

including decarbonising our products,

resilience of products to adapt to changes

inthe environment, energy and material

resilience and minimising product impacts

onthe environment – air, water, land

andbiodiversity.

20-30%

of defence industry emissions

comesfrom upstream activities, so it is key

that we collaborate and partner with our

UKsuppliers to reduce upstream emissions,

while maintaining operational edge.

We have estimated the contribution of

ourglobal supply chain and developed

aSupply Chain Decarbonisation Roadmap

(above), which outlines how we will work

with our peers, suppliers and industry groups

to collectively reduce upstream emissions by

2050. We are initially focused on prioritising

this activity within our businesses in the UK,

Australia andthe Kingdom of Saudi Arabia.

During 2023, we undertook a global

spend-based assessment of our key suppliers

to better understand which are material to

our value chain GHG emission contributions.

In the UK, we will continue to engage with

material suppliers on our decarbonisation

ambitions (above), to highlight key actions

where we can collaborate.

In the UK, we will continue to measure our

spend-basedGHG emissions as we build

capacity with oursupply base through the

use of our service partner, Helios Information,

and itsJoint Supply Chain Accreditation

toolsets. Byobtaining primary emissions

dataandfurther ESG maturity insights across

ourpurchased goods and services, we can

shape ambition into action. We will continue

to engage and support wider industry

initiatives, for instance, from ADS and the

International Aerospace Environmental

Group(IAEG) to facilitate shared learning

andcollective decarbonisation.

1. Roland Berger – Defence Zero Volume 1: Military emissions and potential solutions.

Our Supply Chain Decarbonisation Action Plan for our UK, Australia and Kingdom of Saudi Arabia businesses

Collaborating with suppliers to transition to net zero by 2050.

Laying the foundations Capacity building Enduring engagement

What have we delivered and what do we collectively need to deliver in our journey towards net zero by 2050? Our ambition is informed

bythe UK Government’s PPN06/21 guidance. Through collaboration and by partnering for success we can play our part in decarbonising

our sector.

Establish our community. Complete spend-based data

baselines and materiality assessment. Develop the

stakeholder engagement pathway and launch our

ambitions and action plan.

Integrate decarbonisation into our core processes

andour supplier relationship requirements. Upskill

ourselves and our suppliers. Transition to hybrid

emissions calculation.

Maintain decarbonisation efforts through business

asusual practices and supply chain collaboration.

Introduce minimum decarbonisation maturity

requirements. Transition to product footprint data.

2022–2024

2025–2029

2030–2050

Net zero

2050

Renewable

energy and

efficiency

Green

transport

and logistics

Waste

reduction

and recycling

Climate

resilience & risk

management

Packaging

optimisation

Emissions

Enablers

Engagement

2022

Emissions

baseline and

materiality

assessment

2025

Transition

tohybrid

methodology

calculation

2030

Transition to product

footprint data

2023

Supplier ESG

assessments

introduced

2024

SC decarbonisation

metrics

operationalised

2023

Supply chain

ambitionsset

2023

Supplier engagement

approach developed

2023

Phase 2.2 supplier

engagement (UK)

2024

Phase 3 supplier

engagement (AU)

2023

Phase 1 supplier

engagement

2024

Phase 2.3 supplier

engagement (UK)

2024

Phase 4

supplier

engagement

(KSA)

2023

TOSCAN zero

supplier carbon

accounting tool

launched

2024

Capability

upskilling

2022

Supply chain

ESGcommunity

established

2025

Decarbonisation

integratedinto

coreprocesses

2028

Decarbonisation

supplier risk tool

introduced

2028

All material

suppliers have

published CRP

2025

Decarbonisation

included in

standard terms

and conditions

2025

Suppliers with

contracts>£3m pa

havepublished CRP

2028

Decarbonisation

weighting included

in all relevant

procurement

activity

2030

Minimum supplier

decarbonisation

requirements introduced

2030

Decarbonise our

operations to reduce

theimpacts of our

ownactivities

BAE Systems plc Annual Report 2023

Sustainability

Environmental stewardship

We are committed to high levels of

environmental stewardship and aim

toresponsibly consume resources:

– through the efficient use of energy;

– by reducing all types of waste

(e.g.hazardous, non-hazardous,

radioactive) where we can; and

– by minimising water use, recognising

thatthis is a valuable resource globally.

We also seek to prevent adverse

environmental impacts through the

prevention of sources of contamination,

andto protect thenatural environment

fromharm anddegradation in the

geographies wherewe operate.

Consumption of resources and materials

canbe different year-on-year, due to

differences in geography across our

operations and the stage of manufacture

ofour platforms and programmes.

We are taking a business-led approach

tosetting reduction targets and driving

improvement programmes and activities

tosupport responsible consumption.

During2023, our US business marked

EarthDay with a Battle of the Buildings

competition. This generated morethan

22,743 total energy reduction actions

withestimated environmental savings:

9,000kWh of electricity; 95,000 gallons

ofwater; 1,300gallons of gas; 500 pounds

ofplasticand 500 pounds of waste. For

2023, there have been significant reductions

inwater consumption, compared to 2022, as

a result of varying production requirements

and infrastructure improvements. Waste

production has increased for both non-

hazardous and hazardous waste, as a result

of factors including production requirements

and the review and update of the basis

ofreporting.

Biodiversity and natural capital

Nature loss and degradation pose a risk

toboth the environment and society.

Weareundertaking surveys and assessments

to better evaluate how our facilities and

operations impact the surrounding natural

habitat. In the US, we have completed

projects to enhance the underwater

ecosystems at our Norfolk and San Diego

shipyards, and other efforts have been

undertaken to establish water and riparian

buffer areas at our Norfolk and York facilities.

Operationally, significant aspects of

biodiversity are considered to include

protecting natural habitats, conserving

protected species and the management

ofinvasive species in and around our sites.

Advocacy

We recognise that addressing climate and

environmental matters requires partnership

andcollaboration across many different

entities. We work closely with our defence

sector peers through industry associations

and with our customers and governments.

Inthe UK, we take leadership roles in key

organisations such as the AeroSpace and

Defence Industries Association of Europe,

ADS Group and the International Association

for Engineering Geology and the Environment

toactively participate in developing common

standards and approaches.

Climate and environmental

riskmanagement

Climate and environmental risk is

embeddedin our approach to risk

management (seepage 75) through our

business and project risk registers. We have

identified and assessed climate-related

physical and transition risks aspart of our

decarbonisation strategy.

Consideration of current and emerging

regulation is key to mitigating risk. Identified

regulatory risks include enhanced transparency

and regulatory reporting obligations, taxation

instruments, and the potential for water

restrictions in stressed/scarce geographies.

Understanding how our businesses may be

impacted by changing environmental factors

is important to mitigating medium- and

longer-term risk. A direct environmental risk

factor is water scarcity which has the

potential to impact our operations,

particularly at those sites extracting water

forprocess use. Indirect environmental risks

include the impact of customer product

useand supply chain risk.

Climate change and the environment is

identified as one of the principal risks for the

Group (see page 75). Climate-related risks

may present as financial or non-financial risks

depending on the extent to which their

impacts are associated with financial planning

or have a wider reputational or strategic

impact. During 2023, our sectors continued

to incorporate wider climate risk within risk

registers, including probability, speed and

mitigation impact. This activity willcontinue

in 2024 supported by maturing sector net

zero roadmaps.

Key environmental data

Water consumption (cubic metres)

17%

recycled

(2022 9%)

2023 2022

A Mains 2,135,695 2,409,896

B Abstracted 2,925,651 5,968,417

Total 5,061,346 8,378,313

C Recycled 884,906 728,911

Waste production (tonnes)

48%

recycled

(2022 70%)

2023 2022

A Non-hazardous 58,482 42,413

B Hazardous 9,308 5,072

Total 67,790 47,485

C Recycled 32,870 33,167

Electricity consumption (kWh)

0.3%

renewable

(2022 0.7%)

2023 2022

A Grid 755, 301,151 877,726,240

B Renewable 2,083,735 5,951,873

Total 757,384,885

883,678,113

Read more – Other sustainability information/

GHG methodology statement Page 234

1. BAE Systems Internal Audit has reviewed the

systems, processes and controls in place to

collate,validate and report this data. Based

ontheprocedures and the evidence obtained,

nothing has come to its attention that

indicates the disclosures have not been

properly prepared inaccordance with such

systems, processes andcontrols.

2. Deloitte has provided independent limited

assurance in accordance with the International

Standard for Assurance Engagements 3000

(ISAE3000) and Assurance Engagements on

Greenhouse Gas Statements (ISAE 3410) issued

bythe International Auditing and Assurance

Standards Board (IAASB). Deloitte’s full

unqualified assurance opinion, which includes

details of the selected metrics assured, can be

found at baesystems.com/annual-report.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Environment and climate continued

BAE Systems Board

Quarterly

Overall responsibility for climate-related risks and opportunities impacting the Group, including consideration of climate-related matters

whensetting the Group’s strategy. The Board is supported by a number of Committees, as shown below.

Nominations

Committee

Ensures the Board

retains the required

skills and experience,

including climate-

related matters.

Businesses/sectors

Each business/sector has net zero leads who progress the decarbonisation ambitions of each business/sector.

Sustainability Council

Monthly

Reports to the Group ESG, Culture & Business Transformation

Director, providing recommendations for areas of sustainability

tobe given priority and focus as well as supporting the sectors

inimplementation of the Group’s sustainability agenda.

Net Zero Working Group

Monthly

Reports to the Group ESG, Culture & Business Transformation

Director, and co-ordinates the progression of our decarbonisation

ambitions. The Group is made up of functional representatives,

business leads and environmental specialists.

Executive Committee

Monthly

Responsible for managing climate-related risks and opportunities for delivering the decarbonisation strategy,

including climate-related expenditure and investments.

Our Group ESG, Culture & Business Transformation Director, who has day-to-day responsibility for environmental issues

and ownership of the Group’s Environmental Policy, sits on the Executive Committee and provides the Committee

with regular updates on our environmental and decarbonisation strategy.

Audit

Committee

Reviews and approves

TCFD disclosures,

including analysis of any

financial impact of

climate-related risks.

Environmental, Social

and Governance

Committee

Oversees the Group’s

ESG performance,

including review of

progress against

objectives and targets.

Innovation

and Technology

Committee

Oversees the Group’s

ability to make

technological

advancements through

low- or zero-emission

technologies.

Remuneration

Committee

Determines the Group’s

remuneration policy,

including performance

conditions linked to

climate change and

ESG-related matters.

Core Business Processes

Quarterly Business Review

Quarterly

Management review of the performance of each of the Group’s

businesses against decarbonisation objectives and targets.

Integrated Business Plan (IBP)

Bi-annual

Annual long-term strategy review and five-year plan for each

sector,including investment case to decarbonise.

Chief Executive’s Business Review

Quarterly

Top-level review of progress against decarbonisation

strategy and key sector deliverables.

Business Risk

Bi-annual

Management self-assessment of compliance with the Operational

Framework and summary of key risks. Includes mandated review

ofOperational Assurance Statement.

Read more Page 94 Read more Page 97 Read more Page 102 Read more Page 105 Read more Page 107

How we manage climate-related risks and opportunities

BAE Systems plc Annual Report 2023

Sustainability

Environmental stewardship continued

Task Force on Climate-related Financial Disclosures (TCFD)

The following tables summarise our disclosures relating to the four TCFD Recommendations and 11 Recommended Disclosures pursuant to

ListingRule 9.6.8R(8). We have considered our obligations in respect of climate-related disclosure under the UK Financial Conduct Authority’s

Listing Rules and confirm that these disclosures are consistent with the relevant Listing Rules and the TCFD Recommendations and Recommended

Disclosures (including the implementing guidance set out in the 2021 TCFD Annex), save for – Metrics and Targets, part b. During 2023, we

progressed internal workstreams to understand the GHG emissions associated with our global supply chain and in Australia, the Kingdom of

Saudi Arabia and the UK, we continued to progress a programme of work to understand the GHG profile of material product types. We are not

currently in a position to disclose our total Scope 3 emissions data. During 2024, we will continue to progress internal workstreams to understand

our Scope 3 GHG emissions related to our suppliers and products. We expect to be able to make a recommended disclosure in respect of Scope 3

emissions data in our 2025 Annual Report.

Governance

Pillar/recommendation Overview Where can information be found?

Disclose the organisation’s governance around climate-related risks and opportunities

a) Describe the Board’s

oversight of climate-

related risks and

opportunities.

The Board oversees climate-related risks and opportunities in setting

overall strategy, including expenditure and investments as part of the

IBPprocess. It oversees the Nominations Committee, Audit Committee,

ESG Committee, Innovation and Technology Committee and

Remuneration Committee.

The Board, through the ESG Committee, ensures that appropriate

climate resilience and environmental programmes are in place and

remuneration is set as required to drive the reduction in the Group’s

environmental impact.

Oversight and management of climate-

related risk and opportunity Page 52

Governance framework Page 86

The work of the Board Page 91

Committee reports Page 94

b) Describe management’s

role in assessingand

managing climate-related

risks and opportunities.

Our Executive Committee is responsible for managing climate-related

risks and opportunities and for delivering the decarbonisation

programme through our business and value chain.

Climate-related risks and opportunities are embedded across our

Operational Framework, including roles and responsibilities, key

policiesand processes.

Oversight and management of climate-

related risk and opportunity Page 52

Governance framework Page 86

Strategy

Pillar/recommendation Overview Where can information be found?

Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses,

strategy and financial planning where such information is material

a) Describe the

climate-related risks

andopportunities the

organisation hasidentified

overthe short, medium

andlongterm; and

b) Describe the impact

ofclimate-related risks

andopportunities on

theorganisation’s

businesses, strategy

andfinancial planning.

Our decarbonisation strategy supports our purpose and strategic

framework in delivering a sustainable business and is an overriding

initiative that encompasses our transition plan. It encompasses how

wewill decarbonise our operations and product and service portfolio,

whilst supporting our customers and suppliers in their transition, as

aminimum in line with a 1.5°C pathway

The decarbonisation strategy encompasses material climate-related

risksand opportunities that have the potential to impact our business

model and strategy over the short, medium and long term taking into

consideration our assets and infrastructure. In putting together the

decarbonisation strategy we have considered the commitments made

bythe UK Government.

We have considered the outputs from our scenario planning work

andassessed these as part of our decarbonisation strategy. We can

confirm that this strategy and our ongoing approach to business

continuity encompasses the material risks and opportunities we have

identified through the scenario planning process. These will continue

tobe monitored, managed and, to the extent necessary, mitigated.

These activities will be included within the annual business planning

processes, and our current assessment is that the financial risk associated

with the impact of climate risk on our operations is appropriately

managed and mitigated, and will continue to be in the future.

Our strategic framework Page 12

Our business model Page 14

Environment and climate Page 48

How we manage risk Page 67

Our principal risks Page 70

Impact of climate ambitions on the

Consolidated financial statements Page 158

2023 CDP – baesystems.com/en/

sustainability/sustainability-reporting

Other information – scenario planning Page 232

c) Describe the resilience of

the organisation’s strategy,

taking into consideration

different climate-related

scenarios, including a 2°C

or lower scenario.

During 2021 and 2022, we progressed qualitative and quantitative

scenario planning covering physical risk, transition risk – regulation

andtechnology and transition opportunity – products.

Material climate-related risks and opportunities identified during

thoseprocesses continue to be monitored, managed and, to the

extentnecessary, mitigated. We will continue to address material

climate-related risks and opportunities as part of our decarbonisation

strategy. We anticipate revisiting our scenario planning as part of

ournext business review in 2025.

Other information – scenario planning Page 232

1. Following a Paris-aligned pathway, supporting efforts in limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit warming

to1.5°C – https://unfccc.int/process-and-meetings/the-paris-agreement.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Environment and climate continued

Risk management

Pillar/recommendation Overview Where can information be found?

Disclose how the organisation identifies, assesses and manages climate-related risks

a) Describe the

organisation’s processes

foridentifying and

assessing climate-related

risks;

b) Describe the

organisation’s processes

formanaging climate-

related risks; and

c) Describe how processes

for identifying, assessing

and managing climate-

related risks are integrated

into the organisation’s

overall risk management.

Our approach to identifying, assessing and managing environmental

risks,including climate-related risk, is embedded within our approach

torisk management, via our business and project risk registers. Climate

and environmental risks may present as financial or non-financial risks

depending on the extent to which their impacts can be quantified,

andhow they have been classified.

Climate change and the environment is identified as a principal risk.

Current and emerging regulations are considered as part of the

environmental management system, including energy-related taxes

andschemes.

Environment and climate Page 48

Oversight and management of climate-

related risk and opportunity Page 52

How we manage risk Page 67

Our principal risks Page 70

Impact of climate ambitions on theConsolidated

financial statements Page 158

Metrics and targets

Pillar/recommendation Overview Where can information be found?

Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities

wheresuchinformation is material

a) Disclose the metrics

used by the organisation

to assess climate-related

risks and opportunities in

line with its strategy and

risk management process.

We have reviewed the TCFD Guidance on Metrics, Targets and

TransitionPlans and the cross-industry metric categories included in

thatdocument. We report against the following cross-industry metrics:

GHG emissions – absolute Scope 1, 2 and 3 (employee and business

travel only) emissions, carbon intensity measure.

Capital deployment – disclosure within ‘Impact of climate ambitions

on the Consolidated financial statements’.

Remuneration – 10% ESG weighting for ESG metrics in Performance

Share metric.

We disclose revenue from alternative energy-related products within

ourAnnual Report (see Power & Propulsion on page 37) and

Sustainability Accountability Standards Board (SASB) disclosure –

Resource Transformation: Aerospace & Defence sector disclosure.

We disclose our energy consumption within our Annual Report. We also

disclose other key environmental metrics – water consumption, waste

production and electricity consumption.

We disclose our investment in R&D within our Annual Report (see

page14).

Environment and climate Page 48

Segmental review Page 35

Remuneration Committee report Page 107

Impact of climate ambitions on theConsolidated

financial statements Page 158

Sustainability Accounting Standards Board

(SASB) Disclosure | Sustainability reporting |

Sustainability | BAE Systems

b) Disclose Scope 1,

Scope2 and, if

appropriate, Scope 3

GHGemissions and

therelated risks.

We report our absolute GHG Scope 1, 2, 3 (employee and business

travel only) emissions in line with Streamlined Energy and Carbon

Reporting (SECR) regulations. This data is externally assured, to a

limitedlevel of assurance, by Deloitte LLP.

We have matured our understanding of Scope 3 emissions related to our

industry’s value chain – 20-30% of defence industry emissions comes

from upstream activities (procured products, transport of suppliers and

travel); >65%

of defence industry emissions comes from downstream

customer use of products/platforms (transport of products, usage of

sold products, product disposal).

We are continuing to progress internal work streams to understand

theGHG emissions related to our suppliers and products.

We acknowledge the importance of continuing to partner and collaborate

with our customers and suppliers to reduce emissions by 2050.

Key performance indicators Page 26

Environment and climate Page 48

GHG emissions and methodology Page 234

c) Describe the targets

used by the organisation

to manage climate-related

risks and opportunities

andperformance

againsttargets.

Our target is to be net zero across our operations (Scope 1 and 2) by

2030 by reducing operational GHG emissions year-on-year by 4.2%,

following a Paris-aligned pathway, limiting warming to 1.5°C, over

tenyears (against a baseline year of 2020), with a 90% reduction

inGHG emissions being achieved by 2050.

We are working towards a net zero value chain by 2050. We are

continuing to progress internal work streams to understand the GHG

emissions related to our suppliers and products and to put in place

respective interim reduction targets in line with a 1.5°C pathway

Environment and climate Page 48

Remuneration Committee report Page 107

1. Roland Berger – Defence Zero Volume 1: Military emissions and potential solutions and https://asd-europe.org/climate-change-and-defence.

2. Following a Paris-aligned pathway, supporting efforts in limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit warming

to1.5°C – https://unfccc.int/process-and-meetings/the-paris-agreement.

BAE Systems plc Annual Report 2023

Sustainability

From left: Air Vice-Marshal

Paul Lloyd, Director

Support, Royal Air Force,

Minister for Defence

Procurement James

Cartlidge MP, BAESystems’

Air sector Chief Operating

Officer, Ian Muldowney,

and Steve Gillard,

Regional Director of

UK,Middle East and

International Defence

Sustainability, Boeing.

Reducing reliance on fossil fuels

across our products andplatforms

We are partnering with our customers and

academia to identify andtrial new methods

to reduce our reliance on fossil fuels, which

isfundamental to achieving our net zero

Scope3 ambition.

In 2023, we signed the Defence Aviation

Net Zero Strategy Charter – acommitment

to positively contribute to the UK

Government’s net zero ambition and

support Defence’s Climate Change and

Sustainability strategic approach.

We are continuing to collaborate with the

Royal Air Force, and wider defence industry,

in their goal to reduce carbon emissions. In

January 2023, after its successful sustainable

aviation fuel trial the previous year, the Royal

Air Force blended the remaining sustainable

aviation fuel with traditional Jet A1 products

(46–48%) to conduct the first air-to-air

refuelling sortie with a Typhoon aircraft

using sustainable aviation fuel blends.

Additionally, we are partnering with

theRoyal Navy and Rolls-Royce to trial

alternative fuels in naval vessels by blending

currently available fuels. We aim to

demonstrate a Royal Navy destroyer running

on 100% Hydro-treated Vegetable Oil

(HVO), significantly reducing GHG emissions

with no adverse impact on performance.

Working with academia, we launched a

three-year challenge with Southampton

andStrathclyde universities in the UK to

develop innovative solutions around

hydrodynamic improvements and on-board

energy consumption to reduce emissions

incurrent warships and future designs.

www.baesystems.com/article

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

We are developing an inclusive work environment, and creating opportunities for people

andcommunities where we live and work.

Social

Our social value activities seek to positively

contribute to the communities, regions and

countries in which we operate and propel the

business by ensuring we canattract, develop

and retain atalented anddiverse workforce

that will take us intothe future. During 2023,

we focused onfour areas of social value:

• Workplace environment – Creating

anattractive, diverse and inclusive

environment with an engaged workforce

who feel that they belong, their safety

andwellbeing are supported and they

wantto stay.

• Education and skills – Attracting,

retaining and upskilling talent within our

business and inspiring young people to

consider science, technology, engineering

and mathematics (STEM) careers, while

supporting theiremployability and

contributing to economic growth.

• Supporting local communities –

Working tosupport the communities

where we operate, including charitable

sponsorships, donations, employee

fundraising and volunteering.

• Armed forces support – Being a preferred

employer for service leavers and reservists

andcontributing to organisations that

support active service personnel, veterans

and their families.

We progressed other activities during 2023

tosupport wider social value, including work

streams on responsible supply chain to

develop a diversesupply chain (see page 65).

Workplace environment

Workplace environment encompasses the

range of activities that we undertake as an

employer of choice, a Group that people

want to join and stay in, where employees

areengaged and their safety and wellbeing

are supported.

Our people strategy

Our people strategy is designed to support

our aim to retain, attract and develop talent

and is delivered through:

– robust succession planning;

– targeted recruitment;

– focused talent management;

– a culture of inclusivity, learning

anddevelopment; and

– competitive employee value proposition.

This is underpinned by people policies,

guidance and support tools to enable

ourleaders and enhance the employee

experience. Our people policies lay the

foundations and our people manager

expectations highlight the responsibilities

ofour leaders, which include: leading with

authenticity, fostering a safe and inclusive

culture, developing our people and rewarding

them accordingly, enabling teams to perform,

and establishing and sharing direction and

our long-term vision.

Our dedicated employee communications

team systematically provides employees

withinformation on all matters that impact

them, including the Group’s financial and

business performance. We also have an

established employee experience team

whoregularly survey different employee

populations. Currently, the team serves the

UK and in 2024 will expand to Australia and

the Kingdom of Saudi Arabia. Wealso consult

with our employees and theirrepresentatives

regularly on a widevariety of topics. Their

views are takeninto account in our decision-

making processes on matters that affect their

interests. We also encourage employees’

involvement in Group performance through

an employee share scheme.

Diversity, equity and inclusion

We believe that diversity of thought drives

innovation and performance and we have

setourselves the following gender and

ethnicity goals:

– Group level – 50% of Executive

Committee members to be women

by2030;

– UK – 30% of our workforce to be women

by 2030 at the latest;

– BAE Systems, Inc. – progress towards

greater gender and racial diversity where

currently below market availability; and

– Other countries – targeted ambitions

forother countries in which we operate.

Throughout 2023, we prioritised initiatives

around recruitment and retention of

underrepresented talent, ensuring they are

embedded into ourgovernance system and

processes. As at31 December 2023, 29%

ofthe Executive Committee and 25% of

ourUKworkforce were women.

In 2023, in the UK, 31% of apprentices,

21%of graduates and 25% of experienced

professionals recruited were women. In

Australia, 26% of our early careers intake

(apprentices and graduates) and 23% of

experienced hires were women.

In the UK, we run a Women in Engineering

Insight Experience encouraging young

women (as well as men) to learn more

aboutengineering by gaining first-hand

insight at BAE Systems. In 2023, we

offered79 engineering apprenticeships

toparticipants (56 offers towomen) in

thisprogramme.

At 31 December 2023, in the US, 57% of

ourexecutive leadership team members were

women and women represented 26% of

theoverall workforce. These US metrics are

the result of not only acontinued focus on

establishing robust pipelines for recruiting

women, but also therecognition of the

importance of every employee being able

tosee themselves reflected at all levels of the

organisation. Forexample, a quarter of our

new hires were female, and approximately

one-third of our senior leadership population

are female.

We have also made progress on ethnicity.

Inthe UK, in 2023, 24% (2022 14%) of

graduates and 8% (2022 6.7%)of our

apprentices recruited represented different

ethnicities. In the US, 29% of our Inc. college

and intern hires represented people ofcolour.

In relation to Board diversity, please see

page84 of this Annual Report.

Our Women in Defence mentoring

programme continued alongside our

InspiringFemale Leaders group, supporting

the development of our female talent

pipelinethrough mentoring and networking.

Beyond our own business, we support

initiatives to develop women in STEM

andgrow female talent across the industry,

for example, our Women in Defence

mentoring programme.

During 2023, female engineers in the

UKranked our Company second in

Universum’s

Most Attractive Employers list,

and second for culturally diverse engineering

professionals. BAE Systems has been ranked

number one byEngineering Professionals in

the UK’s MostAttractive Employers list by

Universum and Ranstad, and voted 28th in

TheTimes Top 100 UK Graduate Employers.

Our business in the Kingdom of Saudi Arabia

was also awarded Best Working Environment

for Women within the Gulf Cooperation

Council by the organisation Great Place

toWork.

We are also committed to giving open, full

andfair consideration to applications for

employment from disabled people and

people with health conditions or impairments

who meet the requirements for roles. We

firmly believe that the inclusion of all of our

people, including those who develop

disabilities during employment, is vital to the

success of our business and ensure training

opportunities and appropriate accessibility

areavailable to all.

Sustaining a diverse workforce relies on

building an inclusive work environment

whereemployees feel valued, heard and

thatthey belong.

1. World’s Most Attractive Employers 2023 – Universum https://universumglobal.com/rankings/wmae/.

BAE Systems plc Annual Report 2023

Sustainability

In the UK, we have committed to 33

differentpledges and commitments to

external charters, including veterans,

LGBTQ+,mental health, disability, menopause,

careers in technology and social mobility.

Our ERGs play animportant role in creating a

sense of belonging and educating employees

about the unique issues our colleagues face

in and out of the workplace.

In 2023, in the UK, we also launched

aLearning Community site to facilitate

peer-to-peer knowledge sharing and best

practice, both internally and externally.

Thisincludes tools to help people managers

build more inclusive teams.

Age diversity

3,4

UK ethnicity diversity

1. Senior managers has the meaning given to that term by section 414C(9) of the Companies Act 2006. Senior managers are defined as employees (excluding executive

directors) who have responsibility for planning, directing or controlling the activities of the Group orastrategically significant part of the Group and/or who aredirectors

of subsidiary companies.

2. Executive Committee (excluding executive directors) andtheirdirect reports.

3. As at 31 December 2023, excluding share of equity accounted investments androundedto the nearest thousand employees.

4. BAE Systems Internal Audit has reviewed the systems, processes and controls in place to collate, validate and report this data. Based on the procedures and the evidence

obtained, nothing has come to its attention that indicates the disclosures have not been properly prepared in accordance with such systems, processes and controls.

5. Source: Office for National Statistics, Gender pay gap in the UK: 2023.

Gender diversity

Board (14) Male 9 (64%) Female 5 (36%)

Male 254 (73%) Female 94 (27%)

Male 71,000 (77%) Female 21,000 (23%)

Senior managers (348)

1,2

Total employees (92,000)

3,4

A Under 30 years 19,000 21%

B 30–50 years 42,000 45%

C Over 50 years 31,000 34%

A Ethnic minority 1,600 4%

B White 29,000 67%

C No data entered 9,10 0 21%

D Not disclosed/prefer not to say 3,600 8%

E Other <100 <1%

Gender pay gap

We have published our seventh annual

gender pay gap report in line with UK

regulations. For 2023, our mean gender

paygap for our UK workforce was 7.7%

(20228.6%) and our median gender pay

gapwas 8.7% (2022 8.3%). This compares

tothe UK median gender pay gap of 14.3%

We rely onemploying large numbers of

employees with STEM qualifications and

we,like other companies, face challenges

recruiting women with these qualifications

because there are significantly fewer women

who study and work in these fields. As a

result, a greater proportion of our workforce

and our senior leadership population are men

and this isamajor factor in our gender pay

gap. Wecontinue to work hard to improve

our gender balance and remain steadfast in

our commitment to delivering the plans we

have in place to increase the number of women

in BAE Systems and support the progression

ofwomen into senior executive positions.

Ethnicity pay gap

We published our first UK ethnicity pay

gapreport in December 2023, following our

commitment to Change the Race Ratio and

wider ongoing work in response to the Parker

Review. We are committed to progressing

racial and ethnic minority representation and

in order to do this, we need to understand

our ethnicity pay gap and supporting data.

We already have a number of programmes

underway to progress racial and ethnic

minority talent, including RISE, the KPMG

mentoring programme and our ERGs. In the

UK, we are also committing to growing the

number of employees from an ethnic minority

background year-on-year and aim to double

ethnic minority representation among the

senior leadership of the business (Executive

Committee and Executive Committee -1)

by2026, from our 2023 baseline.

Disclosure rates

We ask our employees to voluntarily disclose

their ethnicity. As at 7 November 2023, 86.3%

of our employees have disclosed their ethnicity.

82.3% of our employees identifiedas

White,4% identified as beinginAll Other

Ethnic Groups and 13.7%did not respond

tothe survey.

Disclosure categories

There is currently no specific guidance on

ethnicity pay gap reporting, so we have

mirrored our gender pay gap reporting

requirements. We use two groupings –

Whiteand All Other Ethnic Groups – to

ensure anonymity of employee disclosures.

Our ethnicity pay gap

We have a mean ethnicity pay gap of 3.9%

and a median ethnicity pay gap of 5.8%.

Bonus

Looking at the bonuses that ouremployees

received, we have a mean ethnicity bonus

gap of –2.3% and a median ethnicity

bonusgap of 1.0%.

98% of our White employees received a

bonus compared to93.4% of employees

from AllOther Ethnic Groups.

Mean ethnicity pay gap

3.9%

Mean ethnicity bonus gap

–2.3%

Median ethnicity pay gap

5.8%

Median ethnicity bonus gap

1.0%

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Social continued

We continued to run regular employee

engagement surveys and analyse data to

understand any differences, between groups

of employees, which is regularly reviewed

andfedinto our DEI strategy.

Recognising our focus on inclusion, we

appeared in the Stonewall Top 100 Employers

Workplace Equality Index and we have

launched an external benchmarking exercise

to measure our progress as part of The

Employers Network for Equality and Inclusion

organisation’s Talent and Diversity Evaluation

which has awarded us Silver Standard.

In the US, our DEI strategy is focused

acrossthree key areas – career, culture and

community. Supporting strategic efforts

include providing inclusive professional

development opportunities (coaching,

mentoring and sponsorship), developing

culturally conscious, inclusive leaders,

enablingoptimal mental health and

wellbeing, and partnering with various

non-profit organisations such as NAMI

(National Alliance on Mental Illness). ERGs

areat the centre of our efforts to continue

fostering a culture where everyone is

valuedand feels they belong. Finally,

accountability for DEI is underpinned by

theInclusive Leader Goal assigned to all

people managers through the performance

management process, with the aim of

achieving transparency through our

annualDEI Impact Report.

Priorities for the year ahead

In 2024:

– We will expand the work of our employee

experience team from the UK to launch

astandardised approach to listening

acrossUK/RoW (United Kingdom, Australia,

the Kingdom of Saudi Arabia, Defence

Information and Local Markets).

– We will seek to strengthen awareness on

managingand supporting neurodiverse

employees through training for line

managers and employees.

– We will sustain our progress to foster a

workplace where differences are valued

and employees see themselves reflected

atall levels of the organisation by removing

barriers, providing opportunities, amplifying

voices, and delivering programmes that

educate, elevate andinspire our workforce.

Safety, health and wellbeing

Our people’s safety is a top priority. During

2023, together with contingent labour, we

recruited more than 11,000 new hires and

scaled up safety training to ensure our people

are safe at work, in addition to increasing

awareness around health and wellbeing.

In 2023, the overall safety performance

ofouroperations improved with our

recordable accident rate reducing by 12.6%.

The majorityof this improvement relates to

areduction in recordable injuries within our

USbusiness, especially those related to heavy

vehicle manufacturing, explosives production

and ship repair. However, the number of

major injuries, our measure of severity, has

increased by 25%, from 32 to 40 during

2023. This has been most marked within our

Maritime sector. The majority of these injuries

relate to bone fractures due to slips, trips or

falls. To address this we have reviewed the

controls around our significant safety risks.

To further strengthen our safety culture

wefocused on three key areas:

– preventative safety management with

theaim of investigating, mitigating and

learning from incidents that can potentially

cause serious injury or a fatality (SIF);

– visible leadership engagement led by

ourExecutive Committee team; and

– continued deployment of safety training

forallemployees.

These areas of focus are regarded as

qualifying metrics linked to the award

ofourexecutive bonuses.

In 2023, in the UK, we strengthened our

focuson supporting employee mental

healthand wellbeing. We achieved Tier 2

status in the CCLA Corporate Mental Health

Benchmark, up from Tier 3 in 2022 as a result

of a sustained collaboration with workplace

mental health experts, data providers,

charities and UK-listed and global companies.

Our ERG for mental health, MindSet,

delivered #breakthestigma roadshows

atmany of our UK sites with high numbers

ofmale operational workers.

We launched a MindSet chapter in the

Kingdom of Saudi Arabia and Australia

during the year. In both markets, we have

undertaken significant activity to raise

awareness of mental health and where to

getsupport including ‘Health & Wellbeing’

stand-downs in the Kingdom of Saudi

Arabiawith engagement from over half

theworkforce.

In the US, our ABLE (Abilities Beyond Limits

and Expectations) ERG continued its focus on

de-stigmatising mentalillness through its

Sharing Our Truths storytelling series.

Additionally, we expanded our mentalhealth

and wellbeing efforts through the creation of

our Multicultural Network Inclusive Well-

Being team, sharing our wellbeing framework

‘The Prescription (Rx) for Well-Being’ with

nearly 500 employees through various

forums, partnering with theNational Alliance

on Mental Illness and commemorating

Mental Health Awareness Month and

Minority Mental Health Awareness Month.

Priorities for the year ahead

In 2024, we will:

– expand our mandatory safety

trainingoffering; and

– continue to visibly lead on health,

safetyand wellbeing from the

ExecutiveCommittee level.

Each of our operating regions will have

anadditional priority:

– in the UK, we will deploy a psychosocial

risk assessment aligned to ISO

45003

toenable a standardised approach to

identifying and reducing work-related

risksto mental health;

– in the US, we will refresh our peer-to-peer

mental health advocacy programme and

begin facilitating our ‘Prescription (Rx) for

Well-Being’ sessions with teams;

– in Australia, we will develop a bespoke risk

mitigation programme in partnership with

a leading psychosocial practitioner in

response to new legislation which

mandates management of psychosocial

hazards at work; and

– in the Kingdom of Saudi Arabia, we will

expand our capability to deliver mental

health first aid to employees.

Recordable Accident Rate

(per 100,000 employees)

BONUS

KPI

2023 424

4852022

Major injuries recorded

BONUS

2023 40

322022

BONUS

The award of the executive directors’ bonuses is dependent upon achievement of improvements in both safety

and diversity (see page 123).

1. BAE Systems Internal Audit has reviewed the systems, processes and controls in place to collate, validate

andreport this data. Based on the procedures and the evidence obtained, nothing has come to its attention

that indicates the disclosures have not been properly prepared in accordance with such systems, processes

andcontrols.

1. International Organization for Standardization.

BAE Systems plc Annual Report 2023

Sustainability

Education and skills

In 2023, we strengthened our recruiting

efforts to meet the growth we experienced

inall areas of our business and prepare for

contracts in new markets. We prioritised

recruiting people with the skills required to

support our key programmes including

engineering, project management and

operations. However, wealso focused on

developing digital, sustainability and

entrepreneurial skills whichare becoming

increasingly important.

In 2023, in the UK, we recruited more than

6,700 experienced professionals as well as

2,400early careers trainees. This represents

an increase of 18% and 37%, respectively,

compared to 2022. Together with contingent

workers, we recruited more than 11,000

newhires into our sites across the UK.

As part of our plans to upskill our existing

workforce, we launched our Global Digital

Academy, initially in the UK, to develop

employee skills at all levels from leaders to

theshop floor. We have two cohorts of

employees going through our sustainability

apprenticeship with Cranfield University. Sixty

current and future leaders have also attended

an Entrepreneurial Development Programme

with the University of Oxford’s Saïd Business

School in the last few years, designed to help

candidates understand how they can deliver

greater efficiency and growth.

In the US, we hired 7,200 people and

received offer acceptances of just over 8,000

with a significant focus on attracting talent to

our industry. These combined efforts resulted

in a26% increase in applicants to over

300,000 and an 89% offer acceptance rate,

an improvement compared to 86% in 2022.

Wealso invested in our existing talent,

launching mandatory people manager

training to increase capabilities in leading

hybrid teams and driving engagement and

productivity (Soar with Core4), as well as a

CEO-sponsored programme for leaders called

‘Senior Seminar: Leading is Learning’, using

case studies of BAE Systems programmes to

enhance performance and development

through organisational learning.

Our ability to retain and recruit people with

appropriate talent and skills is a principal risk

(see page 73) that we continue to take a

range of actions to mitigate.

Our early careers programme is the biggest

opportunity we have to create the future

workforce we need and contribute to social

mobility in the regions where we operate.

In 2023, we had c.5,500 apprentices and

graduates in training in the UK. Our early

careers apprentices achieved a 94%

completion rate, compared to a national

average rate of 51%

, playing a key role

instrengthening our talent pipeline.

In the US, we continued to increase

thenumber of college interns in LEAP

–ourinternship and co-op programme.

Wewere also ranked 26th on the 2023

Forbes ‘America’s Best Employers for

NewGrads’ list; coming second in its

Aerospace & Defense companies sector.

During 2023, in Australia, we recruited

113apprentices and graduates, and

40summer interns and we launched the

firstdegree apprenticeships to meet a

demand for software engineering skills

whicharescarce in Australia.

In 2023, in the Kingdom of Saudi Arabia,

werecruited 246 graduates, trainees and

apprentices to support growth in the region.

During 2023, we continued our global

STEMeducational outreach programmes

toseek to inspire young people at an early

age to choose a career in STEM supporting

our future talent pipeline.

In the UK, we invested £180m in skills,

education and training in 2022 – almost

double our investment in 2020 – and

1,600employees volunteered 11,308 hours

oftheir time as STEM ambassadors

. In 2023,

wealso launched the 18th annual season of

our schools roadshow, jointly with the Royal

Navy and Royal Air Force. With space as its

central theme, the roadshow delivered an

interactive experience for students aged

9to12 years old in more than 420 primary

and secondary schools nationwide.

In the US, we sponsored the FIRST

Championship, the world’s largest K-12

robotics event, gathering innovative students

from around the globe. The event attracted

more than 50,000 attendees from more

than60 countries, impacting more than

18,000 students.

In Australia, our national STEM Outreach

programme for Year 4 to 6 students is now

inits second year. The programme was

delivered in 23 schools and engaged just

under 1,500 students.

Priorities for the year ahead

In 2024, we will seek to:

– ensure our new employee intake is diverse,

building on the progress made this year;

– progress plans to expand the Global Digital

Academy to Australia and the Kingdom of

Saudi Arabia;

– in the UK, recruit almost 2,700 early careers

colleagues to meet business growth;

– ensure thebusiness and our education

providers can provide the placements

andtraining places needed;

– in the UK, continue to promote STEM

opportunities to young people in schools.

Our schools roadshow for 2024 will have a

curriculum theme of ‘electricity’ and engage

more than 400 schools and 100,000 school

pupils aged 9 to 12 years, jointly with the

Royal Navy and Royal Air Force; and

– in the US, continue to invest in our

partnerships focused on diversity in

STEM,including NSBE, SHPE, BEYA,

SWE,SASE and oSTEM to enable a

robustworkforce ofthe future

. In

addition, we will focus on internal mobility

and career development and rolling out a

virtualcareer centre for employees with

anenhanced ‘My Career’ profile.

Community investment

As a Group, we recognise our responsibility

to contribute to the communities in which

welive and work, as well as to the regions

and countries in which we operate.

We contributed £11,267,109

(2022

£11,504,152) to local,national and

international organisations throughout the

year and our employees volunteered 23,705

hours of their time working with charities and

not-for-profit organisations supporting those

communities which we arepart of.

As with all aspects of our sustainability

agenda, partnerships are key. Wecontinued

to strengthen our long-term relationships

with the charities we work with,supporting

them wherever possible tohelp mitigate the

rising cost of delivering charitable services.

For example, we donated £150,000 to help

foodbanks across the UK, taking our total

donation over the last four years to more

than £600,000.

Our people played a huge role contributing

their time and energy to fundraising and

volunteering for our charity partners, as they

do year after year. Around the world, our

employees worked with local organisations

intheir communities to donate a variety

ofitems including food, clothes, toys and

furniture, providing essential resources

forthose in need.

1. Source: the Department for Education Robert Halfon letter (publishing.service.gov.uk).

2. Oxford Economics 2022 ‘The Contribution of BAE Systems to the UK Economy’ report.

3. NSBE – National Society of Black Engineers. SHPE – Society of Hispanic Professional Engineers. BEYA – Black Engineer of the Year Awards.

SWE–SocietyofWomenEngineers. SASE – Society of Asian Scientists and Engineers. oSTEM – Out in Science, Technology, Engineering and Mathematics.

4. Deloitte has provided independent limited assurance in accordance with the International Standard for Assurance Engagements 3000 (ISAE3000) issued by the International

Auditing andAssurance Standards Board (IAASB) over the selected metric. Deloitte’s full unqualified assurance opinion, which includes details of the selected metrics

assured, can be foundat baesystems.com/annual-report.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Social continued

As well as hosting dedicated fundraising

andvolunteering activities, such as our armed

forces fundraiser ‘Skilful Salute’ in the UK and

combining Group donations with employee-

led foodbank drives across our sites, we

developed new community partnerships that

offered employees new ways of delivering

impact for their communities.

In the UK, we are a founding member of

Movement to Work, a charity which aims to

tackle youth unemployment. In 2023, our

Chief Executive, Charles Woodburn, took

upthe role of Chair of the Charity and we

renewed our commitment for a further three

years. We delivered 110 work experience

placements to young people, 60 of whom

went on to secure further education, training

or a job, including 39 with BAE Systems.

We continued to develop skills in our

supplychain and other communities

throughpartners, such as Be the Business,

oursponsorship of Recruit for Spouses,

coaching and mentoring, and support

tothecadet forces.

We also continued to support local projects

close to our sites that served disadvantaged

communities. For example, in Australia, we

provided our second year of support to Stars

Foundation, working with the organisation

tosupport positive social outcomes for

indigenous girls and young women across

ourcommunities. We also donated £480,000

to InnovateHer, which willbenefit 8,000

young women and people from minority

groups of less advantaged backgrounds

across the North West of England over the

next four years, promoting career possibilities

in digital and cyber through a series of

workshops, digital educational sessions

andinspiring assemblies.

In the US, we continued to intentionally

investin local communities, channelling our

contributions into social impact partnerships

to advance meaningful change. For example,

through our partnership with Step Up,

members of our Women’s Inclusive Network

ERG participated as mentors in Step Up’s

Career Camps – virtual field trips designed

tointroduce teen girls and young adults

toavariety of industries, workplaces and

professional cultures that inform their

careerinterests.

Priorities for the year ahead

In 2024, we will:

– improve our volunteering offering to our

employees, introducing more opportunities

for our employees to support their local

communities and introducing a volunteering

tool to make iteasier for more of our

employees to getinvolved; and

– focus on the impact of what we

dobyworking to better understand

thepositive difference we are making

inour communities and sharing these

insights with our different stakeholders.

Armed forces support

Given our Group purpose, supporting

thearmed forces community is part of

whowe are. Our activities focus on two

areas: working with charitable organisations

to support veterans, serving personnel, their

families and heritage institutions through

ourcommunity investment activities; and

being apreferred employer for service

leaversand reservists. We know that there

isa broad talent pool available, aligned

withour business operations and ambitions,

and we want to be at the top of their

listasthey look to employment in the

privatesector.

In 2023, we held our first ever global veteran

ERGcollaboration session with employee

representatives from seven countries coming

together virtually to share challenges,

knowledge and experiences.

In the UK, we celebrated the 10th year of

ourcommitment to the UK Armed Forces

Covenant – for which we hold gold status –

and 20 years of support to Combat Stress.

We have also developed and launched our

first ever Armed Forces Framework which

brings together all elements of our support

tothe Armed Forces Community under one

model with data points for each component

and a steering group structure with Executive

Committee sponsorship. This will aid better

decision-making and help us strengthen

ouroverall offering.

We have been working hard to grow the

UKveteran talent pool through attendance

atthe larger career transition workshops

andsmaller events local to our business, as

well as targeted contracts and social media

campaigns. We have grown our veteran

talent pool this year by more than 80%

to1,000 people. During 2023, 6% of our

experienced hires were veterans.

Our Australian business was recognised

withagold award for Best Employer Veteran

Support Program, relating to the Vetnet ERG.

We were proud to support our charity

partner, Legacy, as it carried out a six-month

torch relay to celebrate 100 years of support

to the families of those who have served

andsacrificed. Our employees stood,

walkedand ran alongside the organisation

tocelebrate this incredible achievement

andraise important funds to enable Legacy

to continue to support military families

inAustralia.

In the US, we continued to attend military

and veteran hiring events and employee

summits. In 2023, 25% of our new hires

wereveterans, increasing our total veteran

headcount to 17%. We were voted Military-

Friendly for the 13th consecutive year by

Victory Media (Gold-level 2024) andAwarded

‘Best for Vets’ for the 10th consecutive year

by Military Times (2023). We continued to

partner with the USChamber of Commerce

‘Hiring our Heroes’ programme toprovide

transitioning service members with

professional training and hands-on

experience for work in the civilian world.

Weare an Executive Committee member

ofthe Virginia Chamber of Commerce

Military and Veteran Affairs Council.

Priorities for the year ahead

In 2024, we will:

– work with our community partners

andheritage institutions to support

important armed forces anniversaries,

suchas the 80th anniversary of the

D-Daylandings;

– develop a global veterans’ charter

toformalise our collaboration across

theGroup; and

– pilot a Corporate Fellowship programme

for transitioning service members in two

ofour business units.

Community investment by type

A Armed forces

32%

B Education 40%

C Local community 25%

D Other 3%

1. Heritage data included in armed forces total.

BAE Systems plc Annual Report 2023

Sustainability

Creating a sense of belonging

Our ERGs are important to creating

aninclusive work environment where

everyone feels they belong. Each of our

ERGs is sponsored by representatives

fromour Executive Committee and

seniorsector and geographical leadership

teams. Our ERGs help shape our DEI

agenda and support our progress

tocreating a diverse workforce.

We have six ERGs in the UK spanning

gender, ethnicity, disability, LGBTQ+,

mental health and wellbeing, and our

veterans. The groups feed back to

leadership on issues that matter to

themand offer employees a nurturing

community with regular engagement

andactivities. Our ERGs are also valuable

in raising awareness and educating

thosewho may not directly relate to their

focus area, but wish to support as an ally.

In 2023, we increased overall membership

in our UK ERGs by 28.5% through

leadership advocacy, regular engagement

within our sectors and early careers

population, and raising awareness through

our communication channels. We also

launched three ERGs in the Kingdom of

Saudi Arabia focused on gender, disability,

and mental health and wellbeing, as well

as two ERGs in Australia tosupport our

First Nations and LGBTQ+ employees.

In BAE Systems, Inc. we have continued

our support through the broader

Multicultural Network and achieved an

11% increase in membership of our

eightUS ERGs in 2023.

www.baesystems.com/article

Marking significant membership growth

during the year, our OutLink ERGs in the

US (above) and the UK (below) organised

participation in Pride parades and events

in dozens of cities to support the

LGBTQ+ and Ally community.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

We are committed toethical and responsible behaviour in everything we do.

Responsible business practices

Ethics and compliance

Our industry is among the most highly

regulated of any sector.

Our global Operational Framework sets

outour approach and the mandated policies,

processes and standards that apply

everywhere we operate. Our Code of

Conduct and ‘SupplierPrinciples – Guidance

for Responsible Business’ (Supplier Principles)

outline expectations forall our employees

and partners.

Anti-corruption programme

Our customers, shareholders, partners and

colleagues expect the highest standards of

ethical conduct. We support our employees

in understanding the vital role they have to

playto conduct business in an ethical and

responsible way. We have a zero tolerance

policy regarding corruption in all its forms.

Our anti-corruption programme is designed

to ensure we adhere to all relevant legal and

regulatory requirements recognising the

bribery and corruption risks the Group faces

(see the ‘Laws and regulations’ principal risk

on page 76). The programme provides our

employees with practical guidance, helps

them to understand what is expected of them

and creates an environment where they feel

they can confidently, and confidentially if

needed, ask questions and raise concerns.

We regularly test the effectiveness of

ourprogramme through internal and

externaloversight and assurance, including

encouraging feedback from our employees

and from independent third parties. Risk-

based due diligence procedures have been

implemented to address bribery, corruption

and other financial and non-financial risk, and

our policies include processes for risk-based

internal and external approvals, ongoing

monitoring and repeat due diligence.

We drive improvements in the programme

annually to ensure it continues to meet best

practice. Our anti-corruption programme

alsoincludes our Code of Conduct and

ethicstraining, and is firmly embedded in

ourOperational Framework through our:

• Code of Conduct – which explicitly

prohibits the giving or receiving of bribes

by BAE Systems employees;

• Advisers Policy – which governs the

appointment, management and payment

of third parties who are engaged to assist

with our sales and marketing activities or

the strategic development of the Group;

• Gifts and Hospitality Policy – which

governs the offering, giving or receiving

ofgifts or hospitality;

• Conflict of Interest Policy – designed

toensure that personal conflicts of interest

do not impair employees’ judgement

anddamage the Group’s integrity and

interests; and

• Facilitation Payments Policy – designed

to ensure that facilitation payments are

notpaid and that the Group and our

employees seek to eliminate the practice

offacilitation payments.

Other relevant policies include: Community

Investment Policy; Finance Policy; Fraud

Prevention Policy; Export Control Policy;

Pursuit of Export Opportunities Policy;

Lobbying, Political Donations and Other

Political Activity Policy; Offset Policy; and

Procurement Policy, which include measures

to address bribery and corruption risks.

Theanti-corruption programme guides

andsupports our employees in making

responsible decisions.

Our ethics programme

Our global Code of Conduct lays out the

standards and behaviours that we expect of

all employees who work for us. It guides us in

acting responsibly and ethically in everything

we do and outlines the ways inwhich anyone

can seek help and guidance. Our Code is

supported by a training and engagement

programme to empower people to make

ethical decisions. All of our employees are

required to complete live, manager-led ethics

training annually alongside e-learning

programmes of role-specific training, for

example, on export controls.

During 2023, we updated our Code of

Conduct to include changes to our internal

processes and policies and incorporate

external best practice. The Code will be

rolledout across our business, supported

byemployee training, during 2024.

In 2023, 98.4% of our employees completed

our Business Integrity Scenario training, with

the majority of those who did not complete

itbeing employees on secondment, maternity

leave, sick leave or other long-term absence.

These employees will complete their training

on their return to the business.

We engage employees throughout the

yearon ethics and responsible business.

Weactively promote our Ethics Officers

andEthics Helpline, to help ensure employees

feel they can raise issues and seek guidance

in a safe environment.

In the US, we produce monthly ‘Ethics

Minute’ messages to communicate directly

on a range of topics, including workplace

respect, gifts and hospitalities, conflicts

ofinterest and speaking up, among others.

Inthe UK, we produce regular ethics and

compliance communications to spotlight

particular areas including gifts and

hospitalities, security and export controls.

BAE Systems plc Annual Report 2023

Sustainability

Raising an ethics concern

Employees can raise a concern anonymously

across four primary channels: via our Ethics

Officers; by email; on the telephone; and

online reporting to our externally run Ethics

Helpline service. Our Ethics Officers receive

regular role-specific training to ensure that

they are equipped with the skills to give

guidance to employees raising anissue.

During 2023, we received 1,531 enquiries,

anincrease of 28% compared to 2022.

There has been a 55% increase in ethics

enquiries from the UK, Saudi Arabian and

Australian businesses, primarily driven by

theMaritime sector. This reflects as a

28%increase globally.

There is a direct correlation between the

increase in number of reports received in

parallel to engagement activities delivered by

the ethics leads in their respective businesses.

Overall, the numbers of reporters seeking

guidance has steadily increased with the

substantiation rate of allegations remaining

consistent. We see this as a positive trend,

with employees reaching out for early

resolution showing trust in the business

andin ‘speaking up’.

Of the 1,531 enquiries received, 770 (50%)

required investigation, 42% of which were

substantiated. The top five categories for

investigation were: employee conduct;

accounting charge practices (including

time-booking matters); employee relations;

management practices; and anti-corruption

(including conflicts of interest). Of the 770

investigations for 2023, 576 were closed

and194 remain open.

22 ethics enquiries were received about

oursuppliers. 2 enquiries required

investigation and were substantiated.

51% of ethics enquiries came from the US

market. The number of ethics reports varies

by region. Factors influencing this include the

number ofindividuals working in that region

and the cultural propensity of individuals from

that region to utilise Speak Up mechanisms.

We value openness, and strive to create a

culture where people feel they can speak

upfreely. Our main metric is the number

ofenquiries made, and more specifically the

number of enquiries per 1,000 employees.

We also measure the proportion of requests

for guidance compared to reports requiring

investigation, anonymity rate and contacts

made directly to one of our 245 Ethics Officers

(one for approximately every 360 employees)

across our business. In 2023, our anonymity

rate was 25% compared to 26% from 2022,

well below the benchmark rate

of 56%.

56% of reports were made directly to Ethics

Officers in 2023 – we encourage this route

formaking reports, as it allows for an

immediate response by someone familiar

withthe local situation.

There has been an overall increase in dismissals

due to unethical behaviour in 2023. Dismissals

data has been reviewed with no particular

trends identified.

2023 ethics enquiries by type

1 761

168

330

1256

708

1110

1611

912

313

Enquiries that did not lead to investigations

1 Enquiries that led to guidance and advice

Enquiries that led to investigations

2 Accounting charge practices (including

time-booking matters)

3 Anti-corruption (including conflicts of interest)

4 Data, technology and trade controls

5 Employee conduct

6 Employee relations

7 Financial misconduct

8 Management practices

9 Policy, process and trading

10 Safety, health and environment

11 Sales, manufacturing and delivery

12 Security and misuse of assets

13 Supplier and procurement

Total ethics enquiries

2,3

2023 1,531

1,1962022

Anonymity rate

25%

(2022 26%)

Dismissals for reasons relating

tounethical behaviour

2023 300

2432022

2023 ethics enquiries by region

A US 787

B UK 673

C Kingdom of Saudi Arabia 47

D Australia 24

1. Navex 2022 anonymity benchmark.

2. BAE Systems Internal Audit has reviewed the systems, processes and controls in place to collate, validate

andreport this data. Based on the procedures and the evidence obtained, nothing has come to its attention

that indicates the disclosures have not been properly prepared in accordance with such systems, processes and

controls.

3. Our US business uses the Helpline as a mechanism for people to declare a conflict of interest (e.g. a family

member also working at BAE Systems, or a second job) – these are not reports of inappropriate behaviour

orrequests for guidance, but a simple logging process.

How our Ethics Helpline has been used

How were concerns raised? What happened?

Concerns

raised

1,531

Helpline

512

Ethics officer

851

135

Other

Case to

answer

244

No case

toanswer

332

Still under

investigation

194

Concerns

investigated

770

Advice

given

761

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Responsible business practices continued

Improving industry standards

We continue to play our part in setting an

example for business partners and seeking

tohelp improve ethics standards across

ourindustry.

We take a proactive leadership role in our

engagement with the defence industry,

governments, NGOs and other interested

parties to develop initiatives that will address

the key ethical issues affecting our industry.

For example, we take leadership positions

with industry ethics groups such as the

International Forum on Business Ethical

Conduct and the US Defense Industry

Initiative. We also regularly interact and

support the Institute of Business Ethics

andthe Ethics & Compliance Initiative,

andare proactive members of both the

Aerospace and Defence Industries of

Europeand the Aerospace, Defence,

Securityand Space TradeAssociations.

Product trading

The defence industry is subject to strict

regulatory controls. We maintain stringent

internal controls that govern what we sell

andto whom. To identify responsible trading

risks our Product Trading Policy requires an

evaluation on all products, services and

trading activities. The process ensures that

inaddition to a commercial assessment,

consideration is given to wider ESGconcerns.

Our Product Trading Policy and Responsible

Trading Principles help us to make informed

decisions about the business opportunities

we pursue in accordance with our values.

Export of controlled goods and technologies

must be authorised in advance by

governments. Failure to comply with all

applicable laws and regulations could result

inserious penalties for BAE Systems and

theindividuals concerned, and could harm

national security and foreign policy interests.

Our Export Control Policy and Procedures are

designed to comply with applicable laws and

regulations, including sanctions and trade

embargoes, as well as to detect and provide

timely responses to actual or potential

violations, including prompt investigations,

disclosures and appropriate remedial actions.

Product safety and quality

We are responsible for ensuring that the

products we deliver conform to their design

and achieve an agreed level of safety and

quality with our customer. We do this

bycomplying with our Product Safety and

Quality policies and processes. We define a

Product as any goods orservices, including

intellectual property, developed or traded

byBAE Systems. Thiscould be physical such

as a platform orsub-system, non-physical

such as software or a design licence,

oraservice such as a maintenance plan

orsupport training package. Our Product

SafetyPrinciples apply throughout the

product’s lifecycle, and certain safety-related

responsibilities may extend beyond the

formalend of a project or programme.

Human rights

We are committed to respecting and

upholding human rights wherever we

operate, in the activities that fall under

thefull, direct control of the Group. Our

employees, our suppliers and business

partners are all expected to adopt high

standards of ethical behaviour. We are

committed to conducting business

responsibly and maintaining and improving

systems and processes to minimise the risk

ofslavery and human trafficking in our

business or supply chain.

Our human rights statement outlines our

approach to responsible business behaviour,

including in relation to anti-corruption, the

environment, as well as our workplace, supply

chain, local communities and products.

Our Code of Conduct and other global

policies and processes mandated under the

Operational Framework, together with our

supporting principles and guidance, support

our commitment to human rights and are

regularly reviewed. Our ‘Supplier Principles

–Guidance for Responsible Business’

communicate the human rights principles

weexpect of our suppliers (see page 87).

Weengage suppliers on our Supplier Principles

during the supplier evaluation stage and

undertake assurance activity as part of

ongoing supplier management assessments.

In the UK and Australia, we have modern

slavery working groups to progress actions

toreview and strengthen how modern

slavery and human trafficking risk is

identified, assessed and managed across

ourbusiness. We publish our annual

responses, including work streams and

progress achieved during the year, to the

UKand Australian Modern Slavery Acts,

anda statement in response to the California

Transparency in Supply Chains Act on

ourwebsite.

Our approach to identifying and assessing

human rights risks is embedded within our

approach to risk management (see page 67).

Cyber security

As a major defence, aerospace and security

company, it is critical that our information

technology and operational technology, as

well as the products and services we sell,

arecyber resilient and the information,

intellectual property and data held and

processed on them is appropriately secured.

The security of the Group’s products

andservices, data, facilities and IT & OT

infrastructure is regularly considered by the

Board and senior management and underpins

the Group’s protective securitystrategy and

influences its engineering, technology, and

digital strategies. Our cyber security strategy

identifiesstakeholder trust in our business

and our products as a fundamental enabler

tomeeting our Group strategy.

We constantly review our cyber security

riskand take an agile, proactive approach to

mitigating the risk. We do this by efficiently

leveraging our core internal capabilities in

cyber security, including our specialist threat

intelligence service, to maintain a managed

risk position as we digitally transform and

thethreat landscape evolves. For further

details, please see Cyber security on page73.

Our internal Cyber Security Standards

arealigned to the National Institute of

Standards and Technology Framework and

aformal, three layers of defence assurance

programme, which is reviewed both

internallyand externally, is operated to check

adherence to these standards and customer

requirements. To further increase cyber

resilience, the Group’s Security Operations

Centres perform continual monitoring of

activity on core networks.

BAE Systems plc Annual Report 2023

Sustainability

Responsible supply chain

Our ambition is to be responsible and

sustainable across our global business.

Wecannot achieve this alone, therefore

itisimportant that we collaborate and

partner with suppliers to make a positive

business impact, and the steps we are

takingare detailed below.

In 2023, we spent £14bn with 21,500

directlycontracted suppliers worldwide.

These relationships are often long lasting

dueto the complexity of our products and

their long lifecycles, so it is critical that our

suppliers share our values.

Our success as a business relies on the

resilience of our supply chain. It is vital that

we collaborate and partner with suppliers

todeliver the capability our customers need

and to support our suppliers in addressing

challenges, including in respect of the

products and services they supply to us.

Byworking together with our supply

chainwe can accelerate our sustainability

programmes which benefits us, our

customers and wider society.

In the UK, Australia and the Kingdom of

Saudi Arabia we have developed a Supply

Chain Sustainability Framework that covers

how we will engage suppliers on our

sustainability strategy.

We communicate our expectations about

responsible supply chain and our sustainability

ambitions through the distribution of our

Supplier Principles document. Our Supplier

Principles cover supplier workplace and

employee business practices as well as

widersustainability issues.

We strive to work with suppliers who share

our approach to responsible business.

Oursupplychain management starts with

ourGlobal Procurement Policy which defines

therequirements to be implemented by

eachofour sectors to support the

management ofsupplier-related risk.

At the contracting stage, we stipulate our

expectation that suppliers embrace our

standards on ethical behaviour, including

those set out in our Supplier Principles.

During 2023, we undertook an annual

risk-based assurance activity to test our

suppliers’ adoption of these principles

andtoidentify any risk areas that

requiredinvestigation and/or mitigation.

Wecompleted this assurance activity

withsuppliers representing more than

30%of our global spend.

Additionally, our standard terms and

conditions require suppliers to comply with

allapplicable laws and regulations, including

those related to human rights, anti-slavery

and the environment.

We are committed to maintaining and

improving systems and processes that reduce

the risk of slavery and human trafficking in

our supply chain. During 2023 we continued

to assess our tier 1 suppliers against high-risk

commodities and locations and we delivered

awareness training to targeted employees

who are responsible for procurement in our

UK businesses. Additionally, we developed

and communicated a formal Modern

SlaveryReporting Procedure within our

UKbusinesses to escalate reports of

andconcerns relating to human trafficking

and slavery.

Conflict minerals

We expect our suppliers to provide products

made from materials, including constituent

minerals, that are sourced responsibly, and to

support efforts to eradicate the use of any

minerals which directly or indirectly finance

orbenefit armed groups that are perpetrators

of serious human rights abuses.

Reporting, disclosure

andassurance

We report on progress of our sustainability

agenda within our Annual Report and online:

baesystems.com/sustainability.

ESG Materiality

We have continued to address the material

ESG issues that were identified during our

2021 materiality assessment. During 2023,

wescoped a double materiality assessment

based on current guidance issued from

EFRAG¹, which we will use within the

methodology of our next materiality

assessment. Results from thisassessment

willbecome available during2024.

Our approach to UN Sustainable

Development Goals

We continue to support the UN Sustainable

Development Goals (SDGs) and remain

committed to making progress on specific

goals that are aligned to our sustainability

agenda. The SDGs provide a framework

fordevelopment and addressing the

challenges that global populations face from

climate change and environmental risks

through to managing societal needs

andbuilding economic growth.

For more information on the UN Sustainable

Development Goals, please visit our website

www.baesystems.com/en/sustainability

Assurance of data

External assurance of GHG emissions

(page234), energy (page 234) and

community investment (page 59) data

isprovidedbyDeloitte LLP.

Deloitte statement

Deloitte has provided independent

limitedassurance in accordance with

theInternational Standard for Assurance

Engagements 3000 (ISAE 3000) and

Assurance Engagements on Greenhouse

GasStatements (ISAE 3410) issued by

theInternational Auditing and Assurance

Standards Board (IAASB) over the selected

metrics identified on pages 234 and 235.

Deloitte’s full unqualified assurance opinion,

including details of the selected metrics assured

www.baesystems.com/annual-report

For more information on all aspects of our sustainability reporting, please visit our website

www.baesystems.com/en/sustainability/sustainability-reporting

1. https://www.efrag.org/News/Public-471/Publication-of-the-3-Draft-EFRAG-ESRS-IG-documents-EFRAG-IG-1-to-3-.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Non-financial and sustainability information statement

The ‘Sustainability’ section (pages 46 to 66) constitutes the Non-financial and sustainability information statement as required by the Companies

Act 2006 as amended, together with the ‘Our stakeholders’, ‘The work of the Board’, ‘Our business model’ and ‘Risk’ sections listedin the table

below, which are incorporated in this Non-Financial and Sustainability Information Statement by reference:

Topic Our principles, policies and standards that govern our approach Where to find information inthisreport

Environmental matters and

climate-related disclosures

– Environmental policy

– Decarbonisation plan

Environment and climate Page 48

Addressing climate risks (TCFD) Page 54

Employees

– Our People policy

– Health and Safety policy

– Communications policy

– Code of Conduct

– Personal Data Protection policy

Our stakeholders Page 24

Responsible business practices Page 62

The work of the Board Page 91

Respect for human rights

– Code of Conduct

– Human Rights Statement

Responsible business practices Page 62

Social matters

– Community Investment policy

– Commercial policy

– Lobbying, Political Donations and other PoliticalActivity policy

– Dignity and Respect Standards, in support ofourglobal

diversity&inclusion vision

– Supplier Principles – Guidance for ResponsibleBusiness

Our stakeholders Page 24

The work of the Board Page 91

Responsible business practices Page 62

Environmental, Social and

Governance Committee report Page 102

Anti-bribery and corruption

– Gift and hospitality policy

– Finance policy

– Conflicts of Interest policy

– Facilitation payments policy

Responsible business practices Page 62

Description of principal risks

relating to topics mentioned

above

– Risk Management policy

How we manage risk Page 67

Description of business model

Our business model Page 14

Non-financial key

performanceindicators

Key performance indicators Page 26

All our policy summaries can be found on our website: baesystems.com/en/sustainability/governance/oversight/policy-summaries

BAE Systems plc Annual Report 2023

Sustainability

Effective management of risks is essential to the delivery of the Group’s strategic objectives

andthe creation of sustainable shareholder value.

How we manage risk

Board

The Board has overall responsibility for

determining the nature and extent of the

risksthe Group is willing to take, and

ensuring that risks are managed effectively

across the Group.

Risk is considered on a regular basis at Board

and Board committee meetings and the

Board reviews risk (including emerging risk)

aspart of its business planning and annual

strategy review process. This provides the

Board with an appreciation of the key risks

within the business and oversight of how

they are being managed.

The Board delegates oversight of certain

riskmanagement activities to the Audit,

Environmental, Social and Governance

andRemuneration Committees.

Audit Committee

The Audit Committee monitors the Group’s

key risks identified by the risk assessment

processes and reports its findings to the

Board twice a year. It is also responsible for

reviewing in detail the effectiveness of the

Group’s system of internal control policies

and procedures for the identification,

assessment and reporting of risk.

Environmental, Social and

GovernanceCommittee

The Environmental, Social and Governance

Committee monitors the Group’s performance

in managing those risks arising in respect of

business conduct, health and safety, and the

environment. The Committee reports its

findings to the Board on a regular basis.

Remuneration Committee

The Remuneration Committee ensures that

reputational and other risks from excessive

reward, and behavioural risks that can arise

from target based incentive plans, are

identified and mitigated.

Approach

The Group’s Risk Management Policy is

setout in the Operational Framework, the

Group’s detailed governance framework.

The Group’s approach to risk management

isaimed at the early identification of material

risks, mitigating the effect of those risks

before they occur and dealing with them

effectively if they crystallise.

The Group is committed to the protection

ofits assets, which include human resources,

intellectual and physical property, and

financial resources, through an effective risk

management process, underpinned where

appropriate by insurance.

Reporting within the Group is structured

sothat key issues are escalated through the

management team and ultimately to the

Board where appropriate. The underlying

principles of the Group’s risk management

processes are that risks are monitored

continuously, associated action plans reviewed,

appropriate contingencies provisioned, with

this information reported through established

management control procedures.

The Board has conducted a review of the

effectiveness of the Group’s systems of risk

management and internal control processes,

including financial, operational and

compliance controls and risk management

systems, in accordance with the UK

Corporate Governance Code. The Group

hasdeveloped a system of internal controls

that was in place throughout 2023 and to

thedate of this report.

As with any system of internal control, the

policies and processes that are mandated

inthe Operational Framework are designed

to manage rather than eliminate the risk

offailure to achieve business objectives

andcan only provide reasonable, and not

absolute, assurance against material

misstatement or loss.

Process

The responsibility for risk identification,

analysis, evaluation and mitigation rests

withthe line management of the sectors

andGroup functions. They are also

responsible for reporting and monitoring

keyrisks in accordance with established

policyand processes under the Group’s

Operational Framework.

The Group’s risk management process

issetout in the Risk Management Policy,

amandated policy under the Operational

Framework, and, in respect of projects,

intheLifecycle Management Framework,

acore business process under the

OperationalFramework.

Identified risks are documented in risk

registers showing: the risks that have been

identified; characteristics of the risk; the

basisfor determining mitigation strategy;

andwhat reviews and monitoring are

necessary. Each risk is allocated an owner

who has authority and responsibility for

assessing and managing it.

Project risks are reported and monitored in

Group-mandated format Contract Review

Packs, which are reviewed by management

atmonthly Contract Reviews. The financial

performance of projects is reported and

monitored using Contract Status Reports,

which form part of the Contract Review Pack.

These include programme margin metrics,

which are reviewed regularly by the Executive

Committee and Board. Project margin is

recognised after making suitable allowances

for technical and other risks related to

performance milestones yet to be achieved.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

How we manage risk continued

In addition, every six months, the

businessesand Group functions complete

anOperational Assurance Statement (OAS),

which is a mandated policy under the

Operational Framework. The OAS is in two

parts: a self-assessment of compliance with

the Operational Framework; and a report

showing the key risks for the relevant

business and Group function. Together

withreviews undertaken by Internal Audit

and the work of the external auditors,

theOAS forms the Group’s process for

reviewing the effectiveness of the system

ofinternal controls.

Risks can develop and evolve over time

andtheir potential likelihood and impact

mayvary over time in response to events.

These may include emerging risks, which

areconsidered through the above existing

processes, and through the Group’s business

planning and annual strategy review process.

Executive Committee

The key risks identified by the sectors and

Group functions from the risk assessment

processes are collated into a report for

reviewby the Executive Committee. In

addition, the Group’s business planning

andannual strategy review process considers

longer-term emerging risks and opportunities.

The Executive Committee reviews these

reports and presentations to identify those

issues where the cumulative risk, or possible

reputational impacts, could be significant.

These reports and presentations are shared

with the Board.

Management responsibility for the Group’s

most significant risks is determined by the

Executive Committee.

The risk registers are reviewed regularly by

the Executive Committee to monitor the

status and progression of mitigation plans.

The key risks are reported to the Board on

aregular basis.

Principal and emerging risks

The Board has carried out a robust

assessment of the principal and emerging

risks facing the Group. Principal and

emerging risks have been identified, and

aremanaged or mitigated, through the

application of the policy and processes

outlined above.

Principal risks include those that would

threaten the Group’s business model, future

performance, solvency, liquidity or reputation.

Risks have been identified as principal based

on the likelihood of occurrence, the potential

impact on the Group and the timescale over

which they might occur. The principal risks,

together with details of how they are being

mitigated and managed, are detailed on

pages 70 to 77.

The safety of our people and products

haslong been a high priority for the Group;

many of the environments in which our

people work are hazardous and many of

ourproducts and services inherently pose

asafety risk. In the Board’s regular review

ofrisks, it has determined that safety ought

to be regarded as a principal risk, providing

consistency of emphasis between the key

safety objectives set for operational

management across the business and the

riskthat the objectives seek to mitigate.

In addition, the risks associated with

operating in international markets have

beenconsolidated, with the principal risk

from the 2022 Annual Report entitled

‘Competition in International Markets’ being

subsumed within a simplified ‘International

markets’ principal risk. The Board considers

that presenting international market risks

under a single heading adds clarity to this

aspect of the Group’s risk profile.

The directors have considered the

relevanceof the risks of climate change

andtransition risks associated with the

Group’s net zero GHG emissions targets

when preparing and signing off

theGroup’saccounts.

Our principal risks Page 70

BAE Systems plc Annual Report 2023

Risk

Our risk management framework

Chief Executive’s Business Review

Quarterly top-level review of the key operational, financial and non-financial performance

issues within the business, and significant forthcoming bids and events

Quarterly Business Review

Quarterly management review of the performance of each of the Group’s businesses

against their objectives, measures and milestones

Integrated Business Plan

Annual long-term strategy review and five-year plan for each business

Risk challenge,

monitoring and reporting

Core Business Processes

Board

Overall responsibility for risk management

Audit Review Board

Assurance of the Business and Project Risk management processes as mandated in the Audit Charter

Audit Committee

Operational Assurance Statement Risk Registers

Environmental, Social and GovernanceCommittee

Operational Assurance Statement Risk Registers: ESG subset

Executive Committee

Operational Assurance Statement Risk Registers

Core Business Processes

Strategic objectives and shareholder value

Project objectives and financial return

Project Risk

Lifecycle Management Framework

(Mandated Policy)

Operational Assurance Statement

Six-monthly management self-assessment of compliance

withtheOperationalFramework and summary of key risks

(Mandated Process)

Lifecycle Management Project Performance Review

Regular management review of project performance, issues and

risks toensurethatappropriate decisions and actions are taken

Business Risk

Risk Management Policy

(Mandated Policy)

Identification

Risks recorded in risk registers

Mitigation

Risk owners identified and action plans

implemented. Robust mitigation strategy

subject to regular and rigorous review

Analysis

Risks analysed for

impactandprobability to

determine exposure

Evaluation

Risk exposure reviewed

andrisks prioritised

See the Group’s Operational Framework for definitions of policies, processes and reviews Page 87

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Our principal risks

Risks are identified based on the likelihood of occurrence, the

potential impact on the Group and the timescale over which

theymight occur. The Group’s principal risks are identified below

together with a description of how it mitigates those risks. The risks

estimated as more significant to the Group (as at the date ofthis

Strategic Report) are placed at the top end of the list.

Government customers, defence spending and terms of trade

The Group’s largest customers are governments. The Group is dependent on government

defencespending, and the timing and terms of trade of government contracts.

Key links to strategy

Description Impact Mitigation

In 2023, 94% of the Group’s sales were defence-

related.

Levels of defence spending by governments are

difficult to predict and can fluctuate depending

onchange of government policy, other political

considerations, budgetary constraints, specific threats

to national security and macro-economic conditions

(including movements in oil prices).

From time to time, there have been constraints on

government expenditure in a number of the Group’s

principal markets.

Lower defence spending by the Group’s major

customers could have a material adverse effect

on the Group’s business, results of operations,

financial condition and prospects.

The business is geographically spread across the

US,UK and international defence markets.

The diverse product and services portfolio is

marketed across a range of defence markets.

Many of the countries in which the Group operates

have announced increases or are making plans to

increase spending to address the elevated threat

environment. Whilst governments face global

economic and fiscal pressures, the commitment to

defence in the Group’s major markets remains robust.

The Group’s principal markets – the UK, US, the

Kingdom of Saudi Arabia and Australia – have a

significant and sustained commitment to defence

and security – see ‘Our markets’ on pages 18 to 19

ofthis Annual Report.

The Group benefits from alarge order backlog, with

established positions onlong-term programmes in its

principal markets. The Group also has a portfolio of

commercial businesses, including commercial avionics.

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 US, UK and

theKingdom of Saudi Arabia, and their agencies

(whorepresented, as at 31 December 2023, 69%

ofthe Group’s revenue). 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. Furthermore,

governments from time to time review their terms

oftrade and underlying policies and seek to impose

such new terms and policies when entering into new

contracts. Most long-term US government contracts,

for example, are funded annually or incrementally

andare subject to cancellation if funding appropriations

for subsequent periods are not made.

Further, 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.

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 business, results of operations,

financial condition and prospects.

The Group has established strong and enduring

relationships in its principal markets and is recognised

as playing a key role in the industrial capability of

each of the countries in which it operates.

Government customers have sophisticated

procurement and security organisations with which

the Group has 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.

The Group’s profits and cash flows are dependent,

toasignificant extent, on the receipt and timing

oftheaward of defence contracts and the profile

ofcash receipts thereunder.

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 capital allocation priorities, potentially

resulting in the need to arrange external

funding and impacting its investment grade

credit rating. This in turn could have a material

adverse effect on the Group’s business, results

of operations, financial condition and prospects.

The Group’s balance sheet continues to be managed

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 access

to cash to meet its operational needs and maintain

adequateheadroom.

Key links to strategy

Sustain and grow our defencebusiness

Continue to grow our business inadjacentmarkets

Develop and expand our international business

Inspire and develop adiverse workforce to drive success

Enhance financial performance and deliver sustainable

growth in shareholder value

Advance and integrate our sustainability agenda

Our strategic framework Page 12

BAE Systems plc Annual Report 2023

Risk

Contract risk, execution and supply chain

The Group has many contracts, including a number of large contracts and fixed-price

contracts, and is dependent upon the delivery of services and component availability,

subcontractor performance andkeysuppliers.

Key links to strategy

Description Impact Mitigation

As a major defence, aerospace and security

company, the Group executes long-term

high-valuecontracts for the provision of complex,

strategically important products and services

foritscustomers. For example, in 2023, 51% of

theGroup’s sales were generated by its 16 largest

programmes and, as at 31 December 2023, the

Group had 12 programmes with an 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. Assumptions on

future rates of inflation on which the fixed prices

are agreed may prove to be inaccurate 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 delivers on its

projects within tight tolerances of quality, time

andcost performance in a reliable, predictable

andrepeatable manner.

The failure by the Group to anticipate technical

problems or deliver on its contractual commitments

could result in (among other things) the loss,

expiration, suspension, cancellation or termination

of any one of its large contracts, which could have

a material adverse effect on the Group’s business,

results of operations, financial condition, prospects

or reputation.

The failure to estimate accurately and control

costson fixed-price contracts could have a material

adverse effect on the Group’s business, results

ofoperations, financial condition and prospects.

All of the Group’s major programmes are managed

under the Group’s mandated Lifecycle Management

process, which includes contract-related risks.

Robust bid preparation and approvals processes

arewell established throughout the Group, with

decisions required to be taken at the appropriate

level in line with clear delegations of authority.

The Group has limited exposure to fixed-price

design and development activity which is in

generalmore risk intensive than fixed-price

production activity.

Further, the Group has a well-balanced spread

ofprogrammes and a significant defence order

backlog which provides portfolio resiliency and

forward visibility.

A significant proportion of the Group’s largest and

most complex 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.

A leadership development programme for project

directors is in place across the Group, covering

theleadership competencies required to manage

complex projects containing significant levels of

riskand uncertainty.

The Group is dependent upon the delivery

ofservices and materials by suppliers and the

assembly of components and subsystems by

subcontractors used in its products in a timely

andsatisfactory manner, on satisfactory

commercial terms and in full compliance

withapplicable terms and conditions.

This can be exacerbated where the Group is

dependent on either one or a limited number

ofsuppliers.

Some of the Group’s suppliers or subcontractors

may be impacted by the economic environment

(including inflationary pressures and material

shortages) which could impair their ability to meet

their obligations to the Group and to supply on

satisfactory commercial terms.

A failure by one or more of the Group’s suppliers

toprovide the agreed-upon materials, components

or products or perform the agreed-upon services,

on a timely basis, at the agreed price, according to

specifications (including compliance with regulatory

requirements) or at all may adversely affect the

Group’s ability to perform its obligations, result

inadditional costs or delays, require the Group

totransition work to other companies (resulting

infurther additional costs and delay) and/or

resultin penalties under, or the termination

of,customer contracts.

This impact is heightened where a supplier is a

solesupplier or one of a small number of suppliers.

Additionally, the Group could be adversely

affectedby actions, or issues experienced by,

theGroup’s suppliers which are outside its

control,such as misconduct and reputational

issuesinvolving the Group’s suppliers, which

couldsubject the Group to liability or adversely

affect its ability to compete for contracts.

Any of the foregoing could have a material

adverseeffect on the Group’s business, results

ofoperations, financial condition, prospects

andreputation.

The Group’s supply chain function establishes and

manages enduring end-to-end integrated supplier

arrangements, in partnership with the programmes

it supports.

In many cases, the Group benefits from long-term

programme positions and incumbencies with more

stable forward visibility for long-lead items allowing

the Group to better manage supplier deliverables

against programme requirements.

Supply chain management starts with the

Group’sGlobal Procurement Policy which

definesthe requirements to be implemented

byeach of its sectors for the establishment

ofprocurement controls and the management

ofsupplier-related risk.

Risk-based due diligence and audit activity is

undertaken for each supplier whom the Group

engages. Once a supplier has been approved,

andacontract has been executed, the supply

chainfunction continues to monitor that supplier.

The supply chain risk management programme

isworking toward providing an enterprise-wide

view of supplier risk, contributing to the continuity

of supply and enabling better intelligence of

sub-tier supply chain risk. Regular global supply

chain meetings are heldwith senior procurement

leaders to ensure that the latest risk data is

appropriately shared.

The Group seeks to manage inflation risk

throughits customer contracting arrangements

onmany of its major programmes, supplier cost

management activity and through its long-term

supplier agreements.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Our principal risks continued

International markets

The Group operates in international markets.

Key links to strategy

Description Impact Mitigation

The Group is an international company

conductingbusiness in a number of regions,

including the US, Australia and the Middle East.

International sales and operations are sensitive

to:social and political changes impacting the

business environment; economic downturns and

inflation; political instability, armed conflict and

civildisturbances; the imposition of capital controls;

the introduction ofburdensome taxes or tariffs;

changes to exportcontrol, tax and other

government policy and regulations in the UK, US

and all other relevantjurisdictions; and the inability

to obtain or maintain the necessary export licences

and other trade restrictions. For example, the risk

of the Group’s inability to obtain and maintain the

necessary export licences for the Group’s business

in the Kingdom of Saudi Arabia could affect the

Group’s provision of capability to the country.

Any of these factors could have a material

adverseeffect on the Group’s business, results

ofoperations, financial condition and prospects.

The Group has a balanced portfolio of businesses

across a number of markets internationally. The

Group benefits from a large order backlog, with

established positions on long-term programmes

inthe US, UK, the Kingdom of Saudi Arabia

andAustralia.

The Group’s contracts are often long-term in

nature and, consequently, it may be able to mitigate

these risks over the term of those contracts.

Whilst some of the Group’s contracts are on a

government-to-government basis, for contracts

which are not government-to-government, political

risk insurance is held where considered appropriate

with regard to the level of risk involved. However,

as with all insurance, it does not provide full cover

against all potential loss scenarios.

The Group has a well-established legal and

regulatory compliance structure aimed at ensuring

adherence to legal and regulatory requirements

and identifying restrictions that could adversely

impact the Group’s activities, including export

control requirements.

Given the international nature of its business,

theGroup is exposed to volatility arising from

movements in currency exchange rates, particularly

in respect of the US dollar, euro, Saudi riyal and

Australian dollar.

Significant fluctuations in exchange rates to

whichthe Group is exposed could cause volatility

inits financial results reported in pounds sterling

and couldhave a material adverse effect on the

Group’sbusiness, results ofoperations, financial

condition and prospects.

The Group’s policy is to hedge all material firm

transactional currency exchange rate exposures.

The international markets in which the Group

operates are highly competitive and the Group’s

business depends upon its ability to win and

contract for high-quality new programmes in

thesemarkets.

The Group is dependent upon US and UK

government support in relation to a number of

itsbusiness opportunities in export markets.

Furthermore, the Group’s competitors may also

develop new technologies or offerings, novel

support models or more efficient ways to produce

existing products that could cause the Group’s

existing products or services to become obsolete

orthat could gain market acceptance before the

Group’s own products or services.

If the Group is unable to compete adequately

and/or obtain new business in the international

markets in which it operates, there may be a

material adverse effect on its business, results

ofoperations, financial condition and prospects.

The Group has an international, multi-market

presence, a broad portfolio of products and

services, 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.

BAE Systems plc Annual Report 2023

Risk

Cyber security

The Group could be negatively impacted by threats to the security of its information

technology and operational technology systems and products.

Key links to strategy

Description Impact Mitigation

As a major defence, aerospace and security

company, it is critical that the Group’s information

technology and operational technology (IT & OT)

infrastructure, as well as the products and

servicesit sells, are cyber resilient and the

proprietary, classified, confidential or otherwise

protected information, intellectual property

andpersonal data held and processed on them

areappropriately secured.

Cyber security threats are continuous and evolving,

and vary from attacks common to most industries,

including those originating both externally and

internally, to those from more advanced and

persistent, highly organised adversaries, including

nation states. The war in Ukraine has also

increasedRussian-aligned hacktivist activity against

pro-Ukraine nations andtheir defence industries.

The cyber security threats faced by the Group

include (but are not limited to): an attack

impactingthe availability of the Group’s IT & OT

infrastructure and systems and/or those of its

customers, partners andsuppliers; unlawful

attempts to gain access to the Group’s proprietary,

classified, confidential or otherwise protected

information, intellectual property and personal

data, and that held or generated by the Group

onbehalf of its customers, partners and suppliers;

and compromise of products and services for the

purposes of sabotage or to disable or deny their

use and/or alter their performance characteristics.

The Group might also be exposed to cyber

securityrisks through an attack on the Group’s

supply chain.

Given the nature and scope of cyber attacks,

itispossible that theGroup is unable to

defend itself against all cyber-attacks, that

unknown vulnerabilities could be exploited or

that the Group may otherwise be unable to

mitigate customer losses and other potential

liabilities (including potential liabilities related

to privacy and intellectual property).

The Group could potentially be subject to:

(a)production downtimes; (b) operational

delays; (c) other detrimental impacts to its

operations or ability to provide products and

services to customers; (d) the compromise,

misappropriation, destruction or corruption

of the Group’s proprietary, classified,

confidential or otherwise protected

information, intellectual property and

personal data, and that held or generated

bythe Group on behalf of its customers,

partners and suppliers; (e) security breaches;

(f) other manipulation or improper use

oftheGroup’s or third-party systems,

networksor products; and/or (g) financial

losses from remedial actions, loss of

business, or potential liability, penalties,

finesand/or damages.

Any of these could have a material adverse

effect on the Group’s business, results of

operations, financial condition, prospects

and reputation.

The security of the Group’s products and services,

data,facilities and IT & OT infrastructure is regularly

considered by the Board and senior management and

underpins the Group’sstrategy and influences its

engineering, technology and digital strategies.

The Group’s internal Cyber Security Standards are aligned

to the National Institute of Standards and Technology

framework and a formal, three layers of defence assurance

programme, which is reviewed both internally and

externally, is operated to check adherence to these

standards and customer requirements. Additionally, where

government customers require formal accreditation of

theGroup’s IT networks, the Group ensures compliance

and accreditation. A number of the Group’s IT networks

are thus formally accredited and/or assessed as compliant

by its government customers.

Education and awareness to embed a strong cyber

security culture across the Group is another vital part

ofits preventative activities. Employees are subject to

mandatory training which, depending on role, covers

cyber security, physical security, document marking,

security of export-controlled information, and personal

data protection. As many cyber-attacks involve email,

theGroup runs a programme of phishing exercises for

allemail users across the enterprise.

To further increase cyber resilience, the Group’s Security

Operations Centres perform continual protective

monitoring of activity on core networks.

The Cyber Incident Response plan feeds into the Group’s

crisis management plan and regular exercises are

conducted across the business to test the Cyber Incident

Response plan, including up to the Executive Committee.

The Group purchases cyber insurance; however, as with

all insurance, it does not provide full cover against all

potential loss scenarios.

To mitigate the cyber security risk posed by suppliers,

theGroup includes cyber security-related obligations

inits contracts where relevant.

Cyber security risk is constantly reviewed and an agile,

proactive, approach to mitigating the risk is taken. The

Group does this by efficiently leveraging its core internal

capabilities in cyber security, including its specialist threat

intelligence service, to maintain a managed risk position

as it digitally transforms and the threat landscape evolves.

People

The Group’s strategy is dependent on its ability to recruit and retain people

withappropriate talent and skills.

Key links to strategy

Description Impact Mitigation

Competition for the people the Group needs to

deliver its strategy, including those with innovative

technological capabilities, is high.

Competition may be intensified by nationality and

regulatory restrictions (including the requirement

for security clearances for certain roles), and

exacerbated by macroeconomic, industry and

labour market conditions more generally.

The loss of key employees or inability to

attract the appropriate people on a timely

basis could adversely impact the Group’s

ability to deliver its strategy, meet its

businessplan and deliver on its contractual

commitments, which accordingly could have

a material adverse effect on the Group’s

business, results of operations, financial

condition and prospects.

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, 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 plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Our principal risks continued

Safety

Employees work with hazardous materials and in challenging locations and the Group’s products

and services, and those of its customers’ or suppliers’, inherently pose a safety risk.

Key links to strategy

Description Impact Mitigation

Given the nature of the Group’s business, employees

work in challenging locations, perform high-risk

activities and at times use hazardous materials.

Furthermore, many of the activities that the

Groupundertakes are in high-hazard industries

with inherent risk of harm, such as heavy industrial

production including shipbuilding.

The risks associated with the Group’s activities and

working environments can cause harm to its people

and those affected by its operations.

There could be significant impacts if the Group

failsto meet the necessary standards to adequately

mitigate against health and safety risks.

The Groupmay face criminal and civil prosecution

inconnection with health and safety incidents,

which could result in substantial penalties and

fines. Furthermore, the Group could be prevented

from operating, due to employees being unavailable

for work, investigations being conducted or if a

regulatory approval or certification is withdrawn,

potentially leading to contractual penalties due

toloss of productivity orinability to deliver on

contractual commitments.

Any of these factors could have a material adverse

effect on the Group’s business, results of operations,

financial condition, prospects and reputation.

Safety of the Group’s personnel, contractor

personnel and the wider communities in which

theGroup operates is a primary concern. The

Group monitors its safety performance constantly

through leading and lagging indicators and strives

to be a leader in safety performance.

Safety performance is led at an Executive

Committee level by the ESG, Culture and Business

Transformation Director and is reported to the

Board quarterly (with the Chief Executive providing

updates at each Board meeting). Accountability for

safety performance at a business level rests with

the relevant Managing Director, who is responsible

forensuring compliance with the Group’s Safety,

Health and Environmental management systems

and the Operational Framework.

At a user level, every employee receives safety

training that is both company-wide and job

role-specific. The Group follows recognised

safetyrisk assessment processes that are task

specific and seeks to ensure hazards are identified,

classified and mitigated against prior to activities

taking place.

The Group’s safety performance and practices

areassured both internally and by external

consultants to ensure compliance with both

Groupand regulatory standards.

The Group designs, develops, manufactures and

maintains highly complex and specialised products

and services. By their very nature, many of the

Group’s products and services are hazardous and

technical, mechanical and other failures may occur

from time to time, whether as a result of a

manufacturing or design defect, ineffective

maintenance, incorrect usage, poorly executed

integration with a third party’s products or services

or through some other cause. In addition, the

safety of the Group’s products could be

compromised as a result of cyber-attacks, such

asthose that seize control and result in misuse

orunintended use of the Group’s products, or

other intentional acts.

The impact of a catastrophic product, service or

system failure or similar safety incident affecting

the Group’s, its customers’ or its suppliers’

products or services could be significant and could

result in injuries or death, property damage, loss

ofstrategic capabilities, loss of intellectual property,

environmental harm, reputational damage or other

significant effects. It could also lead to a loss of

equipment, product recalls and product liability

andwarranty claims, other service, repair and

maintenance costs, significant damages and other

costs (including fines and other remedies),

regulatory and environmental liabilities and a

reduction in demand for the Group’s products

andservices.

Any of the foregoing could have a material adverse

effect on the Group’s business, results of operations,

financial condition, prospects and reputation.

The Group recognises it is vitally important to

workwith its customers, suppliers and partners

toensure its products continue to work safely,

securely and with integrity, within their intended

operational environments.

The Group ensures the safe design and

development of its products through a system

ofcontrols centred on its Operational Framework

and associated policies and procedures, including

those specifically addressing Product Safety and

Engineering standards. Assurance of adherence

tothese aspects of the Operational Framework

isprovided through regular operating business

review, reporting and assessment, with

independent assessment of the effectiveness of

controls by in-house subject matter experts, Group

Internal Audit and external domain regulators.

In addition to the above, the Group continues

toevolve and improve product safety best practice

driven by new technologies and ways of working;

liaise across industry and its government customers

to develop new safety-related standards;and learn

from safety-related failuresin adjacent industries.

BAE Systems plc Annual Report 2023

Risk

Acquisitions

The anticipated benefits of acquisitions may not be achieved.

Key links to strategy

Description Impact Mitigation

The Group considers investment in value-enhancing

acquisitions where market conditions are right and

where they deliver on its strategy.

There are a number of risks and uncertainties

which may arise in these transactions, including

(but not limited to): (a) the risks involved in

enteringnew markets; (b) diversion of management

attention and Group resources to integration

efforts; (c) unidentified issues not discovered in

duediligence; (d) the performance of underlying

products, capabilities ortechnologies; and

(e)failure of the acquired businesses to perform

inline with expectations.

Any of these factors could have a material

adverseeffect on the Group’s business, results

ofoperations, financial condition and prospects.

Inparticular, the potential for an impairment

ofgoodwill and other assets could arise.

Whether the Group realises the anticipated

benefitsfrom these transactions depends upon

thesuccessful integration of the acquired businesses

as well as their post-acquisition performance in the

markets in which they operate.

The Group has established policies and procedures

to conduct due diligence, manage the acquisition

process, monitor the integration and performance

of acquired businesses, and identify potential

impairments.

Climate change and the environment

The Group may be impacted by environmental factors, including those relating

toclimatechange.

Key links to strategy

Description Impact Mitigation

The Group is subject to comprehensive

environmental laws, regulations and permitting

requirements in each of the countries in which it

operates, including those relating to the impacts

ofclimate change. Such laws and regulations

impose standards with respect to air emissions,

wastewater discharges, the use, handling and

storage of hazardous materials and waste,

remediation of soil and groundwater contamination

and the prevention of pollution. Increasingly,

environmental legislation is seeking to encourage

areduction in GHG emissions. These laws,

regulations and/or permitting requirements may

beinterpreted in different ways, conflict and/or

change from time to time (as may any related

interpretations and guidance).

The Group may also be impacted by environmental

factors, including physical risks arising from

climatechange, such as extreme weather events,

for example flooding and storms, and scarcity of

water and other resources.

In addition, the Group may be impacted by climate

change transition risks resulting from the process

ofadjusting to a low carbon economy. Associated

with this are potential risks around (a) the Group’s

ability to attract and retain future talent; (b) the

technology evolution and innovation required

torespond to future customer lower-emissions

requirements; (c) energy-related taxes; and

(d)theincreased costs of compliance with

energy-related schemes.

Environmental factors, including those relating

toclimate change, have the potential to materially

impact the Group’s business and operations.

Increasing changes in environmental laws and

regulations can expose the Group to increasing

unplanned capital and operating costs associated

with compliance, remediation and protection

oftheenvironment. Breaches of these laws and

regulations can result in substantial costs, including

fines, penalties or other sanctions, investigations

and clean-up costs, and third-party claims for

property damage or personal injury as well as

thetermination of permits.

Extreme weather events can impact the Group’s

operational sites as well as those of its suppliers.

The shift to a low carbon economy has the

potential to increase the cost of business as the

Group transitions to lower-emissions technologies

and deals with the disposal of its legacy assets.

The Group has set itself the target of achieving net

zero GHG emissions across its operations (Scope 1

and 2) by 2030 and working towards a net zero

value chain by 2050 and has developed a plan to

deliver this goal which includes exploring green

energy options and surveying its buildings to

determine how to make them more energy efficient.

During 2023, the Group further developed its

understanding of climate-related risks and

opportunities so that the Group could understand

potential unmitigated risks and its business

readiness to mitigate any such risks.

The Group uses analytical tools to apply natural

catastrophe classifications to its sites worldwide.

Thishas informed its strategy as to where to

targetaprogramme of specific flood, windstorm

and earthquake assessments of the Group’s

sitesand implement the subsequent risk

reductionrecommendations.

The Group maintains property insurance cover which

includes property damage and business interruption;

however, as with all insurance, it does not provide

full cover against all potential loss scenarios.

The Group continues to progress a programme of

work to understand the GHG emissions profile of

its material products. This work will help the Group

understand how to further progress efficiency of the

Group’s products; to research and develop alternate

solutions; and to identify how the Group can

support future customer decisions and investment

in product upgrades and new product development,

having due regard for environmental considerations.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Our principal risks continued

Laws and regulations

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

Key links to strategy

Description Impact Mitigation

The Group operates in a highly regulated

environment, across many jurisdictions and

istherefore subject to a variety of legal,

regulatory and litigation risks.

These risks relate to (among other things)

trade controls, intellectual property rights,

data protection and security, contract-related

claims, government contracts (including

auditsand reviews of those contracts), taxes,

environmental matters, sanctions, product

safety and reliability, health and safety,

employment matters, competition laws and

laws governing improper business practices

(such as money laundering, false accounting,

anti-bribery and corruption, and anti-boycott

laws). These laws and regulations may be

interpreted in different ways, conflict and/or

change from time to time (as may any related

interpretations and guidance).

For example, 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.

Changes in laws and regulations (or the

interpretation thereof) could result in higher

compliance costs and impact customer or

supplier contracts. Uncertainty relating to laws

and regulations may also affect how the Group

conducts its business and could limit its ability

to enforce its rights.

A breach of applicable legislation and/or

regulations by the Group, its employees, sales

representatives, marketing advisers or others

working on its behalf could result in significant

fines, penalties or other damages and/or the

suspension or debarment of the Group from

government contracts or the suspension of

theGroup’s export privileges.

If customers or other third parties were harmed

by the conduct of members of the Group, this

may also give rise to legal proceedings,

including class actions. Other legal disputes

mayalso arise between members of the Group

and third parties relating to matters such as

breaches or enforcement of legal rights or

obligations arising under contracts, statutes

orcommon law. Adverse findings in any such

matters may result in members of the Group

being liable to third parties or may result in

rights not being enforced or not being enforced

in the manner intended or desired.

Any of the foregoing could have a material

adverse effect on the Group’s business, results

of operations, financial condition, prospects

and reputation.

The Group has a well-established legal and regulatory

compliance structure aimed at ensuring adherence to

regulatory requirements and identifying 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

andan export control policy mandates compliance with

allapplicable trade controls requirements.

It is important that the Group maintains a culture in which

itfocuses on 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.

Accordingly, it continues to reinforce its ethics programme

globally, supporting employees in making ethical decisions

and embedding responsible business practices.

The Group’s internal legal team and, where appropriate,

external counsel manage litigation and advise on the

management of associated impacts.

BAE Systems plc Annual Report 2023

Risk

Outbreak of contagious diseases

The outbreak of contagious diseases may have an adverse effect on the Company’s

business, financial condition and results of operations.

Key links to strategy

Description Impact Mitigation

An outbreak of a contagious disease could

occur which could introduce constraints on

both the Company’s operations and those

ofits supply chain.

Contagious diseases, and the measures taken to

control them, can have a material adverse effect

on the Group’s business, results of operations,

financial condition and prospects.

Areas of the Group’s business that could be

impacted include a decrease in spending by the

Group’s customers; an increase in taxation by

governments; the failure to obtain awards for

contracts; the inability of the Group to execute

its contractual obligations on time and within

planned budgets; the inability to adequately

staff and manage the business; and a lack of

availability of funding.

The Group’s experience in dealing with the COVID-19

pandemic between 2020 and 2022 will assist it in dealing

with any further outbreaks of contagious diseases. This

includes the use of safe working practices, the effective

useof home working and working collaboratively with

government customers to maintain critical defence and

security programmes.

Pension funding

An aggregate funding deficit could arise in the Group’s defined benefit pension schemes.

Key links to strategy

Description Impact Mitigation

The assets held by the Group’s defined

benefit pension schemes (which, as at

31 December 2023, were £24.0bn) could

prove to be insufficient to meet the

anticipated liabilities of the schemes, resulting

in a funding deficit.

Such a funding deficit could be caused by

anumber of factors including insufficient

investment returns and greater than

expectedmember longevity.

If a funding deficit were to arise in any of the

schemes, the Group may be required to make

deficit repair contributions to those schemes,

thereby reducing cash available to meet the

Group’s other capital allocation priorities.

Thiscould have a material adverse effect on

theGroup’s business, results of operations,

financial condition and prospects.

The funding positions of the schemes are monitored on a

regular basis and the latest triennial actuarial valuations of

the Group’s UK defined benefit pension schemes showed

asat their respective dates that there is no funding deficit in

any of those schemes on a technical provisions basis. That

position is estimated to have been maintained since then.

Each defined benefit scheme pursues an investment strategy

designed to provide a high probability that the scheme will

be able to satisfy its liabilities as they fall due, even under a

range of plausible downside scenarios.

To further reduce the risk of deficits arising in the future,

theschemes’ trustees, in conjunction with the Group, have

continued to take action to hedge major risk factors such

asinflation and interest rate risk, and longevity risk.

All of the Group’s UK defined benefit schemes have

beenclosed to new employees since 2012 and, in the

US,employees have not accrued salary-related benefits

indefined benefit schemes since 2013.

The ranking and evaluation of risks as at the date of this Strategic Report should not be relied upon as a guide to their future ranking and evaluation.

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.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

As required by the provisions of the UK Corporate Governance Code 2018,

theBoard has undertaken an assessment of the future prospects of the Group,

taking into account the Group’s current position and principal risks.

Viability statement

The viability assessment period

The directors have assessed the viability of

the Group over a five-year period. This is

considered the most appropriate period for

the assessment as it is consistent with the

Group’s five-year business planning cycle.

Analysis of business prospects

The Board has considered the long-term

prospects of the Group based on its strategy,

markets and business plan as outlined in this

report. Initsstrategic review of the Group,

the Board recognised the importance of

certain factors that underpin its long-term

prospects and viability. In summary, these are:

• a diverse portfolio of businesses based

onwell-established market positions,

providing both complex, high-technology

products and programmes, and

differentiated technical services and

support. In 2023, 40% of Group sales

wereproduct/programme related and

39%services and support;

• a geographically diverse business with a

high proportion of sales to governments

and other major prime defence contractors.

In 2023, 33% of revenues were to the

USDepartment of Defense, 25% to

theUKMinistry of Defence and 11%

totheKingdom of Saudi Arabia Ministry

ofDefence and Aviation. The Group’s

robust order backlog continues to provide

astrong foundation for further market

diversity and growth;

• long-term visibility of sales and future

saleprospects through a substantial order

backlog and incumbent positions on major

defence programmes; and

• market positions underpinned by a

highly-skilled workforce, intellectual

property assets and proprietary know-how,

which are safeguarded and developed for

the future by customer- and Group-funded

investment. Such investment is focused on

a well-developed understanding of future

technologies and the threat environment

shaping the long-term defence and

aerospace market.

This assessment considered both

the Group’s long-term prospects

and also its ability to continue in

operation and meet its liabilities

asthey fall due over its five-year

business planning period.

Assessment

The Board’s assessment of the Group’s

prospects was informed by the following

business processes:

Risk management process – the Group

hasdeveloped a structured approach to

themanagement of risk (see above) and

principal and emerging risks identified are

considered as part of the Board’s annual

review of the Integrated Business Plan.

The Board recognises that the principal

risksidentified on pages 70 to 77 could

impact the future viability of the Group,

andhas undertaken more detailed scenario

analysis in relation to specific risks that

areconsidered most likely to have a more

immediate and severe financial impact

ontheGroup.

The viability assessment has taken into

account reasonably plausible, but severe,

downside scenarios related to these risks

andassessed the impact on the future cash

flows, profitability, financial covenants,

solvency and liquidity of the Group.

Integrated Business Plan (IBP) – the IBP

represents a common process with standard

outputs and requirements that produces

anintegrated strategic and business plan

forthe Group and also for each of its

businesses over the following five years.

Theuse of a five-year period provides

arobust planning tool against which

long-term decisions can be made concerning,

among other things; strategic priorities,

addressing the Group’s stated net zero target

and climate-related risks and opportunities,

funding requirements (including commitments

to Group pension schemes), returns made

toshareholders, capex and resource planning.

Longer-term strategic inputs also form part of

the IBP process and,where activity is required

to meet suchlong-term priorities, this is

provided forin the plan.

The detailed plan is reviewed each year

bytheBoard as part of its strategy review

process. Once approved by the Board, the

IBPprovides the basis for setting all detailed

financial budgets and strategic actions across

the businesses, and is subsequently used

bythe Board to monitor performance.

Liquidity and solvency analysis – the

Group’s liquidity is underpinned by an

undrawn committed Revolving Credit Facility

(RCF) of £2bn. During the year, the Group

entered into a new five-year RCF, with

twoone-year extension options, taking the

expected maturity of the facility to 2030.

BAE Systems plc Annual Report 2023

Risk

Strategic report

The Strategic report was approved by the Board of directors on 20 February 2024.

David Parkes

Company Secretary

This facility is available to meet general

corporate funding requirements. The Board

regularly reviews an analysis based on the

financial output from the IBP, looking at the

forecast working capital requirements, cash

flow, and committed borrowing (see note 21

on page 189) and other funding facilities

available to the Group overthe five-year

period covered by the IBP. This analysis

includes ‘stress testing’ of the Group’s

liquidity and solvency under severe, but

plausible, scenarios as developed from the

IBP, including the following:

• the Group being unable to access debt

markets to renew term debt facilities;

• an unfavourable change to the terms

oftrade the Group enjoys with certain

principal customers;

• the inability of the Group to estimate

accurately and control costs on significant

fixed price contracts; and

• the loss of significant export awards

assumed in the IBP.

The scenarios tested included the impact of

multiple adverse factors and any mitigating

factors.

In August 2023, the Group announced that it

had entered into a stock purchase agreement

to acquire the Ball Aerospace business from

Ball Corporation for $5.5bn. The acquisition

completed in February 2024 and wasfunded

through a combination of new external

debt,in the form of a bridge loanfacility

(the‘facility’), and existing cashresources.

Following completion of the acquisition,

theGroup intends to refinance the facility.

As at 31 December 2023, thefacility was

undrawn. The Board has considered the

utilisation of the facility and the anticipated

refinancing ofthe facility, taking into account

the Group’s investment grade credit ratings,

strong balance sheet and track record of

raising external debt to fund M&A activity,

and the cash outlay associated with the

acquisition when making this viability

statement.

Conclusion

In undertaking its review of the IBP in

2023,the Board considered the prospects

ofthe Group over the five-year period

covered by the process. On the basis of this

and other matters considered and reviewed

by the Board, the Board has reasonable

expectations that the Group will be able to

continue in operation and meet its liabilities

as they fall due over the following five years.

It is recognised that such future assessments

are subject to a level of uncertainty that

increases with time and, therefore, future

outcomes cannot be guaranteed or

predictedwith certainty. Also, this assessment

was made recognising the principal risks

thatcould have an impact on the future

performance of the Group (see pages 70

to77).

Going concern statement

Accounting standards require that directors

satisfy themselves that it is reasonable for

them to conclude whether it is appropriate

to prepare financial statements on a going

concern basis and the Code requires that, if

appropriate, this report includes a statement

to that effect. Following review, the directors

have concluded that it is appropriate to

adopt the going concern basis for these

financial statements and have not identified

any material uncertainties concerning the

Group’s ability to do so in the 12-month

period from the date of approving them.

For this reason, they continue to adopt

the going concern basis in preparing

the accounts.

BAE Systems plc Annual Report 2023

Strategic report Financial statements Additional informationGovernance

Chair’s governance letter

Contents

Chair’s governance letter 80

Board of directors 81

Board and Executive Management

diversityinformation 84

Governance framework 86

Applying the 2018 UK Corporate

GovernanceCode Principles 88

Compliance with the 2018 UK Corporate

Governance Code provisions 90

The work of the Board (s.172) 91

Nominations Committeereport 94

Audit Committee report 97

Environmental, Social and

GovernanceCommitteereport 102

Innovation and Technology

Committeereport 105

Remuneration Committeereport 107

Dear Shareholders

This section focuses on the Company’s

governance structures, the work of the Board

and its committees and how we comply with

the UK’s Corporate Governance Code 2018

(the Code), and other regulatory

requirements.

A change of Chair allows for a proper review

of the governance structures and processes

already in place. As you would expect, our

existing governance practices are robust, with

clear standards of behaviour laid out in our

Code of Conduct, and a strong operational

framework for managing the business from

Board level down.

Our committee responsibilities are clear and

well managed by individual committee chairs,

and we are in the process of updating and

refreshing terms of reference and standing

agendas for all committees. Some of these

changes are in anticipation of changes in UK

governance standards; for example, weare

updating and refreshing our approach to risk

management and assurance. You can read

about this in more detail in the report onthe

activities of the Audit Committee on page 97.

Such changes are an essential part of

maintaining a robust governance framework

on an ongoing basis.

Our governance structures also respect and

uphold the special arrangements in place to

protect the national security interests of our

government customers. These arrangements

are essential to our success as an international

company and, at the same time, a valued and

trusted partner in the security interests of our

customers. We have a significant presence in

the US, where the Department of Defense is

our largest customer. There is more detail on

arrangements for managing our US business

on page 87.

I am keen to ensure that all non-executive

directors have opportunities to visit our

operations and engage directly with

employees and local leadership teams. This

gives directors deeper insight into employee

views and our culture. In 2023, the Board

visited our Naval Ships’ facilities in Glasgow,

and also some of our Air operations in

Warton, Lancashire where we are working

onthe GCAP future fighter programme.

Along with its broader responsibilities,

ourEnvironmental, Social and Governance

Committee has been focused on employee

issues and you can read more about its

activities on page 102. The Innovation

andTechnology Committee has had its

ownprogramme of visits and you can

readmoreabout its activities on page 105.

The diversity of background, skills and

experience of our Board is key to its strong

performance, and there is more detail on

ourplanning for director succession in the

Nominations Committee report on page 94.

Effective board performance is a key part

ofgovernance, and with a change in Board

leadership, we have taken the opportunity

tohave an external evaluation of board

performance, led by No.4. Further details

onthe evaluation process, its outcomes

andactions we will be taking as a result

areoutlined in more detail on page 95.

Overall the Board is keen to ensure that our

future growth is built on a firm foundation

ofrobust and effective governance and

adisciplined approach to decision making

andprogramme management.

Cressida Hogg CBE

Chair

BAE Systems plc Annual Report 2023

Directors’ report

Committee Chair

Audit Committee

Environmental, Social and

GovernanceCommittee

Innovation and Technology Committee

Nominations Committee

Remuneration Committee

Board of directors

Dr Charles Woodburn CBE

Chief Executive

Tom Arseneault

President and Chief

Executive Officer of

BAESystems, Inc.

Brad Greve

Chief Financial Officer

Cressida Hogg CBE

Chair

Appointed to the Board: 2016

Nationality: UK

Skills, competence and experience

Charles joined BAE Systems in May 2016

asChief Operating Officer and became

ChiefExecutive on 1July 2017.

He is an experienced business leader with

over 27 years’ experience in the defence

andaerospace, and oil and gas industries.

Prior to joining the Company in 2016, he

wasChief Executive Officer of Expro Group,

before which he spent 15 years with

Schlumberger Limited holding a number

ofsenior management positions in Asia,

Australia, Europe and the US. Charles is

atrustee and Chair of the charity Movement

to Work. He is a Fellow of the Royal

Academyof Engineering.

Charles was awarded a CBE in 2023 for

services to international trade and skills.

Appointed to the Board: 2020

Nationality: US

Skills, competence and experience

Brad joined BAE Systems in 2019 as Group

Finance Director Designate and joined the

Board on 1 April 2020.

He is a highly experienced executive with

deep financial and operational management

experience, gained during a career in excess

of 30 years in international engineering and

technology businesses. Prior to joining the

Company, he held a number of senior

executive roles in Schlumberger, undertaking

roles in Europe, Africa, South America and

the US.

Appointed to the Board: 2020

Nationality: US

Skills, competence and experience

Tom was appointed to the Board on

1 April2020, and serves as President and

Chief Executive Officer of BAE Systems, Inc.

Throughout his career, Tom has led complex

organisations responsible for fulfilling critical

and technologically challenging missions.

Before becoming President and Chief

Executive Officer of BAE Systems, Inc.,

heheld various senior roleswithin

BAESystems, Inc.

Prior to his senior leadership appointments,

Tommanaged various organisations and

programmes for Sanders, a Lockheed

Martincompany, until it was acquired

byBAESystems in2000. Earlier in his

career,heheld a variety ofengineering

andprogramme management positions

withGeneral Electric and TASC.

Tom is a member of the Executive committee

oftheAerospace Industries Association.

Appointed to the Board: 2022

Nationality: UK

Skills, competence and experience

Cressida was appointed Chair of BAE Systems

plc in May 2023, having joined the Board as

anon-executive director and Chair designate

in November 2022. Cressida is also a

non-executive director of London Stock

Exchange Group plc, where she is the

SeniorIndependent Director. She has

previously enjoyed a long executive career,

spent largely with 3i Group, during which

shedeveloped adeep understanding of

large,long-term infrastructure projects and

businesses, gaining international experience

whilst working in various countries including

the US, Canada, India, Australia and

theMiddle East.

Cressida was awarded a CBE in 2014

forservices to infrastructure investment

andpolicy.

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

E I N

A I N R A

E N

I N R

A N

E N

Board of directors continued

Nick Anderson

Non-executive director

Crystal E Ashby

Non-executive director

Dame Elizabeth Corley CBE

Non-executive director

Dr Jane Griffiths

Non-executive director

Dr Ewan Kirk

Non-executive director

Angus Cockburn

Non-executive director

Appointed to the Board: 2016 Nationality: UK

Skills, competence and experience

Dame Elizabeth brings a wealth of investor, governance

and boardroom experience to the Board. She is the

Chair of Schroders plc and a former non-executive

director of Pearson plc and Morgan Stanley Inc. She

chairs the board of the Impact Investment Institute,

having previously chaired the industry Taskforce on

Social Impact Investing for the UK government. She

served as Chief Executive Officer of Allianz Global

Investors, initially for Europe then globally, from 2005

to 2016. Prior to that, she worked for Merrill Lynch

Investment Managers.

Elizabeth is active in representing the investment

industry and developing standards within it. She is

amember of the CFA Future of Finance Advisory

Council, the AQR Institute of Asset Management

attheLondon Business School, the Committee of

200and the 300 Club.

Elizabeth is also an acclaimed writer, a Fellow of

theRoyal Society for the encouragement of Arts,

Manufactures and Commerce and a trustee of

theBritish Museum.

Appointed to the Board: 2020 Nationality: UK

Skills, competence and experience

As the former Group Chief Executive of a FTSE 100

industrial engineering company, Nick has a strong

record of leading and growing global businesses.

Hisknowledge and experience, particularly in

leadinginternational engineering and manufacturing

operations, are a particular asset to the Board.

During his tenure as Group Chief Executive

ofSpirax-Sarco Engineering plc, a position he

heldforten years, Nickoversaw the successful

globalgrowth of Spirax-Sarco Engineering. Prior

tohisroles at the company, he was Vice-President

ofJohn Crane Asia Pacific and Presidentof John

CraneLatin America.

Appointed to the Board: 2021 Nationality: US

Skills, competence and experience

Crystal has held various senior leadership roles

withinthe energy and healthcare sectors and

hasconsiderable expertise in government affairs,

legalandregulatory matters. She is currently the

ExecutiveVice President, Chief People Officer,

DEIandCommunications Officer ofthe US health

insurance company, Independence Blue Cross.

In her executive career, Crystal held various senior

leadership roles during a long career with BP America

Inc., culminating with her appointment as Executive

Vice President of Government and Public Affairs and

Strategic University Partnerships and membership of

itsAmericas Leadership Team. She is an Independent

Director on the Board of Texas Reliability Entity, Inc.

and serves on the Engineering Dean’s Leadership

Advisory Board at the University of Michigan. She is

aNational Association of Corporate Directors Fellow

and a member of the International Women’s Forum

and American Bar Association.

Appointed to the Board: 2020 Nationality: UK

Skills, competence and experience

Jane has experience in leading high technology

businesses and international corporate leadership.

Sheis Chair of Redx Pharma Plc, an AIM listed

company, Chair of Theramex and a non-executive

director of Johnson Matthey. Jane is a director of

theSpanish healthcare company, Esteve. In her

executive career with Johnson & Johnson, she held

various executive positions and led its Corporate

Citizen Trust in EMEA and sponsored its Women’s

Leadership Initiative.

Jane previously had been Company Group Chair

ofJanssen EMEA, Johnson & Johnson’s research-

basedpharmaceutical arm, where she was sponsor

ofJanssen’s Global Pharmaceuticals Sustainability

Council. She is a former Chair of the European

Federation of Pharmaceutical Industries and

Associations, past Chair of the PhRMA Europe

Committee and former member of the Corporate

Advisory Board of the UK government-backed

‘YourLife’ campaign, aimed at encouraging more

people to study STEM subjects.

Appointed to the Board: 2021 Nationality: UK

Skills, competence and experience

Ewan has extensive experience in commercialising

datascience and quantitative analysis. He has led

multiple ventures to identify, apply and leverage

technology and mathematics research in both

businessand philanthropy. In 2006, he founded

Cantab Capital Partners, a science-driven investment

management firm, which was acquired by GAM

Investments in 2016 and is one of the top-performing

quantitative investment companies in the UK. Prior

tofounding Cantab, Ewan was Partner and Head of

Quantitative Strategies Group at Goldman Sachs.

He is Chair of the Isaac Newton Institute for

Mathematical Sciences, Chairman of DeepTech Labs,

aUK-based venture capital fund that invests in deep

technology businesses, and Co-Chair of the Turner Kirk

Trust. In 2023, Ewan became the first Royal Society

Entrepreneur in Residence at the Cambridge University

at the Centre for Mathematical Sciences. He holds

aPhD in General Relativity from the University of

Southampton, a MASt in Mathematics from Queen’s

College, Cambridge, andaBSc in Natural Philosophy

and Astronomy fromthe University of Glasgow.

Appointed to the Board: 2023 Nationality: UK

Skills, competence and experience

Angus joined the Board on 6 November 2023.

He was formerly the Group Chief Financial Officer

ofSerco Group plc and, before that, Chief Financial

Officer of Aggreko plc. Angus is Chair of James Fisher

& Sons plc and the Senior Independent Director of

Ashtead Group plc. He is also the Senior Non-Executive

Director of the charitable trust-owned Edrington

Group. He is currently a non-executive director of

STSGlobal Income & Growth Trust but will be stepping

down from that role later this year. He is a former

non-executive director of GKN plc and Howdens

Joinery Group PLC. Angus holds an MBA from the IMD

Business School in Switzerland, and is also an Honorary

Professor at the University of Edinburgh and a member

of the Institute of Chartered Accountants of Scotland.

BAE Systems plc Annual Report 2023

Directors’ report

E N

A E N I N R

Mark Sedwill

Baron Sedwill of Sherborne

GCMG, FRGS

Non-executive director

Appointed to the Board: 2022 Nationality: UK

Skills, competence and experience

During a long career serving the UK government,

LordSedwill held a wide range of national security

anddiplomatic roles in the UK and overseas. In his final

decade in public service, he was British Ambassador

and NATO Representative inAfghanistan, Foreign

Office Political Director andHome Office Permanent

Secretary, culminating in his appointments as National

Security Adviser (2017 to 2020) and Cabinet Secretary

(2018 to 2020). Earlier in his career, he held diplomatic

and security posts, serving in Egypt, Syria, Jordan,

Cyprus and Pakistan.

He is a senior adviser and Supervisory Board member

of Rothschild & Co, and the Senior Independent

Director and Senior Deputy Chair of Lloyd’s of London.

He is also the Chairman of the Atlantic Future Forum

and a member of the UK Parliament’s House of Lords.

Lord Sedwill is a Fellow of the Royal Geographical

Society and of the Institute of Directors. He is

Presidentof the Special Forces Club and a member

ofthe IISS Advisory Council, a trustee of the RNLI,

anHonorary Colonel in the Royal Marines and an

Honorary Bencherof Middle Temple.

Stephen Pearce

Non-executive director

Nicole Piasecki

Non-executive director

and Senior Independent

Director

Appointed to the Board: 2019 Nationality: AU

Skills, competence and experience

Stephen has more than 20 years’ experience as a

director of public companies and over 30 years of

financial and commercial experience in the mining,

oiland gas, and utilities industries. He has held a

rangeof leadership roles including, until recently,

Finance Director of Anglo American plc, a position

heheld for over sixyears.

He previously served as CFO and as an executive

director of Fortescue Metals Group Limited from

2010to 2016. He is a Fellow of the Institute of

Chartered Accountants, a Fellow of the Governance

Institute of Australia and a Member of the Australian

Institute of Company Directors.

Appointed to the Board: 2019 Nationality: US

Skills, competence and experience

Nicole was appointed Senior Independent Director

on1 January 2024. She has extensive experience

gained from executive positions within the aerospace

industry and leadership of multi-functional teams.

Shepreviously held a number of engineering, sales,

marketing and business strategy roles during her

25-year career with the Boeing Company, including

Vice President and General Manager of the Propulsion

Systems Division and Vice President of Business

Development & Strategic Integration for Boeing’s

commercial aircraft business, and President of

BoeingJapan.

She is a non-executive director of Weyerhaeuser

Company and BWX Technologies, Inc. She also serves

on theboards of Kymeta Corporation and Alitheon

Inc. She is a senior advisor to Mitsubishi Heavy

Industries, Ltd and a director of the US think tank,

TheStimson Center. Nicole formerly served on the

Federal Aviation Authority’s Management Advisory

Board, the American Chamberof Commerce in Japan,

the US Department of Transportation’s Future of

Aviation Advisory Committee and the Federal Reserve

Bank of San Francisco’s Seattle branch. She is a former

director ofHowmet Aerospace Inc.

Membership and attendance for the year ended 31 December 2023

Board

meetings

Committee

membership

Audit

Committee

Environmental,

Socialand

Governance

Committee

Innovation

and

Technology

Committee

Nominations

Committee

Remuneration

Committee

Cressida Hogg

8/8

– – – 6/6 –

Nick Anderson 8/8

– 4/4 3/3 6/6 –

Crystal E Ashby 8/8

– 2/4

– 6/6 –

Angus Cockburn

2/2

2/2 – – – –

Dame Elizabeth Corley 8/8

5/5 – 3/3 6/6 5/5

Jane Griffiths 8/8

– 4/4 – 6/6 –

Chris Grigg

8/8

5/5 – – 6/6 5/5

Ewan Kirk

8/8

– – 3/3 5/6

1/2

Stephen Pearce 8/8

5/5 – – 6/6 –

Nicole Piasecki

8/8

– 4/4 3/3 6/6 5/5

Lord Sedwill 8/8

– 4/4 – – –

Charles Woodburn

Chief Executive

7/8

– – – – –

Brad Greve

Chief Financial Officer

8/8 – – – – –

Tom Arseneault

President and Chief

Executive Officer of

BAESystems, Inc.

8/8 – – – – –

1. Appointed Chair on 4 May 2023.

2. Joined the Board on 6 November 2023 and appointed to the Audit Committee on 7 November 2023.

3. Retired as non-executive director and Senior Independent Director on 31 December 2023.

4. Appointed to the Remuneration Committee on1 March2023.

5. Appointed as Senior Independent Director on 1 January 2024.

6. Could not attend due to customer meeting.

7. Attendance impacted by personal matters.

Committee Chair

Audit Committee

Environmental, Social and

GovernanceCommittee

Innovation and Technology Committee

Nominations Committee

Remuneration Committee

The average length of appointment

ofnon-executive members of the Board

(asat 31 December 2023) was three

yearsand nine months.

The average length of appointment of

executive members of the Board (as at

31 December 2023) was four years.

As a result of Chris Grigg’s retirement

on31 December 2023,the following

committee reports and associated

membership, board diversity and skills

datarefer to the board composition from

1 January 2024 unless otherwise stated.

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Board and Executive Management diversity information

Gender

B A

A Male 8

B Female 5

Nationality

A UK 8

B US 4

C Australia 1

Ethnicity

A White British or other 12

White (including minority

White groups)

B Black/African/Caribbean/ 1

Black British

Tenure

(independent non-executive directors)

A Up to three years 4

B Over three and up to six years 4

C Over six years 1

Skills and experience

Risk management

Long-term contracting

Legal and regulatory

International business/commercial

Human capital management

Executive

Non-executive

Financial/accounting

Environmental and social

Engineering, science and technology

Company leadership

Board experience

310

Sex and gender identity

Number of

Boardmembers

Percentage

oftheBoard

Number of senior

positions on the

Board(CEO, CFO,

SIDand Chair)

Number in

executive

management

Percentage

of executive

management

Men 9 64% 3 11 73%

Women 5 36% 1 4 27%

Other categories – – – – –

Not specified/

prefernottosay – – – – –

Ethnic background

Number of

Boardmembers

Percentage

oftheBoard

Number of senior

positions on the

Board(CEO, CFO,

SIDand Chair)

Number in

executive

management

Percentage

of executive

management

White British or

otherWhite (including

minority-white groups) 13 93% 4 14 93%

Mixed/Multiple

Ethnicgroups – – – 1 7%

Asian/Asian British – – – – –

Black/African/

Caribbean/Black British 1 7% – – –

Other ethnic group,

including Arab – – – – –

Board and Executive Management

diversity asat31December 2023

In accordance with Listing Rule 9.8.6(9)

oftheFinancial Conduct Authority’s (FCA) Listing

Rules, these tables set outdetails of the diversity

of the individuals onthe Board and Executive

Management as at 31 December 2023.

On that date, there were 14 Executive Committee

members (including the Chief Executive, President

and Chief Executive Officer of BAE Systems, Inc.

andthe Chief Financial Officer, who are

alsoexecutive directors) and14directors of

theBoard. The Company Secretary is included

inthe calculation of executive management.

The data was obtained on a voluntary self-

reported basis. Participants were invited to

complete a survey through a secure electronic

portal, wherein they were asked to confirm their

sex andgender identity, and ethnic background.

Thedescriptive categories of sex, gender and

ethnic background set out in the survey, were

taken verbatim from Listing Rule 9.8.6(9), and

therefore correspond precisely with the tables.

On 1 January 2024, following the retirement of

Chris Grigg on 31 December 2023, the number

ofmen on the Board reduced to eight. As a

result, the number of percentage of women on

the Board increased to 38%. Changes were made

to the executive management with effect from

1 January 2024 that reduced membership to

13and increased the percentage of women in

executive management to 36%. See Nominations

Committee report on page 94 for further

information and disclosure on diversity.

1. Reflective of the Board from 1 January 2024.

Board information

BAE Systems plc Annual Report 2023

Directors’ report

Board Diversity & Inclusion Policy

This policy sets out the approach to diversity and inclusion in respect of the Board of Directors of BAE Systems plc.

Diversity and inclusion

We are committed to maintaining a diverse

and inclusive Board. As a company, we value

diversity and are committed to creating a

diverse and inclusive working environment

forour employees, in which colleagues from

any background can fulfil their potential.

Thisis reflected in our clear purpose, values

and the behaviours that guide our culture.

The Board understands that diversity is a

keyattribute to its effectiveness. We aim

tomaintain a diverse Board, including an

appropriate balance of nationalities, gender,

ethnicity, skills, knowledge, experience and

personal strengths.

Work of the Committee

The Nominations Committee, on behalf

oftheBoard, undertakes a formal, rigorous

and transparent approach to succession

planning for director appointments. The

Committee oversees the development and

implementation of succession plans for

directors and senior managers.

Appointments and succession plans are based

on merit and objective criteria, reflecting the

skills, knowledge and experience needed to

ensure we have a well-rounded, diverse and

effective Board. In the case of Non-Executive

Directors, other relevant matters are also

taken into account, such as independence

andthe ability to fulfil time commitments.

Due to the nature of its activities, the

UKgovernment holds a Special Share in

theCompany, ensuring that the Company

cannot be non-British controlled. The Special

Share also includes provisions requiring that

amajority of the directors on the Board

areBritish nationals and the roles of Chair

andChief Executive are also subject to

UKnationality restrictions.

The Committee shall aim to comply

withthefollowing targets in respect

ofBoardmembership:

• At least 40% of Board members shall

bewomen (including those identifying

aswomen).

• At least one of the four senior Board

positions (Chair, Chief Executive, Senior

Independent Director, Chief Financial

Officer) shall be a woman (or identifying

asa woman).

• At least one member of the Board shall

befrom an ethnic minority background

(asreferenced in categories recommended

by the UK’s Office for National Statistics).

In line with UK regulatory requirements,

theCommittee shall report in the Company’s

annual report on compliance with the

abovetargets.

The Board and Committee will maintain

oversight of the range of activities the

Company is pursuing aimed at increasing

thediversity of our workforce, including

theexecutive pipeline that is essential for

Executive Directors’ succession planning.

Inaddition, when the Committee engages

search consultants, we will use their services

to help identify a diverse range of potential

non-executive Director candidates and,

wherenecessary, to help with Executive

Directors’ succession requirements.

Reporting

The Committee will ensure that there is

continued appropriate and meaningful

disclosure in the Company’s annual report

against the matters set out in this policy.

Board diversity

Last year, the Committee amended its

Diversity and Inclusion Policy (see above)

toadopt a target of increasing the level of

women on the Board to 40%, and also for

atleast one of the Chair, Senior Independent

Director, Chief Executive or Chief Financial

Officer roles to be held by women. These

targets are in line with the regulatory

requirements introduced recently by the

UK’sFCA onBoard and Executive Committee

diversity targets and disclosures.

The membership of the Board’s Audit,

Remuneration and Nominations committees

is drawn from the wider membership of the

Board and therefore the membership of these

bodies is broadly aligned with the Board’s

Diversity and Inclusion Policy. The Committee

regularly considers the composition of

committees, including the needs for particular

attributes, skills and experience, when

undertaking non-executive search activities.

As at 31 December 2023 (the reference

dateadopted by the Company pursuant

tothe FCA’s Listing Rules), we did not meet

the target of 40% of the Board’s membership

being women. On that date, 35.7% of the

members of the Board were women.

However, as part of our long-term succession

plan, Chris Grigg retired as a Director with

effect from that day, consequently, since the

beginning of the year and up to the

20 February (the latest practicable date for

inclusion in this report), that figure increased

to 38.5% – just short of the 40% target.

Relative to therequirement in the FCA’s

Listing Rules concerning the four senior Board

roles, the Company met that target on the

reporting reference date of 31 December

2023, with the role of Chair being held by a

woman. Inaddition, Nicole Piasecki

succeeded ChrisGrigg as Senior Independent

Director and therefore from 1 January 2024

to the date of this report, two of those senior

roles were currently held by women. One

member ofthe Board is from a minority

ethnic background, and the Company was

compliant with that FCA target at the end

ofthe year and that has remained the case.

Progress has been made in promoting

greaterdiversity on the Board over a number

of years and that continued during 2023.

Asdetailed above, we are just short of the

40% target in the FCA’s Listing Rules and our

policy objectives. One Board appointment

decision was made in 2023 and, based on

merit and the specification agreed for the

search, a male candidate was nominated

forappointment. As part of the appointment

process, the Committee did take steps to

ensure that every effort was taken to deliver

adiverse list of candidates for consideration.

With regard to diversity in our senior

leadership population, the number of women

on the Executive Committee has increased

tofive, 36% of the membership. Currently,

34% of the wider group formed of those

executives reporting to an Executive

Committee member are women (the same

applies if the Company Secretary and his

firstreports are included).

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Principal committees

The Board has established principal

committees which focus on particular

areas, as set out below. The chair of

each committee reports to the Board

onthe committee’s activities after

each meeting.

Executive and other committees

This is the structure through which we manage the Group including the Board division

of responsibilities.

Governance framework

Board engagement with stakeholders

In considering and engaging with stakeholders, the Directors act in accordance with Section 172

of the Companies Act. The work of the Board during the year is detailed on pages 91 to 93.

Role of the Board

The Board is responsible for promoting the long-term sustainable success

of the Company, generatingvalue for shareholders, while havingregard

toits other stakeholders and theimpact of itsoperations on the

environment and the communities in which we operate. Seepage 91

formore information on the workof the Board.

The Board agrees the Company’s purpose, values and standards of

behaviour expected of all employees, satisfying itself that these and

theculture of the business are aligned. The Board also sets the Group’s

strategy, and oversees and monitors internal controls, risk management

andthe Company’s governance framework. Ourrobust governance

framework, the Operational Framework, is agreed by the Boardand

setsout how we do business.

Purpose

The Company’s purpose (see contents page) recognises that we serve,

supply and protect those who serve and protect us, and that we have

important wider stakeholder responsibilities that the Board has regard

toin its decision making. The Board monitors our strategy, behaviours

and culture and their alignment with our purpose.

Culture

Our culture is to be performance driven and values led. The Board is

responsible for ensuring that culture is aligned with our purpose, values

andstrategy.

Strategy

Our strategy (see page 12) is comprised of five key long-term focus areas

aligned with our vision and mission. Agreed annually by the Board, it is

an important part of how it promotes the long-term sustainable success

ofthe Company.

The Board

Board composition

The Board consists of executive and independent non-executive directors,

plusanon-executive chair who wasindependent in accordance with the

UKCorporate Governance Code on her appointment. There is a clear division

inthe roles and responsibilities of the executive and non-executive directors and

between the Chair and Chief Executive which are detailed in our Board Charter

(available on the Company’s website).

Chair

Leads the Board and is responsible for its overall effectiveness in directing the Company.

Alsofacilitates constructive Board relations and the effective contribution of all non-executive

directors, and ensures that directors receive accurate, timely and clear information.

Chief Executive

Responsible for the development and delivery of the strategy agreed by the Board. Developing

fortheBoard’s approval, appropriate values and standards to drive the required behaviours

andbyleading by personal example with regards to company culture.

Senior Independent Director

Acts as a sounding board for the Chair and alsoas an intermediary for the other directors

asnecessary. Annually, or on other occasions asnecessary, leading the non-executive directors

inappraising the Chair’s performance, and providing feedback.

Company Secretary

Ensuring that Board procedures are complied with andadvising the Board on all governance

matters.Also supports the Board by ensuring that it has the policies, processes, information,

timeandresources it needs in order to function effectively.

Environmental, Social and

Governance Committee

Page 102

Remuneration

Committee

Page 107

Nominations

Committee

Page 94

Innovation and

TechnologyCommittee

Page 105

Audit

Committee

Page 97

BAE Systems plc Annual Report 2023

Directors’ report

Responsible trading principles

How we conduct business is fundamental to

thesuccess of our Company and we mandate

aprinciples-based approach to our business

activity. We do not compromise on the way

weconduct business, and consistency of this

approach is key in defining our reputation.

Product safety policy

We set out principles which describe our

approach to product safety to reduce the risk of

unintentional harm to people, property and the

environment. They apply throughout the life of

the Product and throughout the supply chain.

Workplace and operational environment

Our people management expectations are

communicated to all employees and set out

within our People Policy. We have a zero tolerance

policy regarding corruption and our employees

are made aware of their role in ensuring we

maintain high standards of ethical conduct.

Pages62 to 64 provide further detail about

ouranti-corruption programme.

The safety and wellbeing of our employees is

paramount and our high standards for Health

andSafety management provide a common

framework to guide our workforce and further

information can be found on page 58.

We use our expertise to reduce our global

environmental impacts and to develop products

and services for our customers which reduce their

impacts on the environment. Our climate transition

strategy and impact on the environment including

greenhouse gas (GHG) emissions, efficient use

ofresources, land use and biodiversity, and the

environmental impact of the Group’s supply

chainis overseen by the Environmental, Social

and Governance Committee.

We are committed to ensuring that IT systems

and services are used in a manner which

promotes effective communication and working

practices within the organisation and to

preventing damage to its business orreputation

through misuse of those systems.

With the support of ourInternal Audit team,

ourIT assurance and governance programme

hasbeen developed to support the effective

management of cyber risks.

Suppliers

The Group depends upon its suppliers to provide

fully compliant, cost-effective equipment, goods,

services and solutions, which are an integral

partof the world-class products required by

ourcustomers, and also support the effective

operations of our businesses and the Group’s

standards of business conduct. Our supply

chainmanagement and Supplier Principles –

Guidance for Responsible Business (the Supplier

Principles) are focused on high achievement of

our standards. Our supplier contracts contain

anti-corruption and anti-bribery provisions

andstipulate the expectation to compliance,

meet ourstandards on ethical business conduct

and Supplier Principles, including safety,

environment and human rights.

Product trading policy

Underpins all of our business activity and the

policy applies to all Company products, trading,

and throughout the product lifecycle. The policy

is used to reflect the Company’s standards of

integrity and help us to thoroughly evaluate

theopportunities we pursue.

Risk management policy

We set clear requirements for the management

and reporting of risks in support of the delivery

ofour strategy. Project risks are managed

through our Lifecycle Management Framework.

Core business processes

Our IBP represents a common process with

standard outputs and requirements that

producesan integrated strategic business plan

forthe Group and also for each of its businesses

over the following five years. The IBP isreviewed

each year by the Board as part of itsstrategy

review process. Once approved, theIBP provides

the basis for setting all detailed financial budgets

and strategic actions across thebusinesses,

andissubsequently used by theBoard to

monitorperformance.

As mandated by the Operational Framework,

Businesses and Group functions complete a

bi-annual Operational Assurance Statement

(OAS). The OAS is in two parts: a self-assessment

of compliance with the Operational Framework;

and a report showing the key financial and

non-financial risks for the relevant business

andGroup functions. Together with reviews

undertaken by Internal Audit and the work

oftheexternal auditors, the OAS forms the

Group’s process for reviewing the effectiveness

ofthe system of internal controls.

Lifecycle Management (LCM) Framework

describes our approach to the assurance of

Projects. LCM is integral to the successful

execution of the Group’s projects and

programmes. Its application provides progressive

risk-based assurance throughout the lifecycle

toaid decisions, supporting delivery of projects

toachieve customer satisfaction, schedule

andfinancial requirements.

The purpose of the Mergers, Acquisitions

andDisposals process is to provide a structured

approach to managing the acquisitions, strategic

joint ventures and disposals. It forms a part of

ourStrategy and Planning framework in order

tosupport the delivery of the IBP.

National security arrangements

The Group is subject to various national security

requirements which are an important part of

howwe operate as a defence company and meet

the needs of our customers. Due to the nature

ofits activities, the UK government holds a

Special Share in the Company, ensuring that

theCompany cannot be non-British controlled.

Wealso have a Special Security Agreement with

the US Department of Defense addressing national

security matters relating to the ownership and

control of our US defence businesses. Through

the Special Security Agreement, our governance

structure is augmented by the BAE Systems, Inc.

board, which is populated by experienced

individuals drawn principally from the US armed

forces and intelligence community, and also

former Members of Congress.

Similarly, our Australian operations are subject

toan Overarching Deed with the Commonwealth

of Australia which protects national security

andother interests, and allows the Group to

ownand manage certain Australian defence-

related industrial assets. These national

securityarrangements are an important part

ofourgovernance.

We take pride in managing our operations effectively and responsibly

Internal controls

Core Business Processes

This describes thereporting and reviews

mandated by theOperational Framework,

which provide upwards visibility of project

and business performance.

Operational Assurance

A process through which line and functional

leaders respectively confirm twice yearly

that their businesses andfunctions are

compliant with theOperational Framework.

Internal Audit

Assesses the effectiveness ofinternal

controlsthrough aprogramme ofreviews

based on acontinuous assessment of

business risk across the Group.

Operational Framework

Agreed annually by the Board, the Operational Framework is a

comprehensive statement of mandated governance requirements and

delegated responsibilities. The UK Corporate Governance Code’s

(theCode) principles are embedded within the Operational Framework,

and its policies and processes underpin all the disclosures made by the

Board pursuant to the Code’s provisions.

Our Operational Framework provides a stable foundation from which

todeliver our strategy, improve our Group performance and continue

todevelop our culture.

It is mandatory across allwholly-owned entities and details our

organisation, governance framework, core business practices

anddelegated authorities.

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Applying Principles of Good Governance: The Company has applied the Principles in

theUKCorporate Governance Code. Using the principal headings in the Code, the following

provides details of how it has applied those Principles and references other parts of these

reports to provide more detail. The statements reference the Code Principles.

Applying the 2018 UK Corporate Governance Code Principles

Principles Reference

Section 1 – Board leadership and Company purpose

We have an effective and entrepreneurial Board that promotes the long-term sustainable

success of the Company, generates value for shareholders and contributes to wider society.

Sustainability Page 46

Dividends paid and capital

allocationpolicy objectives Page 17

Annual Board evaluation Page 95

The Board has established the Company’s purpose, values and strategy, and satisfied

itselfthat these and its culture are aligned. All directors are required to act with integrity,

leadby example and promote the culture they wish to see for the Company.

Our purpose Contents page

Our strategic framework Page 12

Sustainability Page 46

Governance framework Page 86

Environmental, Social and

GovernanceCommittee report Page 102

Through the Company’s integrated strategic planning process the Board has agreed

annualand long-term strategic and financial objectives for the Company. The integrated

nature of the planning process helps ensure that the necessary resources are in place to meet

those objectives. The Board regularly reviews progress against the plan. The Company has a

comprehensive controls structure thatenables risk to be assessed and managed.

Our business model Page 14

Governance framework Page 86

In order for the Company to meet its responsibilities to shareholders and stakeholders,

thedirectors have established a number of means through which it is able to engage

withthem in order to better understand their views and expectations.

Our stakeholders Page 24

The work of the Board Page 91

Environmental, Social and

GovernanceCommittee report Page 102

The Board looks to ensure that workforce policies and practices are consistent with ourvalues

and support our long-term sustainable growth. All members of our workforce areable to

raise any matters ofconcern through our Ethics Helpline or with a local EthicsOfficer.

Our purpose Contents page

Our strategic framework Page 12

Sustainability Page 46

Section 2 – Division of responsibilities

The Chair leads the Board and is responsible for the overall effectiveness of the Board

indirecting the Company. In doing so she seeksto demonstrate objective judgement and

promotes a culture of openness and debate within the boardroom. The directors are provided

with accurate, timely and clear information, to facilitate open and constructive board relations.

Governance framework Page 86

Annual Board evaluation Page 95

The Board comprises the Chair, three executive directors and nine independent non-executive

directors

. There is a clear division in the roles andresponsibilities of the executive and

non-executive directors andbetween the Chair and Chief Executive which are detailed

inourBoard Charter (available on the Company’s website).

Chair’s governance letter Page 80

Governance framework Page 86

The non-executive directors have committed to having sufficient time to meet their

responsibilities. The non-executive directors provide constructive challenge, strategic

guidance, offer specialist advice and holdmanagement to account.

Governance framework Page 86

Governance disclosures Page 80

Board information Page 81

The Company Secretary supports the Board in ensuring the directors have the correct

policies, processes, information and time in order to function effectively and efficiently.

Governance framework Page 86

Board performance evaluation Page 95

BAE Systems plc Annual Report 2023

Directors’ report

Principles Reference

Section 3 – Composition, succession and evaluation

The Nominations Committee undertakes a formal, rigorous and transparent approach to

succession planning for Board appointments. The Board oversees the development and

implementation of succession plans for directors and senior management. Appointments

andsuccession plans are based on merit and objective criteria, whilst also promoting

diversityin all forms.

Board information Page 81

Nominations Committee report Page 94

The directors look to maintain a good combination of skills, experience and knowledge

onthe Board and on its committees. Succession plans take into consideration the lengths

ofservice of directors and the need to regularly refresh Board membership.

Chair’s governance letter Page 80

Board information Page 81

Nominations Committee report Page 94

The Board annual performance evaluation undertaken by the Board in 2023/2024

considered its composition, diversity and how effectively members worked together

toachieve objectives. The evaluation included an assessment of the effectiveness

ofindividual members.

Nominations Committee report Page 94

Annual Board evaluation Page 95

Section 4 – Audit, risk and internal control

The Board through its Audit Committee has established formal and transparent policies

andprocedures to ensure the independence and effectiveness of internal and external

auditfunctions and the work theyundertake assists the Board in satisfying itself as to

theintegrity offinancial and narrative statements.

Audit Committee report Page 97

As detailed in these reports, the directors confirm they consider the2023 Annual Report

andfinancial statements taken as a whole tobe fair, balanced and understandable and

provide the information necessary for shareholders to assess the Group’s position and

performance, business model and strategy.

Directors’ responsibility statement Page 140

The Board has established procedures to manage risks. It also overseesthe Internal

ControlFramework and determines the nature and extent of the principal risks the

Companyis willing to take in orderto achieve its long-term strategic objectives.

Our risk management framework Page 69

Our principal risks Page 70

Governance framework Page 86

Section 5 – Remuneration

The policies and practices of the Remuneration Committee have beendesigned to

supportour strategy and promote the long-term sustainable success of the Company.

Executive remuneration is aligned to Company purpose and values and is linked to

thesuccessful delivery of our long-term strategy.

Remuneration Committee report Page 107

Annual remuneration report Page 115

The Remuneration Committee has a formal and transparent procedure for developing

policyon executive remuneration and also for determining the remuneration of

directorsandsenior management. Directors are not involved in determining their

ownremunerationoutcome.

Remuneration Committee report Page 107

Directors’ remuneration policy Page 110

The Remuneration Committee has the ability to exercise its discretion and independent

judgement when agreeing remuneration outcomes. When exercising such discretion it will

take into account Company and individual performance, and also wider circumstances.

Remuneration Committee report Page 107

1. Since 1 January 2024, there are eight non-executive directors, following the retirement of Chris Grigg on 31 December 2023.

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Compliance with the 2018 UK Corporate Governance Code provisions

The Company is subject to the principles and provisions of the Code, a copy of which is available

at frc.org.uk. The Company was compliant with the provisions of the Code throughout 2023. The

following statements are made in compliance with the Code.

Dame Elizabeth Corley

Dame Elizabeth Corley, a non-executive

director, is a non-executive director and

Chairof Schroders plc. Schroders plc is

ashareholder in the Company, holding

approximately 0.4% of the total share

votingrights as at 20 February 2024 (the

latest practicable date for inclusion in this

report). Anassessment was undertaken prior

to herappointment to assess whether this

relationship could have a bearing on her

independence for the purpose of Provision 10

of the Code. It was agreed that the number

of shares held by Schroders was not

sufficiently material to have a bearing on

herindependence. The Company was also

made aware of steps that have been taken

bySchroders to avoid a conflict of interest

with regard to any shares it may hold in

BAESystems plc.

Angus Cockburn

In compliance with Provision 15 of the Code,

the Nominations Committee considered

Angus Cockburn’s other commitments prior

to his appointment to the Board as a

non-executive director in 2023. In particular,

it noted his other listed company board

appointments, they being his role as

non-executive Chair of James Fisher & Sons

and non-executive director positions at

Ashtead Group and STS Global Income &

Growth Trust. Prior to his appointment, it was

confirmed that he would be stepping down

from the STS Global Income & Growth Trust

at its AGM this year.

Recognising that Mr Cockburn will be stepping

down from a listed company board later this

year (most likely in July) and that all of his

other corporate interests are non-executive

innature, the Board is satisfied that he has

sufficient time to undertake his duties as a

non-executive director of the Company.

Risk management and

internalcontrol statement

The Board is responsible for the Group’s risk

management and internal control systems.

Ithas delegated responsibility for reviewing

indetail the effectiveness of these systems

tothe Audit Committee, which reports to

theBoard on its findings so that all directors

can take a view on the matter.

An overview of the processes used to

identify,evaluate and manage the principal

risks can be found on pages 70 to 77.

Theseprocesses are an integral part of our

governance framework, and the Operational

Framework, details of which can be found

onpage 86. The Operational Framework

mandates the Operational Assurance

Statement (OAS) process, which is owned

bythe Group’s Internal Audit function and

isone of the principal processes used by the

Board in monitoring the effectiveness of

control systems.

The OAS process has been designed to

provide assurance with regard to compliance

with the policies and processes mandated

bythe Operational Framework. It is a key

element of the Group’s governance and is

formed of two parts: a self-assessment by

businesses and functions of compliance with

the Operational Framework; and a report

showing their assessment of key risks. Twice

ayear, the line leaders for our business and

the heads of our functions are required to

critically analyse compliance relative to a

scoring framework, which sets clear

standards against which compliance must

beassessed. Line and functional leaders

arerequired to assure themselves of the level

of compliance for a business, and submit as

required supporting information and data

toprovide evidence of compliance.

The output from the OAS process is reviewed

by (and subject to challenge from) the Internal

Audit function relative to its understanding

ofmatters within particular businesses.

Inaddition, the OAS risk management

process requires that twice-yearly the risks

identified in each of the businesses are

reported against a set risk framework.

Theoutput from the OAS process is provided

to the Board and isreviewed in detail by the

Audit Committee.

Thereport to the directors on the output

from the OAS process provides granular

graphical and narrative analysis of compliance

against the requirements of the Operational

Framework, and as such is an important part

of how the Board monitors and reviews the

Company’s risk management and internal

control systems. Further details of the Board’s

monitoring and review process can be found

in the Audit Committee report on page 97.

The risk management and internal control

systems detailed in the Operational

Framework were in place throughout the

yearand the Board, having reviewed their

effectiveness, believes they accord with the

Financial Reporting Council’s Guidance on

Risk Management, Internal Control and

Related Financial and Business Reporting.

Viability statement and going concern

As required by the provisions of the Code,

theBoard has undertaken an assessment

ofthe future prospects of the Group, taking

into account the Group’s current position and

principal risks. This assessment considered

both the Group’s long-term prospects and

also its ability to continue in operation and

meet its liabilities as they fall due over its

five-year business planning period. This can

be found on page 78 of the Strategic report.

Directors

In compliance with the Code, all directors are

subject to annual re-election by shareholders.

The Board considers all of the non-executive

directors (except the Chair) named on pages

81 to 83 of this report to be independent

forthe purposes of the Code. The Chair

wasalso independent on her appointment

inMay last year.

Prior to making Board appointments,

theBoard considers other demands on an

individual’s time to ensure that, following

appointment, directors have sufficient

timetomeet their Board responsibilities.

Non-executive directors arerequired to seek

prior approval before taking on additional

external appointments. The Board also

considers whether there are any matters

thatcould have a bearing on a non-executive

director’s independence pursuant to

Provision10 of the Code. The following

disclosure is made on these matters:

BAE Systems plc Annual Report 2023

Directors’ report

The directors of BAE Systems plc – and those of all UK companies – must act in accordance

withaset of general duties. These include a duty under Section 172 of the Companies Act (s.172)

topromote the success of the Company, and in doing so the directors must have regard

(amongother things) to certain stakeholders and other factors. In this statement, on pages

91to93, we highlight some of the key decisions and discussions undertaken by the Board

in2023and stakeholder consideration.

The work of the Board

Companies Act 2006, s.172

(

)

“A director of a company must act in the

way, he considers, in good faith, would

bemost likely to promote the success

ofthe company for the benefit of its

members as a whole, and in doing so

haveregard (amongst other matters)

tothe following factors:

(a) the likely consequences of any

decisionin the long term;

(b) the interests of the company’s

employees;

business relationships with suppliers,

customers and others;

(d) the impact of the company’s

operations on the community

andtheenvironment;

(e) the desirability of the company

maintaining a reputation for high

standards of business conduct; and

(f) the need to act fairly as between

members of the company.”

Shareholder returns

In July 2022, the Board announced a

three-year share buyback programme of

upto £1.5bn. Good progress was made

withthat programme and, consequently, in

August 2023 the Board considered whether

to approve a further buyback programme

which would commence after the completion

of the 2022 programme. In making the

decision to approve a further up to £1.5bn

share buyback programme the Board

considered its stakeholder obligations, the

strength ofthe Company’s financial position

and its capital allocation priorities. The

members ofthe Group’s pension schemes,

comprisinga large number of present

andformer employees, was seen as a key

stakeholder group in respect of this decision.

TheCompany is committed to meeting its

funding obligations to its pension schemes.

Whilst these are long term in nature, the

directors noted that the main UK pension

scheme was in surplus, andalso that the

Company would be making additional

funding contributions as a consequence

ofthe buyback.

The buyback decision was also only

reachedafter the Board considered, and

wassatisfied, that it could continue to invest

for the long-term success of the Company

through research and development funding

and other organic investment opportunities.

Such funding underpins our ability to meet

present and future customer requirements

and drive future growth for the benefit of

allstakeholders. The Board also considered

itsability to invest in future value-enhancing

acquisitions, should that be in line with

strategy, and was satisfied that its ability to

do so would not beunduly impacted by the

buyback decision. Having considered these

matters and the strength of the balance sheet

and business plan, a further buyback

programme of up to £1.5bn was approved

and announced inAugust 2023.

Key matters considered and decisions made in 2023

inrespectof the directors’ duties under s.172

Ball Aerospace acquisition

As part of the Board’s annual strategic review

process, Ball Aerospace had been identified

as a business that, if the opportunity arose,

would add scale to our USspace ambitions

and complement our Electronic Systems

business. Ball Aerospace isa leading provider

of mission-critical spacesystems and defence

technologies, attractively positioned and with

an outlook across military and civil space,

C4ISR, and missile and munitions markets.

The work undertaken over a number of years

to identifyBall Aerospace as a potential

acquisition target came to fruition last year

and, following a detailed review, the Board

approved a proposal for its acquisition by

ourUS business.

The Company was successful in its bid to

acquire Ball Aerospace for approximately

$5.5bn. In approving the proposed acquisition,

the Board believed that investing in this

high-quality, fast-growing and technology-

focused asset would help promote the

long-term success of the Company.

Consideration of the acquisition within the

context of our capital allocation policy was

animportant part of the Board’s deliberations.

The Group’s capital allocation policy can be

found on page 17. In reaching the decision

toacquire Ball Aerospace the Board carefully

considered its duties under s.172 of the

Companies Act, particularly withregards

tolong-term capital allocation. That policy

has the objective of maintaining the Group’s

investment grade credit rating and ensuring

operational flexibility whilst: meeting its

pensions obligations; investing in the business;

paying dividends; making accelerated returns

to shareholders, when the balance sheet

allows; and making value-enhancing

acquisitions. The Board made the decision

toacquire Ball Aerospace after considering

these priorities and the interests of

relevantstakeholders.

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

The work of the Board continued

Next-generation nuclear-powered

attack submarine programme

In February last year, the Board considered

and agreed the proposed basis under which

the Group would enter into a contract with

the Ministry of Defence for the next phase

ofthe UK’s next-generation nuclear-powered

attack submarine, known as SSN-AUKUS.

Theambition is for the UK and Australia to

both build submarines to this new design,

with the construction of the UK’s boats

taking place principally at the Group’s site

inBarrow-in-Furness, Cumbria.

The £3.95bn award for the next phase of

theUK’s next-generation attack submarine

programme will cover the development

workup to 2028 and enable the Group

toprogress into the detailed design phase

ofthe programme. In making the decision

onthe Group’s long-term role on this major

programme, the Board was very much aware

of a range of stakeholders that will benefit

from it, particularly suppliers, employees

andthe local community in Barrow-in-

Furness, Cumbria.

The long-term funding secured by the

awardhas enabled the Group to begin the

procurement of long-lead items, placing

contracts through our supply chain that

willmitigate programme risk and widen

theeconomic benefit for these suppliers

andthe communities they serve.

The Group’s employees will benefit from

theinvestment in the SSN-AUKUS and the

Group’s other submarine programmes.

Workforce planning and skills development

was an important part of the Board’s

considerations in approving the Group’s

participation in the SSN-AUKUS programme.

In order to meet our customer commitments,

it recognised that we will have to grow the

workforce and ensure that we have the range

of skills required to deliver this major new

programme. We currently have a workforce

of over 12,000 in Barrow-in-Furness,

Cumbriawith plans to recruit an additional

2,700 people. Investment in early careers

development is critical for the Submarines

business and we plan to recruit and train

around 900 apprentices a year to support

thelong-term success of the business.

Investment in recruiting and training

alargeskilled workforce benefits the

localcommunity. For example, last year we

announced the acquisition of former retail

properties in Barrow-in-Furness town centre

that, working with the local authorities,

wewill refurbish and convert into modern

multi-use units to support our future growth

plans. This, together with a number of

otherlocal investments, will bring economic

advantages to the local area in addition

tothe Group’s long-term commitment to

providing high-quality employment

opportunities in the town.

Global Code of Conduct

The s.172 duty includes having regard to

maintaining a reputation for high standards

of business conduct. Our Code of Conduct

sets the expected standards of business

conduct across the Group. It is a critical part

of our ethics and governance framework, and

the foundation of our ethical corporate culture.

As part of our Operational Framework, it

guides what we do and how we do it.

During 2023, the Board undertook its triennial

review of the Code of Conduct, aimed at

ensuring that it remains up-to-date and aligned

with best practice. Everyone in the Group,

including the Board, is required to behave

inaccordance with the standards set by the

Code of Conduct when dealing with

colleagues, business partners, customers,

suppliers, contractors, competitors and other

stakeholders. The revised Code of Conduct,

approved by the Board and effective from

thebeginning of 2024, provides additional

emphasis on speaking upand reporting

concerns. It highlights the need to speak up

ifsomething does not feel right and how to

do so, whether that is in person to one of our

Ethics Monitors, online, by phone or by email.

The Board maintains oversight of the

requirement of the Code of Conduct,

principally through an annual review of

business conduct. Such a review was

undertaken in 2023 and this included an

analysis of matters raised by employees and

how these had been dealt with. The Board

also considered the processes in place to

further investigate matters raised by employees.

Customers

The Board receives regular updates on

customer relationships from the Chief

Executive, who meets regularly with our

principal customers. During the year, the

Board also met with a senior customer

officialto gain a first-hand understanding

ofdefence procurement priorities and

capability requirements, and also the

Group’sperformance as a major supplier

tothe UK’s armed forces.

In the US, customer relationships are

managed by the President and Chief

Executive Officer of our US business.

Totheextent allowed by national security

considerations, he provides feedback to

theBoard on BAE Systems, Inc.’s customers.

Given the elevated global threat environment

that we saw throughout 2023, one of the key

messages that the Board received from many

of our national customers last year was the

Warton

In September, the Board visited the

Airsector’s manufacturing and assembly

facilities in Warton. As well as operating

existing programmes from the site,

suchas Typhoon and Hawk, it is the

basefor the development of the

Group’sUK future flying combat

airdemonstrator.

BAE Systems plc Annual Report 2023

Directors’ report

need for the defence industry to respond to

increased operational requirements, and to

actively engage in how we can help replenish

and equip our armed forces customers to meet

their urgent needs. In response to customer

requirements, we saw increased activity

across the Group; one example of which was

the significant increase in investment inour

UK munitions business and orders received

for additional battlefield munitions.

Employees

The principal means by which all

membersofthe Board engage directly

withemployees is through visits to our

sites.During 2023, the Board visited our

Naval Ships business in Glasgow and the

Airbusiness in Warton, Lancashire.

In Glasgow, directors met with employees

and also engaged with local trade union

officials. A key part of the visit was an

opportunity to meet with different employee

groups and engage with them on a range

oftopics. These included the use of an

Employee Resource Group (ERG) to explore

different workplace issues, ethical business

conduct, health and safety, sustainability

within the workplace, supporting early careers

and adapting to new technology. Workplace

health and safety, and how we can continue

to drive improvements in this area was an

important part of the Board’s learning from

the visit. One example of which was

developing a better understanding of the

roletrade unions can play in engaging

withemployees and reinforcing key safety

messaging, such as the use of personal

protective equipment.

During the Warton visit, employee engagement

with a cross-section of the local workforce

took the form of six groups of 12 employees

engaging directly with Directors on a variety

of topics they wished to raise and discuss.

These included issues such asworkplace

conditions, career opportunities and

organisational change.

During the year, individual non-executive

directors also visited our businesses elsewhere

in the UK and in the US, the Kingdom

ofSaudi Arabia andAustralia.

More information on employee engagement

can be found in the ESG Committee report

on pages 102 to 104.

Suppliers

The directors receive information on

particular supply chain matters through

ourregular Board reports. In addition, the

Chief Procurement Officer attended a Board

meeting last year and provided an update

onsupply chain matters. The Board was

particularly interested in how the Group was

managing the post-pandemic supply chain

challenges and the actions being taken to

increase the level of supply chain resilience.

Inthis respect, the Board was informed

aboutthe work initiated to improve sub-tier

supplier visibility and help manage potential

risks below the Group’s direct suppliers.

Werecognise the vital role that our suppliers

play in allowing usto deliver our programmes

in line with ourcommitments to customers.

Consequently we work closely with key

suppliers and take steps as may be necessary

tomaintain continuity of supply.

Environment

The Board had regard to environmental

considerations during 2023 in a number of

different contexts. Elsewhere in this report

you will read about our sustainability agenda

and how this has a focus on climate risk,

what we need to do to address these risks

inour own operations and how we can

workwith stakeholders in our supplier

andcustomer base to address this issue.

TheBoard and its ESG Committee are a

keypart of the governance and oversight

ofenvironment and climate change matters,

and these activities are regularly reported

anddiscussed in Board meetings.

Sustainability, and the adoption of new and

alternative technologies aimed at reducing

environmental impacts, formed part of the

Board’s strategy review in 2023. The review

highlighted opportunities to evolve low-

carbon products and develop decarbonisation

technologies to meet future defence and

civilcustomer needs. In our US business,

theBoard continues to see opportunities

toleverage our power management and

flight controls expertise and broaden our

range of electrification offerings, one

example of which is our collaboration with

Heart Aerospace to define the battery system

for its ES-30 regional electric aircraft.

Stakeholder engagement

The Company engages with a variety of

stakeholders on a regular basis. Feedback is

received at a number of different levels and

helps inform numerous decisions made on a

delegated basis across the Company – but

within a well-developed governance structure

approved by the Board. Stakeholder feedback

isalso received by the directors, either directly

via executive management or through formal

reporting processes. In addition to that shown

below, further information on stakeholders

andhow we engaged in 2023 can be found

inthe ‘Our stakeholders’ section of this report

(see pages 24–25). Also, further details of

thematters covered by the s.172 duty,

includingenvironment and climate, workplace

environment and community investment can

befound in the Sustainability section of the

report on pages 46 to 66.

Glasgow

In March, the Board visited our Naval

Ships business in Govan and Glasgow,

Scotland where construction is underway

on the first four City Class Type 26

frigates. In total, eight Type 26 frigates

will be constructed in Govan and

Scotstoun, with work recently

commencing on a new ship build hall

atthe Govan shipyard to enhance the

shipbuilding facilities in Glasgow.

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Membership from 1 January 2024:

Nick Anderson

Crystal E Ashby

Angus Cockburn

Dame Elizabeth Corley

Jane Griffiths

Ewan Kirk

Stephen Pearce

Nicole Piasecki

Lord Sedwill

Nominations Committee report

Cressida Hogg

Chair

Dear Shareholders

I am pleased to present my first Nominations

Committee report as Chair. As with many

companies, all the non-executive Directors

are members of the Committee. Therefore,

itsmembership reflects changes to the Board,

with Sir Roger Carr and Chris Grigg ceasing

to be members during the year and Angus

Cockburn joining on his appointment to

theBoard in November 2023.

Executive succession

The Board and Nominations Committee have

a crucial role in planning effectively for senior

management succession. I understand why

this is an area of focus for many shareholders,

and is frequently raised during shareholder

meetings. We currently have an excellent

leadership team in Charles, Brad and Tom and

we are focused on keeping them supported

and motivated. However, all companies must

have resilience and be able to maintain

momentum through management change.

The Nominations Committee has been

working on our plans throughout 2023,

focusing on identifying talent and potential

internally and externally.

The heads of our Air and Digital Intelligence

businesses retired at the end of 2023. This

provided an opportunity to promote some

ofour most talented managers, and the

Nominations Committee was pleased to

endorse the appointments of Simon Barnes

to lead our Air sector, and Andrea Thompson

to head Digital Intelligence. Both have been

part of the senior executive development

andsuccession programme for several years.

During 2023 the Committee reviewed

thedetailed succession plans for the three

Executive Directors, and looked at them inthe

context of wider succession planning across

the Group. The plans for these individuals

continue to develop and mature, and further

work is planned for 2024. The Committee

also has to consider nationality requirements

in succession planning. National security

considerations place certain restrictions on

the pool of talent available when considering

candidates for certain leadership roles. In

particular, the Chief Executive must be a

UKnational, and the role of President and

CEO of BAE Systems Inc. can only be

undertaken by a US resident citizen.

To attract and retain talented individuals

inleadership roles, the Committee is also

veryaware that our remuneration needs

tobe competitive within the wider market

context. We are grateful that, to date,

shareholders have supported the Board’s

recommendations on our remuneration

policy. Competitive reward and retention

willcontinue to be critical issues for both the

Nominations and Remuneration Committees,

and ones that underpin the effectiveness of

our succession plans.

In addition to the Executive Director

succession reviews, during last year we

alsoreviewed executive succession planning

processes across the group, recognising

thevital importance of this activity in

delivering effective long-term Board

succession planning. This review showed

howwe are increasing the resilience of

ourbusinesses by positively managing our

talent resource. Our talent pipeline is being

strengthened, with greater focus on clear

succession routes for key executives below

the level of the Executive Committee,

andmore executives being identified and

developed for specific roles. We also

increased investment in the recognition

andretention of high-potential individuals

and this more focused approach is achieving

results. The Committee is pleased to see

thatthe diversity of our talent pipeline has

improved, with 42% of the individuals

identified as being up to two jobs away from

an Executive Committee role being women,

an increase of 9% compared with 2022.

Non-executive succession

As I have already mentioned in my Letter to

Shareholders, this has been a year of Board

evolution with the retirement of both the

Chair and our Senior Independent Director

during the course of the year. Following

ChrisGrigg’s retirement, I am pleased that

Nicole Piasecki has taken on the role of SID

inaddition to Remuneration Committee chair.

The Committee has continued to plan

forcontinuity of knowledge and depth

ofexperience as the Board evolves.

AngusCockburn joined the Board and

AuditCommittee at the end of 2023.

Angusis anexperienced business leader who

will be known to many shareholders from his

time as CFO at Aggreko and Serco. He brings

deep boardroom experience as both an

executive and a non-executive and Chair.

Since joining the Board at the beginning of

November he has been engaged with learning

more about the Company, and an overview

of his induction programme is shown below.

BAE Systems plc Annual Report 2023

Directors’ report

Process

The evaluation was an externally facilitated

self-evaluation by an external provider,

No4,who conducted thorough one-on-one

interviews with the Board and key individuals.

The 2023/2024 evaluation process guided

amore strategic review of the Board, and

itsoperation to consider how the Board

might make improvements to an already

well-functioning Board and also how to

bethe most effective Board it can be for

BAESystems over the next three to five years.

The evaluation was conducted according to

the guidance in the Code. Jan Hall and No 4

have no connection to, or relationship with,

the Company or any director.

The process started with briefing meetings

where Jan Hall of No 4 met the Chair,

ChiefExecutive, Senior Independent Director

and Group Finance Director. These meetings

helped her understand the Board, how

itoperates and the future priorities for

BAESystems, as well as to agree the

evaluation’s objectives, scope and timetable.

No 4 then prepared a discussion guideline

which formed the basis of her one-on-one

meetings, and this was sent to the individuals

who participated in the Board evaluation

ahead of her meetings with them.

During January 2024, Jan Hall conducted

confidential and detailed interviews with

theBoard, selected executives, the Company

Secretary, BAE Systems’ external auditor and

independent remuneration adviser, to seek

their views on the Board’s effectiveness.

The report was shared with the Chair

andChief Executive and then the full Board.

Itwas presented by No 4 and discussed in

detail at a meeting of the Board in

February2024.

Content

The Board evaluation addressed the views

ofdirectors on matters including:

• organisation for the Board and Committees;

• the Board and Committee agendas

andpapers;

• strategy development and discussion;

• leadership of the Board and the

Committees;

• dynamics and culture of the Board;

• relationships between non-executive

directors and management;

• technology development and innovation;

• stakeholder engagement and

communication; and

• succession planning and composition

oftheBoard.

Areas for future focus

The Board has agreed to take certain actions

based on the outcomes from the evaluation.

These deal with the following:

• optimising the scheduling of formal

andinformal Board time;

• giving more time to discussing senior

executive development and succession

planning;

• including sessions in strategy discussions

onlonger term strategic options;

• greater insight into how new technologies

are likely to impact the future development

of the business; and

• reviewing the Board composition for the

longer term.

Conclusions of the evaluation

The overall conclusion of this Board

evaluation is that the BAE Systems Board

hasbeen operating effectively.

The Board is hugely supportive of the

ChiefExecutive and his team, and recognises

the excellent leadership and enormous

commitment they bring.

The areas for future focus will serve to

furtherstrengthen the Board and ensure

itremains effective.

Board evaluation 2023/24

1. Russell Reynolds Associates provide other services tothe Company but have no connection to any ofitsdirectors.

When initiating the search that led to Angus

Cockburn’s appointment, the Committee

considered and specified the attributes

required in the ideal candidate. The Committee

generally uses external search consultants to

assist in its appointment activity and engaged

the services of Russell Reynolds Associates

lead the search.

When making Board appointments, the

Committee also has to consider nationality.

As mentioned, there are specific nationality

requirements for certain executive roles. In

addition, the Special Share provisions in the

Company’s Articles of Association require that

a majority of the members of the Board must

be British nationals, and that also applies to

the membership of Board Committees.

Thesenationality requirements must be

factored into the Committee’s long-term

plans for managing Board composition. It also

has to be considered when we are looking at

Board Committee membership.

Cressida Hogg

Chair of the Nominations Committee

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Nominations Committee report continued

February

Committee (London, UK)

– Reviewed Board composition and

themembership of its Committees.

– Discussed non-executive director

successionplanning.

– Reviewed annual performance evaluation.

May

Committee (Farnborough, UK)

– Discussed the role specification

fornon-executive director search.

June

Committee (Washington DC, US)

– Discussed candidate short-list for

non-executive director search.

July

Committee (London, UK)

– Discussed ongoing non-executive

committee appointment.

September

Committee (Warton, UK)

– Reviewed succession plans for

executivedirectors.

– Discussed nomination of candidate for

appointment as non-executive director.

November

Committee (Horsham, UK)

– Reviewed succession plans for executive

directors.

– Reviewed non-executive director’s term

ofappointment.

– Discussed appointment of Senior

Independent Director.

February

Committee

May

Committee

The Nominations Committee’s year

June

Committee

July

Committee

September

Committee

November

Committee

Non-executive

directorinduction

The following provides an

overviewof the induction

programme for Angus Cockburn,

who was appointed a member

ofthe Board in November 2023.

Business sector overview

Visits completed to date

Maritime and Land

Submarines, Barrow-in-Furness, UK

Maritime and Land

Naval Ships, Glasgow, UK

Visits planned for 2024

BAE Systems, Inc.

Head office, Washington DC,US

BAE Systems, Inc.

Electronic Systems, Nashua NH, US

Air

Warton/Samlesbury, Lancashire, UK

Digital Intelligence

Guildford, Surrey, UK

Executive briefings covering:

– Financial control and reporting

– Legal and regulatory compliance

– Directors’ duties and listed

companyregulation

– ESG and sustainability

– Investor relations

– HR and reward

– Technology management

– Health and safety

– Treasury and corporate finance

– Pension

– Strategic development

and business planning

– Employee engagement

– Internal audit

– IT and information security

– Corporate communications

– Community investment

BAE Systems plc Annual Report 2023

Directors’ report

Membership from 1 January 2024:

Angus Cockburn

Dame Elizabeth Corley

Jane Griffiths

Audit Committee report

Stephen Pearce

Chair

Dear Shareholders

This report is intended to provide you with

aninsight into the activities and key areas

weconsidered for theyear-ended December

2023. On page 101 there is an overview of

the areas we havereviewed and discussed

during the year. As part of this report, I will

give a summary of some of our discussions.

The Committee, on behalf of the Board,

monitors the Group’s internal control

environment and the integrity of financial

reporting. Additionally, we challenge the

management team and the internal and

external auditors on a number of areas,

including key accounting judgements and

control matters. The Committee’s Terms of

Reference are available on the Company’s

website.

Committee composition

Our biographies on pages 82 to 83 provide

asummary of our skills and our experience,

which highlights that all Committee

membershave the necessary skills, and

financial literacy, in order to effectively

discharge our duties as an Audit Committee.

During the year, Angus Cockburn joined

theCommittee and Chris Grigg retired as

anon-executive director and member of

theAudit Committee on 31 December 2023.

I would like to express my thanks to Chris

forhis contribution to our discussions and

welcome Angus. In addition, from

1 January2024, Dr Jane Griffiths, Chair

oftheEnvironmental, Social and Governance

Committee, has joined the Audit Committee.

Meeting overview

After four of our meetings, we met privately

(without management) with the External

Auditors and the Internal Audit Director. Our

meetings were also attended by the Board

Chair, the Chief Executive, the Chief Financial

Officer, the Group General Counsel, the

Internal Audit Director, the Group Financial

Controller, and the Senior Audit Partners

from Deloitte LLP. During the year, Iregularly

met with the Audit Partners to discuss key

issues.

From time-to-time and depending on

thematters to be discussed, other senior

executives are invited to attend our meetings

in order to provide subject matter expertise

and further insight.

After each Committee meeting, I report

tothe Board on the Committee’s activities,

the key matters discussed and any

recommendations from the Committee.

In2023, we met six times during the year

andhad five formal meetings.

Climate-related financial reporting

To stay abreast of developments, weregularly

receive updates from the management team

on developments in reporting regulations,

including global initiatives and climate-related

reporting regulations, in relevant jurisdictions,

that could impact the Group.

The Committee is responsible for the

oversight of the internal and external

assurance processes in regard to ESG data,

including the sustainability-related disclosures

that are linked to the financial statements,

which includes the Task Force on Climate-

related Financial Disclosures (TCFD). During

our joint Audit and ESG Committee meeting

earlier in the year, we reviewed the

requirements and the robustness of the

assurance processes surrounding the

provision of the data underpinning the

TCFDdisclosures.

We consider the impact of climate-related

transition activities and physical risks on

financial reporting. We have judged there

tobe no material impact on the Group’s

Consolidated financial statements for the

yearended 31 December 2023 and we will

continue to closely review this position.

External audit

Following a tender process, Deloitte LLP

wasappointed as the Group’s external

auditor at the 2018 Annual General Meeting

and has completed the first year of its second

five-year cycle. Claire Faulkner succeeded

John Adam as Senior Audit Partner in 2023.

The Committee monitors engagements

withexternal stakeholders relevant to the

Committee’s areas of oversight, including

theFinancial Reporting Council (FRC).

Duringthe year, the FRC’s Audit Quality

Review (AQR) team reviewed Deloitte’s audit

of the Group’s 2022 financial statements as

part of its annual inspection of audit firms.

The Committee received and reviewed the

final report from the AQR team which

identified no key findings or other findings

and noted several areas of good practice.

During the year, the Committee reviewed

andagreed the scope of the external audit

plan in respect of the auditors’ review of the

half-year accounts, and of their audit of the

full-year accounts, taking into consideration

key audit risks and other particular areas of

focus for the Group. We also reviewed and

approved the fees for this work and the

auditengagement letters.

The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use

of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014

The Company has complied with the Statutory Audit Services Order issued bythe UK

Competition and Markets Authority for the financial year ended 31 December 2023.

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Audit Committee report continued

Auditor independence

We oversee the relationship with the

externalauditor and regularly assess their

effectiveness, in order to ensure that they

retain their independence and objectivity.

As part of this process, we formerly consider

when it would be appropriate to complete

acompetitive tender process for the external

audit. We do so in line with the Statutory

Audit Services for Large Companies Market

Investigation (Mandatory Use of Competitive

Tender Processes and Audit Committee

Responsibilities) Order 2014, concerning the

frequency and governance of tenders for

theappointment of the external auditor.

During the year, the Committee concluded

that Deloitte remained effective in its role

asexternal auditor. In view of this, and

havingconsidered the continued objectivity,

independence and effectiveness of the

auditors, the Committee considers it to be

inthe best interests of the Company’s

shareholders for Deloitte LLP to remain as

external auditors for the upcoming financial

year. The scope and output of our annual

review of the external auditor’s independence

and effectiveness is discussed below.

We will continue to review the effectiveness

and independence of Deloitte LLP as external

auditor and will ensure that an audit tender

isconducted no later than the 2028

financialyear.

Non-audit services policy

We maintain a policy on non-audit services

which is aligned to the FRC’s 2019 Revised

Ethical Standard of Permitted Audit-Related

and Non-Audit Services. The policy prohibits

certain activities from being undertaken

bythe auditor and places restrictions on

theemployment of former employees of

theauditor.

The policy permits the provision of Audit-

Related Services and Permitted Non-Audit

Services up to limits that are pre-approved

bythe Committee, with specific Committee

approval required beyond such limits.

Assuch, these matters were approved by

theCommittee and were compatible with

thegeneral standard of independence for

auditors. Prior to approving any non-audit

work, the Committee considered the nature

of the services, and concluded that the

provision of these services did not impair

theindependence of the external auditor.

Further information about the audit and

non-audit fees for 2023 is disclosed in

note3to the Consolidated financial

statements onpage 165.

Internal audit

The Group’s Internal Audit function is

independent and has no responsibility

foroperational business management.

Through its assurance activities, it is able

toindependently review the effectiveness

ofinternal control systems and processes.

Committee meetings are attended by the

Internal Audit Director and the VP Internal

Audit, Inc. The Internal Audit Director

provides regular reports to the Committee

onthe assessment of the Group’s risk

management activities, internal controls

andcorporate governance framework.

The scope and authority of the Internal

Auditfunction is defined within its charter

and we review and approve the Internal

Auditplan and any changes to its

programme. We received updates on the

execution of the Internal Audit Plan, relevant

findings and enhancement opportunities

andremediation plans.

During the year, the Internal Audit Director

announced his intention to retire and the

Committee oversaw the identification and

appointment of a successor. Prior to their

appointment, we reviewed the suitability

ofthe individual, examining their skills,

qualifications and ability to undertake the

post and continue the delivery of robust

assurance activities and focus on quality

bythe Internal Audit function.

Assessing the effectiveness of External Audit

Who we surveyed to inform our assessment on the effectiveness of the Group’s External Auditor

What we surveyed

Outcome

The Committee noted that the output of the review was broadly positive and consistent with prior years. Participants felt

thatthe external auditor provided robust and constructive challenge and overall delivered an effective audit.

On the basis of the review following the 2023 year-end audit, the Committee hasproposed to the Board that it recommends

that shareholders support the re-appointment of Deloitte LLP at the 2024 AGM.

Senior Finance Executives

Partners &

Audit Teams

Communication

& Reporting

Planning Scope

& Execution

Challenge

& Insight

Internal Audit Director

BAE Systems plc Annual Report 2023

Directors’ report

Effectiveness of the Internal Audit function

In 2023, in accordance with the International

Standards for the Professional Practice of

Internal Auditing, an External Quality

Assessment of the Internal Audit function

was conducted by Ernst & Young.

The results showed that the Internal Audit

function was well established and well

respected across the Group. We were

pleasedto learn that the remit, role, mandate,

and independence and objectivity were

understood by stakeholders. The function

was found to be ‘Proficient’ across all

components of the EY Internal Audit maturity

model (Purpose, People and Process), which

demonstrated an overall increase in the

function’s maturity and establishment,

sincethe previous assessment five years

ago.The assessment also provided some

useful suggestions for further development.

The implementation of these areas of

development and overall effectiveness

oftheInternal Audit function will continue

tobean area of focus for the Committee.

Risk management and internal controls

A key focus for the Committee in 2023

hasbeen the oversight of the evolution

andmaturity of the Group’s business risk

management processes. During the year, we

received updates on the progress of various

risk and internal controls improvements,

including undertaking a deep dive on

internalcontrols and risk management.

Wealso continued to review the IT

controlenvironment and enhancements

recommended. The work undertaken sets a

solid foundation for the recently announced

changes, required by theUK Corporate

Governance Code 2024, which will apply

from 1 January 2026.

The Group’s Risk Management and

InternalControl Framework are designed

tomanage, rather than eliminate, the risk

offailure to achieve its strategic objectives.

Itcan only therefore provide reasonable

andnot absolute assurance against

materialmisstatement or loss.

We discussed, in detail, the evolution

ofthebusiness risk management process.

Inparticular, we were pleased with the

workto further develop improved business

risk management processes. An overview

ofthe Group’s risk management systems

andprincipal risks are provided on pages

67and 77 of this Annual Report.

As part of our responsibilities, we review

theGroup’s risk management and Internal

Control Framework, including overseeing

theeffectiveness of the operation of the

relevant policies, standards and procedures

inoperation. The six-monthly OAS process,

coupled with the risk register, provides the

basis for our review of the effectiveness of

internal controls and risk management.

The OAS returns comprise submissions by

each business or function. The amalgamated

output highlights trends and provides the

context which supports the identification and

monitoring of risks. Following reviews by the

Executive Committee and the Group Audit

Review Board, an assessment is made on the

probability of the risks arising and potential

impact to the Group’s five-year IBP. The most

significant of these, as measured through

potential impact and probability, are the

Group’s principal risks as set out on pages

70to 77.

In considering the effectiveness of internal

controls and risk landscape, the Committee

received updates from the Group General

Counsel, Group Financial Controller, Group

Treasurer, Group Tax Director, Internal Audit

Director and the External Auditor, on material

developments within the legal, regulatory

and financial context of the Group. These

internal control and risk management

processes are part of the Group’s governance

framework (page 86).

As a whole this governance framework

underpins our financial and narrative

reporting processes and seeks to provide

reasonable assurance that the Annual

Reportand financial statements are

preparedin accordance with applicable

standards.

Financial statements

andnarrativereporting

As in previous years, the Committee reviewed

all significant issues concerning the financial

statements which include the going concern

and viability statements. In considering the

Group’s Annual Report, the Committee

assessed whether the report was fair,

balanced and understandable and also

whether it provided the information

necessary for shareholders to assess the

Group’s position and performance, business

model and strategy.

In order to make this determination, we

received updates on the internal verification

processes which had taken place, and

usedthat to assist our assessment of the

disclosures made within the Annual Report.

We also received early sight of the draft

Annual Report and Accounts, in advance

offinal review and sign-off by the Board,

allowing us the opportunity to consider

theAnnual Report asa whole.

After careful review and consideration of

allrelevant information, the Committee was

satisfied that, taken as a whole, the 2023

Annual Report and Accounts are considered

to be fair, balanced and understandable and

we therefore affirmed this view to the Board.

The Committee also agreed the parameters

of, and subsequently reviewed the reports

which supported the going concern

statement (see page 79) and the statement

on the Board’s assessment of the prospects

of the Group (see the viability statement on

page 78).

The assessment of the going concern and the

directors’ viability statement is underpinned

by assessments of reasonably plausible, but

severe, downside scenarios related to the

Group’s principal risks and assessed the

impact on the future cash flows, profitability,

financial covenants, solvency and liquidity of

the Group. As part of this process, we also

considered the period covered by the viability

statement and we continue to be of the

viewthat a five-year period remains the

mostappropriate timespan for the Group,

given the business planning cycle and the

long-term nature of a number of the

Group’sprogrammes.

Overview of the process to ensure that the Group’s Annual Report, taken as a whole, is fair, balanced and

understandable and provides information necessary for shareholders toassess the Group’s position

andperformance, business model and strategy

Fulsome guidance issued to all the contributors at operational level

A verification process dealing with the factual content of the reports

Thorough reviews undertaken at different levels in the Group that aim to ensure consistency and overall balance

A comprehensive review by the directors and the Executive Committee

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Audit Committee report continued

The principal areas of judgement considered

concerning the 2023 financial statements

were as set out below.

Margin recognition

The estimation of contract margin and the

level of revenue and profit to recognise in a

single accounting period requires the exercise

of management judgement. The Committee

reviewed key estimates and judgements

applied in determining the financial status of

the more significant programmes.

Pensions

Accounting for pensions and other post-

employment benefits involves making

estimates when measuring the Group’s

retirement benefit obligations. These

estimates require assumptions to be made

about uncertain events, such as discount

rates, inflation rates and longevity. As at

31 December 2023, a number of the Group

pension schemes remain in an accounting

surplus. The Group has recognised the

surpluses on the basis that the future

economic benefits are unconditionally

available to the Group. These have been

recognised after deducting a 35%

withholding tax, which would be levied prior

to the future refunding of any surplus and

have been presented on a net basis as this

isnot deemed to be an income tax of the

Group. Wehave reviewed this presentation

and concluded this estimate is appropriate

based on the Group’s ability to access its

defined benefit surpluses.

We reviewed the methodology used to

allocate a proportion of the net post-

employment benefit surpluses to equity

accounted investments and concluded

thatthis continues to be appropriate with

reference to agreement between the

Company and the retirement benefit

schemes. We also considered the disclosures

in respect of the sensitivity of the surplus

tochanges in these key assumptions (see

note 24 to the Consolidated financial

statements on pages 191 to 202).

Taxation

Computation of the Group’s tax expense

andliability, the provisioning for potential tax

liabilities and the level of deferred tax asset

recognition are underpinned by management

judgement and estimation of the amounts

that could be payable.

We noted that the UK Government has

nowenacted legislation to embed Pillar 2

within UK tax law. While the legislation

became effective from 1 January 2024, we

reviewed the disclosure requirements ahead

of this date to make an initial assessment of

the expected impact of thenew legislation

onthe Group going forward. Although the

Group continues to work through the impact

of the legislation, we believe the disclosures

are appropriate given the complexity of the

legislation. Management will continue to

work through the impact of the legislation so

as to comply with the requirements for 2024.

Tax policy ultimately remains a matter for

theBoard’s determination, we reviewed the

Group’s tax strategy. Twice during the year,

we reviewed the Group’s tax expense and tax

provisions, and discussed these with the

Group Tax Director.

Acquisition of Ball Aerospace

On 17 August 2023, the Group announced

itsintention to acquire 100% of the share

capital of the Ball Aerospace division for

consideration of $5.5bn (£4.4bn), The

acquisition completed on 16 February 2024.

Given the limited time since the acquisition

date and the size and complexity of the

transaction, the Group is working through

the accounting under IFRS 3 Business

Combinations and is unable to reasonably

estimate and determine the fair value of net

assets acquired and resulting goodwill at the

date of this report. The Group will work

through the fair value exercise under IFRS 3

and the Committee will review the provisional

disclosures that will be reported in the

Group’s 2024 half-year results.

Stephen Pearce

Chair of the Audit Committee

100

BAE Systems plc Annual Report 2023

Directors’ report

February

Committee (London, UK)

– Reviewed the financial statements

andspecific disclosures, including viability

and going concern, for recommendation

tothe Board.

– Received a presentation from the Group

Financial Controller and Group Treasurer

inrespect of work supporting the viability

and going concern statements.

– Considered the accounting, financial

control and audit issues reported by

theexternal auditor that flowed from

theaudit work.

– Reviewed the effectiveness of the external

audit process.

– Received a report from the Group

TaxDirector.

– Reviewed external auditor

independenceand nature and value

ofnon-audit services.

Joint session with the Environmental, Social

and Governance Committee:

– Considered output from the six-monthly

OAS review.

– Reviewed the procedures and outputs

forthe identification, assessment and

reporting of risk.

– Agreed final iteration of the 2023

InternalAudit programme.

– Reviewed ESG assurance map.

– Received an update on limited assurance

work undertaken by Deloitte on various

ESG matters.

– Considered development of ESG-related

disclosures, including climate change and

TCFD reporting requirements.

June

Committee (Washington DC, US)

– Agreed the 2023 external audit plan

andscope.

– Reviewed external auditor independence.

– Agreed external audit engagement letter

and fee.

– Considered any emerging accounting

issuesprior to the half year.

– Received a presentation from VP,

InternalAudit, for the US businesses.

– Reviewed the Non-Audit Services Policy.

– Reviewed the nature and value of

non-auditservices.

– Agreed external audit partner successors

for the US and UK/RoW businesses.

July

Committee (Videoconference)

– Reviewed the financial statements and

specific disclosures, including going

concern, for recommendation to the Board.

– Received a presentation from the Group

Financial Controller and Group Treasurer

inrespect of work supporting the going

concern statement, together with an

update on viability.

– Considered the accounting, financial

control and audit issues reported by the

external auditor that flowed from the

half-year review work.

– Received a report from the Group

TaxDirector.

– Considered output from the six-monthly

OAS review.

– Reviewed the procedures and outputs

forthe identification, assessment and

reporting of risk.

– Reviewed external auditor independence

and the nature and value of non-audit

services.

– Discussed the outcome of the External

Quality Assessment of the Internal Audit

department.

November

Meeting (London, UK)

– Informal meeting with the Internal Audit

Director and external auditor.

Committee (Sussex, UK)

– Undertook a deep dive on the

proposedchanges to the UK Corporate

Governance Code and the implications

ofthe UK Economic Crime and Corporate

Transparency Act 2023.

– Received an update on the

financemodernisation programme from

theChief Financial Officer.

December

Committee (Videoconference)

– Considered any emerging accounting

issues prior to the year end.

– Considered the external auditor’s

controlsreport.

– Considered output of the Internal

AuditDirector’s report.

– Received a report on export control

compliance from the Chief Counsel

Export Control and Compliance.

– Reviewed the risk radar.

– Set the parameters for work

supportingthe viability and going

concernstatements.

– Received technical accounting and

reporting updates.

– Discussed the first iteration of the

2024Internal Audit programme.

– Reviewed the Internal Audit Charter.

– Reviewed external auditor independence

and the nature and value of non-audit

services.

February

Committee

The Audit Committee’s year

June

Committee

July

Committee

The Committee holds a quarterly session with the Internal Audit Director and external auditor without management present. The Audit Committee Chair

alsomeets with the Chief Financial Officer, the Internal Audit Director and the external auditor on an ad hoc basis.

November

Meeting

Committee

December

Committee

101

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Membership from 1 January 2024:

Nick Anderson

Crystal E Ashby

Stephen Pearce

Lord Sedwill

Environmental, Social and Governance Committee report

Jane Griffiths

Chair

Dear Shareholders

This summary provides you an overview

ofthe discussions of the Environmental,

Social and Governance Committee during

2023. Page 104 below gives an outline of

ourkey areas of focus and the timeline

ofactivities. Our Terms of Reference can

befound on the Company’s website

andprovides further details of the

Committee’s responsibilities.

At each meeting, we received progress

updates from Executive Committee members

and senior leadership, against delivery of

theGroup’s ESG programme and various

initiatives. During the year, we met four

timesand, after each Committee meeting,

Ireported to the Board on the Committee’s

activities, the key matters discussed and

anyrecommendations from the Committee.

Committee composition

Our biographies, on pages 82 to 83, provide

asummary of the Committee member skills

and our experience which highlights that our

collective skills enable us to properly oversee

the Company’s progress on ESG matters.

Environment and climate transition

Environmental factors, including those related

to climate change, are one of the Group’s

principal risks. The Group’s decarbonisation

ambitions, with regard to net zero GHG

emissions (Scopes 1 and 2) by 2030, are

embedded within the strategic framework

and climate transition matters are considered

as part of the IBP. As such, climate transition

and climate resilience remained important

areas of discussion during our meetings

thisyear.

We received updates from the Climate

Resilience & Environment Director, on the

impact of climate change on the Group’s

activities, transition risks and opportunities

and also considered areas such as material

scarcity and supplier vulnerability. The

impactof the Group’s activities on the

climate, nature and biodiversity were

alsoexamined by the Committee.

Furtherdetail on the Group’s decarbonisation

strategy can be found on pages 48 to 50.

Wewere pleased tohear of the various

decarbonisation activities underway, such as:

• investment in power purchase agreements;

• site consolidation and building energy

efficiency initiatives; and

• the development of decarbonisation

products.

As approved by shareholders at the 2023

AGM, the long-term incentive plan features

an ESG objective. In 2023, the ESG metric

had a 10% weighting and was based on

thereduction of Group GHG emissions

(Scope 1 and 2) aligned toascience-based

pathway. In assessing performance against

this objective, we notedthat the Group had

achieved a reductionof 11% in Scope 1 and

2 GHG emissions.

Workplace environment

The Committee received reports on the

various workplace environment initiatives

thathad been undertaken across the Group,

to create and maintain a positive and

welcoming workforce environment. Safety,

wellbeing and the approach to diversity,

equity and inclusion (DEI) are integral to

theGroup’s employer of choice approach.

Safety

The Committee was pleased to see

theinclusion of safety as a principal risk.

Employee and product safety have long been

key areas of focus for the Group, the Board

and this Committee. The inclusion of safety

asa principal risk formalises that this remains

a key area of focus, and provides consistency

between the objectives and the risk that

those objectives seek to mitigate.

Whilst we were pleased to note an overall

improvement in the safety performance, with

the reduction of the recordable injury rate by

12.6% compared to 2022, we noted that

there had been an increase in the number

ofmajor injuries, by 25%.

At various points in the year, we heard

fromour Safety, Health and Wellbeing and

DEI Director who provided updates as to the

initiatives being taken to address the potential

increase in the severity of injuries which

occurred during the year. We learned that

thefollowing initiatives had been

implemented, with a view to improving

safetyculture and awareness:

• engagement on safety continued with

aGroup-wide focus on safety culture,

face-to-face training, leading indicators

andvisible leadership;

• additional training materials had been

made to managers and individual

contributors providing scenario-based

learning and improvements made to new

employee inductions;

• a Group-wide software platform, which

would allow managers and individuals to

review safety and input safety data, leading

to improved identification of Serious Injury or

Fatality (SIF) and sharing best practice; and

• a standardised approach to safety

investigations had been articulated which

required different injury types and potential

SIFs, to be investigated at various levels,

with major injuries being reviewed in

detailby the UK and US CEOs.

Diversity, equity and inclusion

As part of every meeting, we review an

ESGdata dashboard, which includes key

performance indicators for areas such as

safety and DEI. At our meeting in February,

we had a deep dive into the Group’s progress

in respect of its DEI ambitions. In particular,

we were pleased to note the progress

madethrough recruitment efforts; a fuller

explanation of this progress can be found

onpage 56.

102

BAE Systems plc Annual Report 2023

Directors’ report

The Group has a wide range of ERGs that

have seen an overall membership increase of

27.5% compared to 2022. We heard of the

various campaigns which brought authenticity

and personal perspectives on matters such

asmental health, menopause and veteran

workplace integration.

In 2023, the Group had a record early

careersintake with the recruitment of

1,323apprentices and 1,113 graduates and

undergraduates in the UK. The Committee

were pleased to learn that 31% of the

apprentice intake were female, and this

proportion surpassed the national average

of10% within engineering and

manufacturing apprentice placements.

The work being done across the Group

tobecome a preferred employer for service

leavers, was an area of interest for us.

AGlobal Veterans Network had been

established during the year, with membership

from the Australian, Canadian, Indian, Saudi

Arabian, Swedish, UK and US businesses.

The Group’s performance on DEI is a

non-financial component of the annual

incentive plan for senior executives. These

objectives operate as a downward underpin

to the incentive, reducing incentive payment

if performance is not at the expected levels.

We set, measure and determine the level

ofperformance achieved against all ESG

objectives and make a recommendation

tothe Remuneration Committee.

Information on further employee engagement undertaken by members of the Board can be found on pages 92 to 93.

The 2023 DEI objectives were:

• within UK/RoW: increasing gender diversity

in mid-management employees and

increasing the proportion of employees

from minority ethnic backgrounds; and

• within BAE Systems, Inc.: increasing gender

diversity in mid-management roles and

increasing the proportion of employees

from minority ethnic backgrounds, in each

case compared to 2022.

Details of the objectives forthe2024 annual

incentive plan may befound on page 114.

Communities

The communities in which we operate and

the Group’s impact are an area of focus for

this Committee and the Board. During our

meetings, we review the community impact

and investments being made across the

Group. At the end of the year, we reviewed

the contributions and commitments which

had been made in 2023. Overall, £4.8m had

been invested in STEM education initiatives,

£2.9m donated in support of armed forces

charities, £1.3m provided to local community

projects and £448k contributed to

heritageprojects.

Employee voice

In accordance with Provision 5 of the UK

Corporate Governance Code (the Code), the

Board maintains an effective mechanism to

engage with the workforce. The Committee

undertakes some employee engagement on

behalf of the Board. This approach is regularly

reviewed, to ensure its effectiveness, taking

into account contemporary employee

engagement practices.

As a Board, we discuss employee

engagement matters and feed back

important elements of conversations and

observations from our interactions. Site visits

provide useful insight into employee voice,

aswell as the considerations and concerns

ofthe local communities in which we

operate. Together with data and reports

fromsenior management, our site visits,

meetings and opportunities discussions

withemployees give us good perspective

intothe matters important to our employees

and their communities.

Jane Griffiths

Chair of the Environmental, Social

andGovernance Committee

Summary of employee engagement undertaken by the Board and its Committees

Key

Board/committee/director

Date

Location

Themes and activity

ESG Committee Chair

April

Video calls with

UKSHEandDEI team

Discussions on safety culture,

new SHIELD system, safety

performance and DEI initiatives

Board members

June

Chair’s awards

Discussions

onemployee

wellbeing

andculture

Innovation and

Technology Committee

July

Site visit to Rochester

Discussions on early careers,

diversity andcommunity

Board

September

Site visit to Warton

Discussions on

innovation, culture, key

skills and education

ESG Committee Chair

May

Video calls with

Australia SHE team

Discussions on safety

culture improvements and

integration of safety within

business teams

Board

March

Site visit. Glasgow

–Scotstoun and Govan

Discussions on culture,

early careers, safety and

gender diversity

ESG Committee Chair

June

Site visit with Shared

Services team

Board

June

Dinner with

BAESystems, Inc.

Senior Leadership Team

Discussions on culture

andkey challenges

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BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Environmental, Social and Governance Committee report continued

February

Committee (London, UK)

– Received an update on the progress of the

Group’s net zero programme and reviewed

some key developments in the Group’s

sustainable technologies.

– Discussed the application ofthe Group’s

Lobbying policies.

– Reviewed workplace safety and wellbeing.

– Discussed the progress being made in

respect of DEI ambitions.

– Joint meeting with the Audit Committee

toreview TCFD requirements, non-financial

risk register and agree the 2023 Internal

Audit programme.

June

Committee (Washington DC, US)

– Performed a deep dive on the Group’s

safety performance to date.

– Received a briefing on the progress

oftheGroup’s diversity, DEI programmes.

– Discussed the progress of the Group’s

environment and climate transition –

netzero programme.

– Reviewed the Group’s approach to

employee engagement on ESG matters.

September

Committee (Preston, UK)

– Performed a deep dive on various

stakeholders perspectives of the Group’s

ESG performance.

December

Committee (Videoconference)

– Received an update on the Group’s social

value activities, particularly in respect of

skills and education, communities and

employee wellbeing.

– Reviewed the 2023 safety and DEI

performance in respect of the outcomes

of the annual incentive plan.

– Considered the initial proposed objectives

and annual incentive targets for 2024 in

respect of safety and DEI.

February

Committee

June

Committee

September

Committee

December

Committee

The Environmental, Social and Governance Committee’s year

104

BAE Systems plc Annual Report 2023

Directors’ report

Membership from 1 January 2024:

Nick Anderson

Dame Elizabeth Corley

Nicole Piasecki

Innovation and Technology Committee report

Ewan Kirk

Chair

Dear Shareholders

I am pleased to present this report of the

Innovation and Technology Committee

andprovide a summary of our activities

during 2023. Our Terms of Reference

canbefound on the Company’s website

whichgives further details of the

Committee’s responsibilities.

We met three times during the year

andaftereach meeting I reported the

keytakeaways from our discussions and

interactions with employees during our site

visit to the Board. All of our discussions and

our site visit were undertaken in accordance

with national security requirements of the UK

andother nations. In all of our conversations,

we are particularly cognisant of and observe

the requirements of BAE Systems, Inc.’s

Special Security Agreement.

Technologies

As part of our standing meeting agenda, we

review the Group’s research and development

activities and consider relevant emerging and

current technologies.

During the Board strategy reviews, we

hearfrom the Group Chief Technology

andInformation Officer (CTIO) and

BAESystems, Inc.’s Senior Vice President

ofStrategy & Corporate Development on

theGroup’s landscape, customer priorities

and the key technology drivers for the

Group’s global customers. As part of

ourCommittee meetings, we review these

technologies inmore detail and develop a

further understanding of the Group’s ability

to effectively respond to customer needs.

In the year we learned that, due to

theevolving nature of conflicts, there is

increasing demand for agile technologies

with higher levels of resilience and

interconnectivity between tactical

andstrategic assets, as well as

commandsystems.

A brief summary of our discussions

aboutthese key technology focus areas

isprovided below.

Space

We reviewed the progress made in respect

ofAzalea

™

, the Group’s low Earth orbit,

multi-sensor satellite cluster. The 2024

acquisition of Ball Aerospace will enhance

theGroup’s already existing capabilities

todesign, build and operate satellites

andsatellite systems.

Sustainability and electrification

Sustainability remains an area of focus for

theGroup and its customers who wish to

meet national decarbonisation commitments.

We heard about the ongoing work in

regardsto sustainable alternatives such

asnovel maritime heat to power solutions,

hybrid power and propulsion, hydrogen

andmethanol fuel cells and aircraft

electrification programmes.

Quantum technologies

We also discussed quantum sensing

andthepotential incorporation into our

products,and specifically, within navigation

and detection technologies. Quantum

sensing haspotential to provide more

accurate and sensitive measurements when

used for Position, Navigation and Timing,

which reduces the need for GPS technologies.

Developments in quantum sensing could

alsoenable the detection of underwater

andstealth vehicles. During the year, we

learned of the work being undertaken

bytheUK business, working with key

universities to understand the capability

ofthese technologies and how they could

beintegrated and applied in our products.

Autonomy, uncrewed systems

andArtificial Intelligence (AI)

As part of our Board strategy discussions,

wenoted the increased use of uncrewed

andautonomous systems in various

domainsand the changing nature

ofwarfare.The Group is working on its

various programmes to develop autonomous

and counter autonomous solutions.

As a Committee, we discussed the

investments being made in AI and the

abilityto increase autonomy within design

and manufacturing processes, as well as

enhancing and creating new capability within

platforms and services. We understand that

any proposed application of AI in defence

and security must be carefully considered

andapplied in line with regulatory and

legalframeworks and we acknowledge

ongoing work by our customers to establish

appropriate principles and policies. The Board

will continue to monitor developments in this

and other technology areas.

105

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Innovation and Technology Committee report continued

Multi-domain and digital integration

Multi-domain capabilities and digital

integration continues to be an area of

focusfor the Group and therefore an

areaofdiscussion for this Committee.

Integration across the air, sea, land, cyber

andspace domains was increasingly

important for customers.

The CTIO and Technology Director provided

us with updates on our own programme

todevelop multi-domain andintegration

autonomous solutions. Weunderstood that

these capabilities could be implemented

within existing and developing products and

services, as well as those of third parties, and

deliver improved interoperability or augment

product performance. We heard about the

progress being made to improve network

robustness and resilient connectivity, and

theinvestments in developing high-fidelity

synthetic environments that could be used

fortraining and the preparation and planning

ofmissions. Further information on our

integration work can be found on page20.

Innovation culture

From an innovation culture standpoint,

wewere pleased to learn that the activities

and discussions required to deliver against

ourintegration, autonomy and other

programmes, led to increased collaboration

with various teams across business units.

Anew cross-sector manufacturing

technology strategy has been articulated.

Thisis aligned to overall Group strategy and

associated key technology drivers and will

help create a better understanding of where

we can collaborate and help deliver a more

innovative culture.

We heard about the Company’s grand

technology challenges whereby business

unitteams and university partners are

fundedand tasked with devising innovative

approaches to technical challenges.

Additionally, an entrepreneurial development

programme sponsored by the CTIO team

hasbeen created. Various cohorts of product

owners and engineers were brought together

to collaborate and were encouraged to

broaden their skillsets in an effort to augment

innovation and develop entrepreneurial skills.

Ewan Kirk

Chair of the Innovation and

TechnologyCommittee

March

Meeting (London, UK)

– Strategic context.

– Discussion on advanced programmes.

– Review of culture.

– Discussion on sustainability projects.

July

Dinner (London, UK)

– Dinner with key member of the Electronic

Systems sector to better understand

innovation culture, challenges and key

areas of management focus.

Site visit (Rochester, UK)

– Strategic context, challenges and

opportunities.

– Informal lunch with employees to

understand and hear first-hand

experiences.

– Product demonstrations and conversations

with employees.

October

Meeting (Videoconference)

– Strategic context.

– Agreed key areas of focus for 2024.

– University partnerships.

– Review of Committee operations

andkeythemes.

March

Meeting

July

Meeting

Site visit

October

Meeting

The Innovation and Technology Committee’s year

106

BAE Systems plc Annual Report 2023

Directors’ report

Membership from 1 January 2024:

Angus Cockburn

Dame Elizabeth Corley

Ewan Kirk

Contents

Remuneration Committee report 107

Quick read summary 110

2024 remuneration framework 114

Annual remuneration report 115

Remuneration Committee report

Nicole Piasecki

Chair

Dear Shareholders

On behalf of the Board, I am pleased to

present the Remuneration Committee’s

report for 2023, and to share our decisions

inrespect oftheremuneration outcomes

for2023.

The Remuneration Committee remains

responsible for the full spectrum of senior

executive employment matters, including

ensuring remuneration structures, measures

and targets that reward performance and

determine appropriate outcomes. This is

considered in the context of how performance

has been delivered, aligned with both

company values and shareholder interests.

The Company has been mindful of the needs

of our entire workforce in last year’s

inflationary environment with regard to

higher average salary increases. Lower-paid

and mid-level employees in the UK and some

other jurisdictions also received special lump

sum payments in 2023, in addition to a

performance-related bonus and annual

award of shares.

This year, we have sought to make the

remuneration report simpler and easier

toread, by including a ‘quick read’ section

onpages 110 to 114 summarising the

remuneration policy for each component

ofpay, and detailing its application and

outcome for 2023.

Achievements against each of the

performance targets for 2023 are detailed

onpage 113, showing total remuneration

foreach executive director. A summary

ofthe2024 remuneration framework is

included on page 114.

I hope that you will find these improvements

useful to our annual remuneration reporting.

A full copy of our Remuneration Policy can

befound on theCompany’s website at

www.baesystems.com/rempolicy.

Pay and performance in 2023

BAE Systems has delivered another year

ofstrong performance.

In 2023, each of our business sectors

delivered improved financial and operating

results, supported by higher defence spending

and highly relevant capabilities to meet the

current threat environment. As a result, each

of our key performance indicators have

exceeded target, including Group underlying

EPS up 14%, Group order intake of£37bn

and Total Shareholder Return of 144.8%

overthreeyears, making BAE Systems one

ofthehighest performers inthe FTSE 100.

Within this context, and considering overall

business performance, the Committee has

determined the following outcomes for the

annual andlong-term incentive plans:

Annual incentive

For executive directors, 75% of their annual

bonus opportunity is determined by financial

performance, and 25% is determined by

theachievement of key strategic objectives.

The financial performance targets are agreed

by the Committee at the beginning of the

year, in line with the Integrated Business Plan

(IBP), with appropriate performance levels

setat threshold, target and stretch. For 2023,

thefinancial outcomes exceeded stretch,

withmost but not all of the key strategic

objectives achieved (see page 123).

TheCommittee determined annual bonus

outcomes of around 98% ofmaximum for

each of the executive directors for 2023.

One-third ofthe bonus amounts are deferred

into shares for a further three years, in

accordance with our Remuneration Policy.

Our CEO pay is 84%

performance-based,

with58% paid in shares,

and a minimum

shareholding requirement

of 300% ofsalary.

2023 – another year of strong performance

• Group underlying EPS up 14%

• Group order intake at record levels

• Total Shareholder Return of 144.8% over three years, one of the highest

performers in the FTSE 100

Remuneration Committee

We achieve our objectives with

anexecutive remuneration

programme that:

• offers competitive pay that

allows us to retain and attract

top talent;

• emphasises pay for performance

that drives superior financial

results and value creation;

• provides strong alignment with

the interests of our shareholders;

• mitigates unnecessary and

excessive risk-taking; and

• considers the needs of our

entireworkforce.

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Remuneration Committee report continued

Long-term incentive

Performance Share awards were granted

toexecutive directors in 2021 with vesting

subject to the achievement of stretching

goals for relative total shareholder return

(TSR), earnings per share (EPS) growth,

cashflow and strategic progress metrics

incorporating operational excellence

(ontimedelivery of key projects), return

oncapital, and advances in technology.

For the three-year performance period

ended31 December 2023, TSR grew by

144.8%,with average annual EPSgrowth

of13.3% per annum and free cash flow

of£6.2bn over theperiod, exceeding the

stretch targets setin 2021. Not all of the

strategic progress metrics were fully achieved

(see page 124) andtherefore the Committee

determined vesting of the Performance

Shares of 97.9% of maximum for the

executive directors.

Before approving the outcomes, the

Committee considered overall financial

performance and whether there had been

awindfall gain due to market volatility at

around the time of grant in March 2021.

The2021 Performance Share awards were

granted on 25 March 2021 at a share price

of£4.999. Having considered the share

pricemovements around the time of grant,

and also having retrospectively reviewed

share price performance since grant, the

Committee was satisfied that the level of

vesting and values for the 2021 Performance

Shares is appropriate.

The Committee has discretion to reduce

formulaic outcomes if appropriate. The

Committee did not consider it necessary

inrespect of the 2023 pay outcomes.

Accordingly, the Remuneration Policy as

approved by shareholders in 2023, operated

as intended throughout the year, in the

context of company performance and

overallpay outcomes.

Taking care of our people

High price inflation continued during the

year,resulting in increased cost of living

adjustments.Employees in the UK received

anaverage 6% pay increase in 2023,

andwillreceive pay increases in 2024

averaging 4.5%for executives and 5.2%

forcollectively-bargained (manual and

professional) employees. In addition,

UKcollectively bargained and mid-level

non-collectively bargained employees

(representing around 88% of the total

UKworkforce) received a further £750 lump

sum payment in August 2023, in addition

tothe £1,000 lump sum payment received

inJanuary 2023, to help with the higher

costofliving.

The First Rate Credit Union, owned and

runby current and retired employees of

BAESystems, also provided assistance

toemployees during 2023.

Additionally, UK employees are eligible

toreceive a performance-related bonus,

plusan annual award of shares worth

£629for2023, as wellas company pension

contributions, freematching shares through

the all-employee Share Incentive Plan, life

insurance, income protection insurance,

andaccess to shopping discounts, and

otherhealth and wellbeing benefits through

aflexible benefits platform, including a

24/7/365 employee assistance helpline.

In the US, average salary increased by5%

for2023. For 2024, average salary increases

of around 4% are expected, with additional

off-cycle increases for critical talent.

Summary of key decisions

andoutcomes

• 2024 salary increase for executive

directors is 4.5%, in line with the low

endof increases for the UKworkforce.

• 2023 annual bonus payouts for

executive directors are around 98%

ofmaximum.

• 2024 annual bonus will be based 75%

onIBP stretch goals for earnings, cash

and order intake, and 25% based on

theachievement of strategicobjectives

witha safety and DEIunderpin.

• Performance Shares granted in March

2021 will vest at 97.9% of maximum

based on three-year performance to

31December 2023.

• Performance Shares to be granted

in2024 will be subject to the same

performance measures as applied

in2023, with stretching targets.

108

BAE Systems plc Annual Report 2023

Directors’ report

Executive director pay in 2024

The Committee is comfortable that the

internal pay relativity reference points set

outin this report and external market

positioning, provide justification that the

current remuneration structure is appropriate.

Accordingly, for 2024, no revisions are

proposed to the executive remuneration

framework that would constitute a change

tothe Remuneration Policy.

Base salary

In line with the low end of the pay increases

for UK employees in 2024, the executive

directors have received base salary increases

of 4.5% with effect from 1 January 2024.

Annual incentive

The annual bonus structure and opportunity

for executive directors will remain unchanged

in 2024, with 75% determined by financial

performance and 25% determined by

theachievement of key strategic objectives.

For2024, the performance measures

andweightings will continue to be based

onearnings, cash and order intake, with

performance targets set in line with the

Integrated Business Plan (IBP).

Long-term incentives

The Committee rebalanced the

performancemeasures in 2023, to better

align with business goals, introducing a return

on capital employed (ROCE) measure and

adding specific and measurable environmental,

social and governance (ESG)goals. For2024,

the Committee has maintained thesame

performance measures andweightings.

The competitive environment

We continue to operate in a very

competitivemarket for skills and talent,

notonly in the UK, but throughout our

majormarkets inthe United States,

Australia,the Kingdom of Saudi Arabia,

andother key international markets.

Our employees are highly skilled and

experienced, and critical to the delivery of

ourfuture business ambitions. Accordingly,

our approach to remuneration needs to

beflexible and appropriate tothe various

markets in which we compete for talent.

Two of our executive directors have US

nationality, with one based in the US, leading

our US business representing 43% of our

global revenues. Many of our employees

arein demand globally, so we need a

Remuneration Policy that enables us to

respond quickly to competitive threats

fromwherever they arise.

The Remuneration Policy approved by

shareholders at the 2023 AGM provided

renewed opportunity to compete in this

increasingly challenging environment, and

Iam grateful for the feedback and support

ofshareholders at the 2023 AGM who

votedfor our Remuneration Policy proposals

with more than 97% in favour.

We will continue to keep our Remuneration

Policy under review, to ensure that it remains

sufficient to recruit and retain employees

thatare critical to our future success.

Committee changes

I cannot close without thanking the

Committee for their knowledge, insight and

challenge during the year, and in particular,

Chris Grigg who retired from the Board and

Committee in December 2023. I am delighted

that both Ewan Kirk and Angus Cockburn

have joined and will further strengthen

theCommittee.

In conclusion

I hope that you will find this year’s report

aclear account of the Committee’s

considerations, decisions and explanation

ofthe remuneration outcomes for 2023.

Furthermore, I hope that you will continue to

support the Committee in its determination

to enable fair and effective remuneration

linked to business results and shareholder

returns, while securing the key skills needed

for our future success.

On behalf of the Board

Nicole Piasecki

Chair of the Remuneration Committee

We need a Remuneration

Policy that enables us

torespond quickly to

competitive threats.

We received strong

shareholder support for

our Remuneration Policy

in 2023, with more than

97% in favour.

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Quick read summary

Remuneration policy summary and 2023 implementation

This section summarises the key features of the remuneration policy approved by shareholders at the 2023 AGM.

Please refer to the 2022 Annual Report (available on the Company’s website) for full details.

Remuneration element

and time horizon Policy summary 2023 implementation

Base salary

2023

2025

2024

2026

2027

Operation

Base salaries are reviewed annually, taking

intoaccount performance, skills, the scope

oftherole,and the individual’s time in role.

Opportunity

Increases for executive directors will generally

notexceed the average percentage increase

foremployees asa whole. As a maximum,

inexceptional circumstances (e.g. a material

increase in job sizeor complexity, or for a

recentlyappointed executive director where

salary has been positioned low against

themarket), the increase is not expected to

exceed 10% in any single year for executive

directors performing in the same role.

Performance

Business and individual performance will

betakeninto consideration.

Base salary

Effective

1 January

2023

Effective

1 January

2024

increase

Charles Woodburn £1,180,635 £1,233,764 4.5%

Brad Greve £750,150 £783,907 4.5%

Tom Arseneault $1,094,080 $1,143,314 4.5%

UK employees below board (average) 4.5% – 5.2%

Pension

2023

2025

2024

2026

2027

Operation

For UK executive directors, a defined

contributionpension plan, or a salary

supplementin lieu, or some combination

thereof.Base salary is the only element of

pensionable remuneration. The President

andCEO of BAE Systems, Inc. participates in

theUS Defined Benefit pension plans and a

USSection 401(k) defined contribution plan.

Opportunity

The maximum employer contribution for

theChief Executive has been aligned to

theweighted average of the UK workforce.

Themaximum employer contribution for any

newUK executive director is in line with the

levelavailable to new joiners to the wider

UKworkforce. The maximum annual accrual

forthe US Defined Benefit pension plans is

$1,500, and the maximum 401(k) contribution

is6% of base salary, capped at applicable

USregulatory limits.

Performance

No performance conditions.

Pension contributions during 2023 (% of salary)

Charles Woodburn 14%

Brad Greve 8%

Tom Arseneault US DB + 401(k)

(see page 121)

Benefits

2023

2025

2024

2026

2027

Operation

Employment benefits which are competitive

inline with relevant home market.

Opportunity

The maximum amount is the cost of providing

thebenefits, subject to the limits of those

benefitplans and any tax or regulatory limits.

Performance

No performance conditions.

Benefits during 2023 include:

– Transportation benefits

– Financial and tax advice support

– Medical benefits

(see page 121).

110

BAE Systems plc Annual Report 2023

Directors’ report

Remuneration element

and time horizon Policy summary 2023 implementation

Annual incentive

2023

2025

2024

2026

2027

One-third

deferred for

threeyears

Operation

Annual cash bonus linked to in-year financial

performance, corporate responsibility and other

non-financial objectives. One-third of the total

net bonus is compulsorily deferred for three

yearsinto shares without any matching.

Malusand clawback provisions apply.

Opportunity

No bonus for below threshold performance,

with20% of maximum at threshold; 50%

ofmaximum at target; 100% of maximum

atstretch; and payout determined on a

straight-line basis for performance in-between.

Performance

75%-80% of targets will relate to financial

metrics aligned with long-term earnings and

cash. The non-financial element will be based

ona combination of personal performance

objectives that provide clear line of sight to our

strategic objectives including those in relation

toESG, safety measures, diversity, equity

andinclusion.

At target

(% of salary)

At maximum

(% of salary)

Actual 2023

(% of max)

Charles Woodburn 112.5% 225% 98.375%

Brad Greve 100% 200% 98.125%

Tom Arseneault 112.5% 225% 98%

2023 performance measures

UK executive directors

A Financial performance 75%

EPS 45%

Cash 22.5%

Order intake 7.5%

B Key strategic objectives 25%

(see page 123)

Long-Term Incentives

Performance shares

2023

2025

2024

2026

2027

Performance

Deferral

Restricted shares

(USexecutive director)

2023

2025

2024

2026

2027

Service

Clawback

period

Operation

Performance Share awards are subject tothree-

year performance conditions. For UKexecutive

directors, shares are deferred forafurther two

years and vest from the fifth anniversary of grant,

and for US executive directors the shares vest in

three equal trancheson the third, fourth and fifth

anniversaries of grant.

USexecutive directors receive Restricted Shares,

subject to remaining employed for threeyears

after grant, with a requirement toretain those

shares for a further two-year clawback period.

Opportunity

Nil vesting for below threshold performance,

with25% of maximum at threshold; 50% of

maximum at target; 100% of maximum at

stretch; and vesting on astraight-line basis

between these points.

Performance

Direct financial measures based on the KPIs that

drive our financial ambitions, linked to long-term

strategic priorities. The Committee has discretion

to override the formulaic outcome if it is not

reflective of underlying performance. Malus

andclawback provisions apply.

No performance conditions for Restricted Shares.

Performance shares

Maximum opportunity

(% of salary)

2023 grant

(% of salary)

Vesting based

on performance

ending in 2023

(% of max)

Charles Woodburn 370% 370% 97.9%

Brad Greve 335% 335% 97.9%

Tom Arseneault 440%

440%

97.9%

1. Plus 150% salary in Restricted Shares.

2021 grant performance measures (performance period ended 2023)

A Group EPS growth 25%

B TSR vs FTSE 100 25%

C Cash flow 25%

D Strategic progress 25%

D A

2023 grant performance measures

A Group EPS growth 30%

B TSR vs FTSE 100 15%

C Cash flow 30%

D ROCE 15%

E ESG 10%

111

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Quick read summary continued

Remuneration policy summary and 2023 implementation continued

Remuneration element

and time horizon Policy summary 2023 implementation

Minimum

Shareholding

Requirement (MSR)

Employment

Post

(UK)

Post

(US)

Executive directors are required to establish

andmaintain a minimum shareholding equal

toaset percentage of base salary. Executive

directors are expected to achieve 50% of

theMSR as quickly as possible, and achieve

thefull MSR within a five-year period.

If an executive director leaves employment

forany reason, they are required to maintain

aminimum level of shares for a minimum

periodpost-cessation.

Full MSR

(% of salary)

Post-cessation MSR

(% of salary)

Actual shareholding

31December 2023

(% of salary)

Charles Woodburn 300% 300% for two years 485%

Brad Greve 200% 200% for two years 150%

Tom Arseneault 425% 300% for one year 1,176%

Shareholder

voting

The outcomes of shareholder voting on the

resolutions to approve the annual Remuneration

Report at the 2023 AGM, and the latest vote

(in2023) ontheDirectors’ Remuneration Policy

are shown in the charts opposite.

Repo

Poli

2.18%

For

97.82%

97.61% 2.39%

Against

Total Shareholder

Return (TSR)

The total return to BAE Systems’ shareholders

(including share price growth and dividends)

over the ten-year period to 31 December 2023,

compared to the FTSE 100 index.

£100 invested in BAE Systems on 31 December

2013 was worth £381.74 by 31 December

2023, compared to £167.98 if invested in

theFTSE100.

The bars in the chart represent total

remuneration of the Chief Executive.

£0

£50

100

£150

£200

£300

£350

£400

£450

£500

£550

£250

FTSE 100

Chief Executive remuneration

1,000

2,000

3,000

4,000

5,000

11,000

7,000

8,000

9,000

10,000

6,000

12,000

13,000

BAE Systems

£’000

20232022202120202019201820172016201520142013

112

BAE Systems plc Annual Report 2023

Directors’ report

2023 performance outcomes

Actual performance against targets set for 2023 Weight (% of maximum)

Threshold Target Stretch Actual

UK executive

directors

US executive

director

% of maximum

achieved

Annual bonus

Group underlying EPS

45.0% 15.0% 100%

54.2p 57.0p 58.7p 63.5p

Group net cash/(debt)

22.5% 7.5% 100%

£(2,942)m £(2,542)m £(2,142)m £(1,108)m

Group order intake

7.5% 2.5% 100%

£19.7bn £20.8bn £21.8bn £37.3bn

Inc. underlying EBIT

30.0% 100%

$1,580.9m $1,650.9m $1,695.9m $1,715.8m

Inc. net cash/(debt)

15.0% 100%

$2,383m $2,608m $2,833m $3,210m

Inc. order intake

5.0% 100%

$11.3bn $11.9bn $12.4bn $19.8bn

Key strategic objectives

See key strategic objectives on page 123

25.0% 25.0% 92%–93.5%

100% 100% 98%–98.375%

Long-term incentives

Annual average EPS growth (3-year)

25.0% 25.0%

3.0%

per annum

5.0%

per annum

7.0%

per annum

13.3%

per annum

100%

TSR vs FTSE 100

13.6%

median

53.5%

80th percentile

144.8% 25.0% 25.0% 100%

Free cash flow £3.7bn £4.0bn £4.2bn £6.2bn 25.0% 100%

Inc. operating cash flow $3,754m $3,979m $4,429m $4,985m 25.0% 100%

Strategic progress metrics

– Operational excellence (on time delivery)

UK executive directors

–5%

Improvement in

3-year average

+3% +6.4% 8.3% – 100%

– Operational excellence (on time delivery)

US executive director

–5%

Improvement in

3-year average

+3% +5.8% – 8.3% 100%

– Return on capital employed 14.98% 15.23% 15.48% 17. 22% 8.3% 8.3% 100%

– Advance technology 50% 75% 100% 87.5% 8.3% 8.3% 75%

100% 100% 97.9%

Note: Actual results adjusted to be on a comparable basis with the targets, including alignment of foreign exchange rates.

Total remuneration

The charts below provide a breakdown of the total remuneration received by the executive directors and their maximum total remunerationopportunity.

Charles Woodburn

(£’000)

2022 (actual) 1,356 2,490 8,161 12,008

13,451

13,696

9,450

9,652

2,613

2,656

2023 (actual) 1,387

2023 (maximum)

1,387

Brad Greve

(£’000)

2022 (actual) 741 1,025 6,366

7,126

7,256

4,807

4,599

4,909

1,472

1,500

2023 (actual) 846

2023 (maximum)

846

Tom Arseneault

(£’000)

2022 (actual) 996 1,865 4,629 8,751

9,259

9,407

5,015

5,123

1,261

1,350

1,940

1,980

2023 (actual) 954

2023 (maximum)

954

Fixed (base salary, benefits and pension contributions)

Annual incentive

Performance Shares

Other (Restricted Shares, free shares and matching shares under the UK all-employee Share Incentive Plan).

The totals for Charles Woodburn and Brad Greve include between £1k and £2k attributable to ‘Other’.

The values for the 2020 Performance Shares which vested based on the three-year performance period ended 31 December 2022, have been updated to reflect the share

price at the date of vesting on 25 March 2023 (£9.73). Thiswasnot known at the date of publication of the 2022 Annual Report, so the Performance Shares vesting values

were based on the three-month average share price to 31 December 2022 (£8.127). Further details can be found on page 120.

113

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Quick read summary continued

2024 remuneration framework

Charles Woodburn

CEO

Brad

Greve

CFO

Tom Arseneault

President and

CEO Inc.

Base Salary

£1,233,764 £783,907 $1,143,314

Pension

andbenefits

Pension

Defined contribution

(14% of salary)

Defined contribution

(8%ofsalary)

US defined benefit

andSection 401(k)

definedcontribution

Benefits

Transportation benefits

Financial and tax advice support

Medical benefits

Annual Incentive On-target/maximum opportunity

(%salary)

112.5%/225% 100%/200% 112.5%/225%

Performance condition

75% financial (earnings, cash and order intake)

25% non-financial (key strategic objectives)

Deferral into Deferred

Bonus Plan

One-third compulsorily deferred for three years

Performance

Grant (% salary) 370% 335% 440%

Performance condition

30% three-year diluted underlying EPS growth

15% relative TSR vs FTSE 100

30% cash flow

15% return on capital employed

10% ESG metrics

Vesting

Three-year performance conditions,

vests in year 5

Three-year

performanceconditions

andvested shares released

one-third in years 3, 4, 5

Restricted

Grant (% salary)

n/a 150%

Vesting n/a

Three-year service

conditionand two-year

clawback period

Minimum

Shareholding

Requirement

(% salary)

300% 200% 425%

Post-cessation shareholding requirement

(% salary)

300% for

two years

200% for

two years

300% for

one year

114

BAE Systems plc Annual Report 2023

Directors’ report

This section provides further detail on the remuneration of theexecutive directors, as well as

theremuneration of the non‑executive directors (including the Chair), during the financial year

ended 31 December 2023. Together with the Committee Chair’s report and quick read summary

on pages 110 to 114 inclusive, it will be proposed for an advisory vote by shareholders atthe

2024Annual General Meeting (AGM).

It has been preparedon the basis prescribed in Schedule 8 of the LargeandMedium‑sized Companies and Groups

(Accounts andReports) Regulations 2008.

UK Corporate Governance Code 2018

Reporting against Code requirements canbe found as follows:

Strategic rationale for our directors’

remuneration Pages 116 and 119

Appropriateness of ourremuneration

Pages 116, 118 and 132–133

Addressing Provision 40 factors Page 118

Operation of our policy Pages 107–112

Engagement with shareholders Page 117

Engagement with workforce Page 117

Exercise of discretion Pages 107–109

Annual remuneration report

for the year ended 31 December 2023

Contents

Statement of voting 115

Our reward approach

andstrategicrationale 116

Engagement with our stakeholders 117

Remuneration principles 118

Implementation of policy for 2024 119

‘Single figure’ of remuneration –

executivedirectors 120

Benefits 121

Pension entitlements 121

Annual bonus 122

Key strategic objectives 123

Long-Term Incentive Plan (LTIP)

performance 124

Share interests:

– Description of share plans 125

– Scheme interests awarded

duringthefinancial year 126

– Statement of directors’

shareholdingsand share interests 127

Executive directors’ service contracts 129

‘Single figure’ of remuneration for

theChair and non-executive directors 130

Chair and non-executive directors’

lettersof appointment 131

Pay comparisons 132

Remuneration Committee

composition andadvisers 134

The Remuneration Committee’s year 134

Statement of voting

Shareholder voting on the resolutions to approve the Annual remuneration report and the

Directors’ remuneration policy put to the 4 May 2023 AGM were:

Annual remuneration report

Votes for % Votes against % Total votes cast

Votes withheld

(abstentions)

2,159,695,607 97.82 48,155,233 2.18 2,207,850,840 1,023,290

Directors’ remuneration policy

Votes for % Votes against % Total votes cast

Votes withheld

(abstentions)

2,150,307,412 97.61 52,732,857 2.39 2,203,040,269 5,851,354

The current Directors’ remuneration policy approved at the 2023 AGM is available on the

Company’s website at www.baesystems.com/rempolicy.

115

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Annual remuneration report continued

Our reward approach and strategic rationale

Our people strategy is designed to support our aim to retain, attract and develop talent. This is delivered through robust succession

planning,targeted recruitment, focused talent management, a culture of inclusivity, learning and development and a competitive

employeevalue proposition.

Accordingly, as set out in its terms of reference (available on our Company website at baesystems.com), the Remuneration Committee has

responsibility for determining the policy for executive director remuneration and ensuring that it is aligned to the Company’s values andclearly

linked to the successful delivery of its long-term strategy. As part of this, the Committee reviews group workforce remuneration and related

policies, and the alignment of incentives and rewards with culture, taking these into account when setting the policy for executive remuneration.

This was considered as part of the core principles in the renewal of the 2023 Remuneration Policy (2023 Policy), including how reward policy

and practice compares across the wider workforce.

The table below sets out our strategic rationale for each element of remuneration and how our remuneration structure applies for the different

groups of employees within BAE Systems.

Remuneration element and

strategic rationale

Executive

directors

Executive

Committee

Senior

executives

Middle

management

Wider

workforce

Base salary

Recognises market value of role

and individual’s skills, experience

and performance to ensure

thebusiness can attract and

retaintalent.

Base salaries are based on a market pay approach, taking into account performance, skills, the

scope of the role, and the individual’s time in role.

Normally reviewed annually with increases typically in line with the wider workforce.

Base salary is either

subject to negotiation

with recognised trades

unions and/or is set in

linewith market and/

or performance.

Pension andbenefits

Provides employment and

post-retirement benefits that

aremarket competitive as part

ofoverall package.

Range of employment benefits and competitive post-retirement benefits in line with relevant home market.

Short‑term incentives

Drives and rewards annual

performance of both financial

andnon-financial metrics,

including leadership behaviours,

inorder to deliver sustainable

growth inshareholder value.

Compulsory deferral intoshares

increases alignment with

long-term shareholder interests.

Annual cash bonus linked to in-year financial

performance, corporate responsibility and other

non-financial objectives.

Compulsory deferral for three years into shares

without any matching.

Annual cash bonus

linked to in-year

KPIsand other

personal objectives

and behaviours.

Compulsory deferral

for three years into

shares without

anymatching

(forthemajority

ofUKandRest of

Worldexecutives).

Annual cash bonus

linked to in-year

business and

individual

performance.

In UK businesses,

cash bonustypically

based onin-year

business and/or

individual

performance.

None in US, Australia

or the Kingdom of

Saudi Arabia.

Long‑term incentives

Longer term reward, predominantly

in shares, providing alignment

with interests of our shareholders.

Performance shares drive our

financial ambitions for the

Company, with measures linked

toour key long-term strategic

priorities including our

sustainability agenda, aligned to

the interests of our shareholders.

Restricted shares are designed

topredominantly help ensure

remuneration for senior US-based

executives is competitive in the

local market.

Eligible employees may participate in and receive free matching shares in our Company Share Incentive Plan (SIP)

orinternational equivalent.

The Company rewards eligible employees with annual award of free shares, or cash equivalent, based on our Group

financialperformance.

Performance shares are

subject to three-year

performance conditions

(andfurther holding

requirements).

Restricted shares vest

subject to remaining

employed for three years,

with a further two-year

clawback period (applicable

in the US only).

Performance shares are subject to

three-year performance conditions.

Restricted shares vest subject to

remainingemployed for three years

(predominantly applicable in the US).

116

BAE Systems plc Annual Report 2023

Directors’ report

Engagement with our shareholders

In line with our commitment to full transparency and engagement with our shareholders on the topic of executive remuneration, the

Remuneration Committee Chair periodically writes to our major shareholders and also the Institutional Shareholder Services, the Investment

Association and Glass Lewis, to set out our planned remuneration changes.

In particular, during the formulation of the 2023 Policy, the Remuneration Committee Chair engaged directly with and met our major

shareholders to discussand seek their views on potential changes. The Remuneration Chair values direct engagement with our shareholders

andmade herself available for such meetings to hear their perspective on remuneration matters which helped shape the 2023 Policy.

Engagement with our workforce

The safety, wellbeing, skills, capabilities and commitment of our people are critical to ensuring the long-term sustainability of our business

anddelivering the innovation needed to solve our customers’ complex challenges. Effective engagement enables our employees to contribute

toimproving business performance and helps us to create an environment in which everyone is safe, valued and can fulfil their potential.

Both the Board as a whole and the ESG Committee undertake workforce engagement. Feedback from the ESG Committee on its engagement

activities, and insights from the Board’s own conversations and observations from employee interactions at site visits and in various other

forums, all provide useful context. This, coupled with data and reports from senior management, gives good perspective for the Board into

employee voice, including matters important to the wider workforce. Further detail on Board and ESG Committee employee engagement can

be found on pages 93 and 103.

During 2023, we used a range of channels to engage with employees across the Group, including in-person and virtual meetings, briefings,

conferences, toolbox talks, safety stand-downs, events and listening forums at all levels. Leaders provided regular updates aswell as attending

events throughout the year. We also engaged with employees using digital channels including our Employee App, intranet, email and TV systems.

Our Employee Resource Groups (ERGs) are important to creating an inclusive work environment where everyone feels they belong, and

educating employees about the unique issues our colleagues face in and out of the workplace. We also consult with our employees and their

representatives regularly and ona wide variety oftopics. Their views are taken into account in our decision-making processes on matters

thataffect their interests.

Engagement with our trades unions

Engagement forums continued with trades unions in Australia and the UK and labour unions in the US.

Engagement on executive remuneration

This report is the principal means through which we communicate and engage with employees on how executive remuneration aligns with

thatof the wider workforce. Over 53,000 of the Company’s employees who are shareholders in the Company receive email communications

with a direct link to this report on the Company’s website and an invitation to vote on the resolutions being put to the Annual General Meeting

(AGM), including those resolutions on executive remuneration. The results of employee shareholder voting on the AGM resolutions, including

those relating to executive remuneration and the renewal of our remuneration policy in 2023, are subsequently reported to the Board for

discussion. This is not used to seek feedback on individual outcomes.

Engagement on wider workforce remuneration

The Committee regularly undertakes in-depth sessions to build its understanding of reward arrangements applicable to the wider workforce

across different populations and geographies. The Committee has continued to deepen its approach, not only due to the broader governance

requirements, but because it believes that well-designed remuneration can be a tool of culture change and progressive improvement in

Company performance. Such sessions provide assurance that the remuneration for the wider workforce is consistent with market trends,

withregulation, and support an inclusive work environment in line with our focus on Diversity, Equity and Inclusion.

These sessions have covered a range of topics including the outcome of the annual reward review, spotlight on the total reward package

withindifferent workforce populations and geographies and the outcome of our UK gender and ethnicity pay analysis.

117

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Financial statements Additional informationGovernanceStrategic report

Annual remuneration report continued

Remuneration principles

The Committee has established six core principles which underpin our approach to executive remuneration. The principles are aligned to

theCompany’s strategic objectives, taking account of shareholder expectations and the remuneration factors set out in Provision 40 of the

UKCorporate Governance Code (the Code). The Committee considered these principles in the renewal of our 2023 Policy, whilstbeing mindful

of the alignment and fairness of remuneration with the wider workforce. The table below shows this close alignment between the Committee’s

core principles and the Code’s factors, including how the Committee addresses each factor.

Factor within Provision 40 How the Committee addresses the factor

Clarity

Remuneration arrangements

should be transparent and

promote effective engagement

with shareholders and

theworkforce.

In line with our commitment to full transparency and engagement with

ourshareholders on the topic of executive remuneration, the Remuneration

Committee Chair periodically engages with our major shareholders to set

outthe changes planned. In a year of significant change, the Remuneration

Committee Chair will consult with our major shareholders todiscuss

andseekviews on potential changes.

The Company consults directly with the broader employee population

ontheirremuneration through a variety of methods including virtual

meetings, explanatory guides hosted on the intranet, human resources or

business-led briefings, direct line manager engagement and materials posted

to employees’ homes (see also page 117 for engagement on executive pay).

Simplicity

Remuneration structures

shouldavoidcomplexity and their

rationale and operation should be

easy tounderstand.

Simple three-part construct of salary, annual incentive and long-term

incentives has been in use for a number of years.

Use of a single ‘umbrella’ LTI plan allowing for simplicity and flexibility

ofdesign.

Risk

Remuneration arrangements

should ensure reputational

andother risks from excessive

rewards, and behavioural risks

that can arise from target-based

incentive plans, are identified

andmitigated.

Full range of design features exist within remuneration arrangements to take

risks into account as follows:

– malus and clawback mechanisms within annual and long-term incentives;

– Remuneration Committee application of reasonable discretion to override

formulaic outcomes; and

– safety targets expected to be met in all circumstances, with a downward

underpin applying within the annual incentive in the event of below-

targetperformance.

Predictability

The range of possible values

ofrewards to individual

directorsand anyother limits

ordiscretions should be identified

and explained at the timeof

approving the policy.

Our remuneration policy contains the following:

– maximum award levels and vesting outcomes applicable to annual

andlong-term incentives; and

– as set out above in Risk, the Committee has the ability to apply malus,

clawback and reasonableness discretion where appropriate.

Proportionality

The link between individual

awards, the delivery of strategy

and the long-term performance

of the Company should be clear.

Outcomes should not reward

poor performance.

Performance conditions attached to annual and long-term incentive

arrangements require a minimum level of performance to be achieved before

any payout is made. There is a direct link between anindividual’s reward and

their contribution to driving strategy and increasing Company performance.

No payment is made for poor performance. Any individual’s performance that

is below expectations is dealt with as part of our performance management

process – any individual leaving due to performance issues would not be

entitled to any incentive payments.

Alignment to culture

Incentive schemes should

drivebehaviours consistent

withCompany purpose,

valuesand strategy.

As set out on pages 116 and 119, there is a direct link between driving

BAESystems’ strategy and an individual’s reward, with incentive measures

chosen as they align with the Company’s shared strategic objectives.

As shown to the right, the Committee has applied six core principles which

underpin the philosophy and approach to executive remuneration to ensure

alignment to the Company’s strategic objectives.

Remuneration Committee

coreprinciples

Simplicity

Clarity and simplicity of design;

ease of understanding by

executives and external

stakeholders.

Motivational

Plans are relevant and meaningful

with clear line of sight between

actions and reward outcomes;

metrics and targets which drive

superior performance and value

for shareholders.

Aligned with

shareholderinterests

Close alignment of reward

outcomes and shareholder

experience; long-term share

ownership and ‘skin in the

game’for executives.

Globally competitive

Reward opportunity

alignedtorelevant competitive

employment market; enabling

mobility across different

businesses and geographies.

Reflects ESG progress

Embedding the sustainability

agenda to benefit all stakeholders;

compliance and scrutiny of

executive pay and fairness relative

to the wider workforce.

Flexibility

Transparent and responsible

application of discretion to

override formulaic outcomes;

ability to respond to special/

unforeseen circumstances

duringlife of binding policy.

118

BAE Systems plc Annual Report 2023

Directors’ report

Strategic alignment of our incentives

The chart below shows how our remuneration framework directly aligns to our shared strategic objectives through the use of incentive

arrangements that support the Company’s strategy.

Annual incentive

Long-term incentive

How our strategic objectives aremeasuredin our incentives

Shared strategic objectives

Sustain and grow

ourdefence

and security

business

Continue to grow

ourbusiness in

adjacent markets

Develop and

expandour

international

business

Enhance financial

performance and

deliver sustainable

shareholder growth

Inspire and

developa diverse

workforce to drive

success

Advance and

integrateour

sustainability

agenda

Free cash flow

Order intake

Key strategic objectives

Earnings per share

Relative Total Shareholder Return

Cash flow

Return on capital employed

Environmental, social and governance

Earnings per share

Implementation of our policy in the year ending 31 December 2024

For the purposes of the Companies Act 2006, the Directors’ remuneration policy (the Policy) has been operating in practice since the date of

its approval on 4 May 2023 at the 2023 AGM (and is available on the Company’s website). The remuneration for 2024 will be implemented

as follows:

– The salary of the executive directors with effect from 1 January 2024 is: Chief Executive £1,233,764; Chief Financial Officer £783,907;

andthe President and Chief Executive Officer of BAE Systems, Inc. $1,143,314.

– Annual and Long-Term Incentive opportunity levels are in line with the 2023 Policy as set out on page 114.

– Long-Term Incentive awards of Performance Shares only for UK executive directors, and Performance Shares andRestricted Shares

forourUS executive director.

– The performance metrics applicable to the 2024 Annual Incentive will remain 75% on financial metrics relating to earnings, cash and

order intake at a Group level, and additionally, in the case of the US executive director, at a BAE Systems, Inc. level. Thecash metric will

bemeasured on free cash flow, replacing the former net cash/(debt) metric. The remaining 25% will continue to be based on the

achievement of key strategic objectives. The weightings of the financial metrics are:

For UK executive directors: For US executive director:

Group EPS – 45% Group EPS – 15%

Group free cash flow – 22.5% Group free cash flow – 7.5%

Group order intake – 7.5% Group order intake – 2.5%

BAE Systems, Inc. EBIT – 30%

BAE Systems, Inc. free cash flow – 15%

BAE Systems, Inc. order intake – 5%

Key strategic objectives designed to support the Group’s strategy and with Safety and Diversity, Equity and Inclusion (DEI) applying as

adownward underpin onthiselement – 25%.

The Committee is of the view that bonus targets for the Annual Incentive are commercially sensitive and that it would be detrimental

tothe Company to disclose them in advance. The targets will be disclosed retrospectively after the end of the relevant financial year.

– The performance measures and weightings for 2024 for the Long-Term Incentives are set out on pages 114 and 125.

119

BAE Systems plc Annual Report 2023

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Annual remuneration report continued

‘Single figure’ of remuneration – executive directors (audited)

The following table shows the single total figure of remuneration for each executive director in respect of qualifying services for the 2023

financial year, together with comparatives for 2022.

Fixed Variable

LTIP

Base

salary

£’000

Benefits

£’000

Pension

£’000

Total

fixed

£’000

AIP

£’000

Face value

£’000

appreciation

£’000

Total

LTIP

£’000

Other

£’000

Total

variable

£’000

Total

£’000

2023

Charles Woodburn 1,181 41 165 1,387 2,613 4,012 5,438 9,450 1 12,064 13,451

Brad Greve 750 36 60 846 1,472 2,041 2,766 4,807 1 6,280 7,126

Tom Arseneault 880 60 14 954 1,940 2,129 2,886 5,015 1,350 8,305 9,259

2022

Charles Woodburn 1,135 37 184 1,356 2,490 3,626 4,535 8,161 1 10,652 12,008

Brad Greve 657 31 53 741 1,025 2,043 2,556 4,599 1 5,625 6,366

Tom Arseneault 851 56 89 996 1,865 2,057 2,572 4,629 1,261 7,755 8,751

The above table has been subject to audit.

The single figure table of remuneration for the Chair and non-executive directors is on page 130.

1. This column relates to the base salary received by the executive directors.

Tom Arseneault is paid in US dollars with the disclosed figures being converted into pounds sterling at the required exchange rate.

TomArseneault’s 2023 salary reflects his 4% increase and the exchange rate fluctuations experienced during 2023.

2. The benefits received by the executive directors are detailed on page 121.

3. The figures for Charles Woodburn and Brad Greve relate to a salary supplement in lieu of Company pension contributions and the added

pension value received in the year from their defined contribution schemes in respect of the employer contributions. The figures for Tom

Arseneault include company contributions paid into his Section 401(k) defined contribution arrangements. The figures for Tom Arseneault

also reflect defined benefit arrangements calculated in line with the method set out in Section 229 of the Finance Act 2004 using a

capitalisation factor of 20 for the life pension, a x10 factor for the ten-year pension and a x1 factor for the lump sum benefit (see page 121).

4. Further detail on bonus payments is provided on pages 122 and 123. One-third of the net bonus paid will be deferred compulsorily into

BAESystems shares for a three-year period, without additional performance conditions.

5. These columns relate to the estimated or actual value of Long-Term Incentive Plans for which the performance period ended in the relevant

financial year.

The 2023 values in the LTIP columns are calculated on the basis of the three-month average share price of £10.6475 as at 31 December 2023

and relates to the vesting portion including shares deriving from notional reinvested dividends, of the 2021 Performance Share award for

which the performance period ended on 31 December 2023. Vesting is 97.9% overall for UKdirectors and 97.9% overall for the US director.

See page 124 for further detail.

As required by regulation, the estimated vesting values for the awards shown in the 2022 columns (which were calculated in the 2022

AnnualReport on the basis of the three-month average share price of £8.1272 as at 31 December 2022) have been adjusted to reflect the

actual value on the vesting of the Performance Share award in March 2023 based on the then share price of £9.73 and excludes the value

ofthe shares deriving from notional reinvested dividends in respect of Performance Share awards already disclosed in a prior year’s single

figure remuneration table. The figures reported in the 2022 column in the 2022 Annual Report on the estimated basis were Charles

Woodburn: £6,846k; Brad Greve: £3,842k and Tom Arseneault: £3,869k. The respective figures in the 2022 Total and Total variable

remuneration columns have been recast accordingly. Additionally, theChief Executive’s single total figure for 2022 as referenced on pages

112, 113, 132 and 133 has been recast.

6. This column includes (i) the value of Free Share awards under the UK all-employee Share Incentive Plan (SIP) of £629 for Charles Woodburn

andBrad Greve, and their respective Matching Shares under voluntary investment in the SIP; and (ii) for Tom Arseneault, the value of the

2023 grant of Restricted Shares (£1,350k). This award formed part of Tom Arseneault’s 2023 LTIP allocation but is required to be reported

under ‘Other’ as it has no performance conditions attached.

There were no payments to former directors in 2023.

120

BAE Systems plc Annual Report 2023

Directors’ report

Benefits (audited)

Benefits received by the executive directors are detailed below.

Transportation benefits

Financial and tax advice support Medical benefits

Total

2023

£’000

2022

£’000

2023

£’000

2022

£’000

2023

£’000

2022

£’000

2023

£’000

2022

£’000

Charles Woodburn 25 25 8 6 8 6 41 37

Brad Greve 20 19 8 6 8 6 36 31

Tom Arseneault 25.5 21.5 12 12 22.5 22 60 55.5

1. For UK executive directors includes Company car or cash allowance. For US executive director includes private use of chauffeur-driven car and Company aircraft.

2. For UK executive directors includes private medical insurance and medical benefits. For US executive director includes private medical and executive medical

benefits,dental benefits, insured life cover and disability benefits.

Pension entitlements

Total pension entitlements (audited)

Figures included in the remuneration table on page 120

Director Age

Normal

retirement

age

Accrued

benefit at

1January 2023

Accrued

benefit at

31 December 2023

Added pension

value received in the

year from defined

benefit scheme

Added pension

value received in the

year from defined

contribution scheme

Total

Charles Woodburn 52 65 66,229 80,485 n/a 8,500 8,500

Brad Greve 56 65 27,30 4 38,424 n/a 8,500 8,500

Tom Arseneault 60 65 See notes below – 14,317 14,317

1. Accrued benefit for Charles Woodburn and Brad Greve is the total value of their defined contribution account, including employee contributions and investment returns.

The above table has been subject to audit.

Charles Woodburn participates in the Mercer Master Trust – BAE Systems Retirement Savings Plan (BAESRSP), which is a defined contribution

arrangement. The Company contributes the maximum into the BAESRSP arrangement as permitted by the Annual Allowance (£4,000 per

annum to 5 April 2023; £10,000 per annum from 6 April 2023). A 14% salary supplement is paid in lieu of the Company contributions in

excessof those permitted by the Annual Allowance which are paid into the BAESRSP.

Brad Greve also participates in the BAESRSP. The Company contributes the maximum into the BAESRSP arrangement as permitted by the

Annual Allowance (£4,000 per annum to 5 April 2023; £10,000 per annum from 6 April 2023). An 8% salary supplement is paid in lieu

oftheCompany contributions in excess ofthose permitted by the Annual Allowance which are paid into the BAESRSP.

Tom Arseneault participates in US defined benefit and Section 401(k) arrangements as follows:

Arrangement Accrued benefit at 1January 2023 Accrued benefit at 31 December 2023

BAE Systems ERP Qualified Plan – life pension $39,348 per annum $39,348 per annum

BAE Systems ERP 2006 Qualified Plan – lump sum $84,000 $85,000

12/31/2004 BRP Restoration Plan – life pension $5,283 per annum $5,283 per annum

2007 BRP – ten-year pension $101,177 per annum $97,416 per annum

Section 401(k) $1,421,754 $1,719,441

The accrued defined benefit for Tom Arseneault is an annual pension and lump sum payable at retirement prior to any reduction forearly

retirement. Tom Arseneault also participates in a Section 401(k) defined contribution arrangement set up for US employees in which the

Company will match his contributions up to a maximum contribution of 6% of salary, up to USregulatory limits (2024 $23,000; 2023 $22,500).

In 2023, theCompany paid contributions of $18,250 into this arrangement. The accrued Section 401(k) benefit for Tom Arseneault is the total

value of hisSection 401(k) account including both employee and company contributions as well as investment returns.

121

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Annual remuneration report continued

Annual bonus (audited)

The 2023 annual bonuses are based on performance for the year ended 31 December 2023. 75% of the bonus opportunity is determined

byfinancial performance, and 25% is based on the achievement of key strategic objectives.

The figures in the table below represent the total annual bonus amounts to be paid, including the cash amount payable in March 2024

(two-thirds of total), and the amount deferred into BAE Systems shares for a further three years to be released in March 2027 subject to

malusand clawback provisions (one-third of total).

2023 annual bonus for Charles Woodburn and Brad Greve

2023 performance range and outcome Weighted vested outcome (%)

Performance measure

Threshold

(20% max)

Target

(50% max)

Stretch

(100% max) Actual

Percentage

ofmaximum

achieved Weighting

Charles

Woodburn

Brad

Greve

Financial

Group underlying EPS 54.2p 57.0p 58.7p 63.5p 100% x 45% = 45% 45%

Group net cash/(debt) £(2,942)m £(2,542)m £(2,142)m £(1,108)m 100% x 22.5% = 22.5% 22.5%

Group order intake £19.7bn £20.8bn £21.8bn £37.3bn 100% x 7.5% = 7.5% 7.5%

Non-financial

Key strategic objectives See page 123

Charles Woodburn

93.5% x

25% =

23.375%

Brad Greve

92.5% x 23.125%

Total (% of maximum) 100% = 98.375% 98.125%

x x

Maximum bonus opportunity (% salary) 225% 200%

x x

2023 base salary £1,180,635 £750,150

= =

2023 annual bonus £2,613,261 £1,472,169

2023 annual bonus for Tom Arseneault

2023 performance range and outcome Weighted vested outcome (%)

Performance measure

Threshold

(20% max)

Target

(50% max)

Stretch

(100% max) Actual

Percentage

ofmaximum

achieved Weighting

Tom

Arseneault

Financial

Group underlying EPS 54.2p 57.0p 58.7p 63.5p 100% x 15% = 15%

Group net cash/(debt) £(2,942)m £(2,542)m £(2,142)m £(1,108)m 100% x 7.5% = 7.5%

Group order intake £19.7bn £20.8bn £21.8bn £37.3bn 100% x 2.5% = 2.5%

BAE Systems, Inc. underlying EBIT $1,580.9m $1,650.9m $1,695.9m $1,715.8m 100% x 30% = 30%

BAE Systems, Inc. net cash/(debt) $2,383m $2,608m $2,833m $3,210m 100% x 15% = 15%

BAE Systems, Inc. order intake $11.3bn $11.9bn $12.4bn $19.8bn 100% x 5% = 5%

Non-financial

Key strategic objectives See page 123

Tom Arseneault

92% x 25% 23%

Total (% of maximum) 100% = 98%

Maximum bonus opportunity 225%

2023 base salary $1,094,080

2023 annual bonus $2,412,446 £1,939,686

A Safety and DEI underpin applies to the non-financial element, with the requirement to uphold and deliver our commitment tohigh standards

of safety and a diverse and inclusive workforce. Performance in respect of this underpin was determined by the Environmental, Social and

Governance Committee (whose composition is stated on page 102). For 2023, improvements in our overall safety requirements were met. The

overall safety performance of our operations improved with our recordable accident rate reducing by more than 12% and the majority ofthis

improvement relating to a reduction in recordable injuries within our US business. There has been continued year on year improvement

indiversity for both increased gender diversity in mid-management roles and increased proportion of employees from minority ethnic

backgrounds. The Committee therefore concluded that the underpin requirements had been met and there would be no reduction to

theexecutive directors’ bonuses for 2023.

122

BAE Systems plc Annual Report 2023

Directors’ report

Key strategic objectives

Achievement against key strategic objectives represents 25% of the annual bonus opportunity. These objectives

relate to the delivery of the Group’s strategy centred on maintaining and growing our business, securing growth

opportunities through advancing our strategic priorities including our sustainability agenda, anddemonstrating

leadership behaviours. An underpin applies to the outturn ofthenon-financial element, with a requirement to

uphold and deliver our commitment to high standards ofsafety, and a diverse and inclusive workforce. Executive

directors and Executive Committee members are collectively responsible for, and required to support, a set of

shared common strategic objectives.

Shared strategic objective Assessment of strategic objective

Sustain and grow our defence and security business

– Improve project outcomes

– Increase internal collaboration

– Increase supply chain collaboration

– Resource for future growth

– Increased project management capability, understanding and application ofLife

CycleManagement (LCM).

– Leveraged capabilities across geographies to develop new cross-sector products

andservices.

– Early adoption of sub-tier supply chain process improvements.

– Improved the effectiveness of our recruitment process to deliver accurate in-year

recruitment demand plan to support programme delivery resourcing and capabilities.

Continue to grow our business in adjacent markets

– Evolve new technology opportunities

– Significant progress achieved against our strategic technology growth themes

demonstrated through major internal development milestones against certain

advanced projects.

Develop and expand our international business

– Pursue growth

– Win new orders

– Delivered significant progress against our non-home or non-core market

growthambitions.

– Exceeded targets to win and progress specific international orders.

Inspire and develop a diverse workforce to drive success

– Grow our talent and succession pipeline

– Increase Diversity & Inclusion

– Increased diversity of experience in our talent pipeline through increased

mobilityacross the Company.

– Improvements in diversity of talent in relation to gender, ethnicity and people

ofcolourrepresentation.

Enhance financial performance and deliver sustainable

shareholder growth

– Increase our efficiency and effectiveness

– Improve project performance

– Reduced day to day costs of running the business as percentage of revenue.

– Delivered net improved project performance margins per Group salients.

Advance and integrate our sustainability agenda

Environment

– Progress towards net zero

– Increase supply chain environmental engagement

– Technology emissions

Social

– Improve safety performance

– Increase diversity

Governance

– Enhance our risk management performance

– Increase our investor ratings

– Decarbonisation of own operations (scope 1 and 2) ahead of SBTi milestone.

– Launched global supply chain decarbonisation strategy and supply chain

engagementprogramme.

– Completed assessment of Scope 3 product use SBTi emissions baseline forour

products and services.

– Year on year improvements in safety performance and safety training compliance.

– Linked to objective to inspire and develop a diverse workforce to drivesuccess.

– Reduced overall significant Group risk rating.

– Increased investor ESG ratings through improved data, progress in key ESG material

areas and transparency of reporting.

Charles Woodburn

Chief Executive

Brad Greve

Chief Financial Officer

Tom Arseneault President and

Chief Executive OfficerofBAE Systems, Inc.

Payout (% of maximum):

93.5%

Payout (% of maximum):

92.5%

Payout (% of maximum):

92.0%

Safety and DEI underpin:

100%

Safety and DEI underpin:

100%

Safety and DEI underpin:

100%

Overall non-financial outturn:

93.5%

Overall non-financial outturn:

92.5%

Overall non-financial outturn:

92.0%

Key

Below target

Target

At or exceeds stretch

123

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Annual remuneration report continued

Long-Term Incentive Plan (LTIP) performance (audited)

The 2021 LTIP award is dependent upon performance of Earnings Per Share (EPS), Total Shareholder Return (TSR), Cash Flow and a Strategic

Progress metric, each in equal measure, over the three years ended 31 December 2023. The following table summarises the achievement of

thevesting outcomes of the respective performance conditions.

Actual performance against targets

Percentage

of maximum

achieved

Weight

(percentage of

maximum)

Weighted vested

outcome (%)

Key performance indicators

Threshold

(25%vesting)

Target

(50%vesting)

Stretch

(100%vesting) Actual

executive

directors

executive

director

executive

directors

executive

director

Annual average EPS growth (three-year) 3% pa 5% pa 7% pa 13.3% pa 100% 25% 25% 25% 25%

TSR vs FTSE 100 13.6%

median

53.5%

80th percentile

144.8% 100% 25% 25% 25% 25%

Free cash flow £3.7bn £4.0bn £4.2bn £6.2bn 100% 25% 25%

BAE Systems, Inc. operating cash flow $3,754m $3,979m $4,429m $4,985m 100% 25% 25%

Strategic progress metrics

– Operational excellence (on time delivery)

UK executive directors

–5%

Improvement in

3-year average

+3% 6.4% 100% 8.3% – 8.3% –

– Operational excellence (on time delivery)

US executive director

–5%

Improvement in

3-year average

+3% 5.8% 100% – 8.3% – 8.3%

– Return on capital employed 14.98% 15.23% 15.48% 17.22% 100% 8.3% 8.3% 8.3% 8.3%

– Advance technology 50% 75% 100% 87.5% 75% 8.3% 8.3% 6.3% 6.3%

100% 100%

Overall vesting 97.9% 97.9%

2021 Performance Shares

For the EPS performance measure, in line with theCommittee’s agreed principles, measurement in constant currency is used to ensure that the

calculation of EPS is not impacted by currency exchange rate fluctuations, upwards or downwards. In reviewing the composition of EPS growth,

no one-off amounts were deemed relevant inthe overall consideration of the achievement of the EPS outturn. The Committee was therefore

satisfied that the performance condition was achieved at a vesting level of 100% of the EPS portion.

TSR performance exceeded the upper quintile (top 20%) of the FTSE 100 comparator group, and therefore vesting is atmaximum. In confirming

this outcome, the Committee also considered the secondary condition and determined that there had been a sustainedimprovement in the

Company’s underlying financial performance.

Group free cash flow exceeded stretch requirements over the performance period and will therefore vest at maximum. In the case of

BAESystems, Inc. operating cash flow, which applies to our US executive director, the stretch performance requirements were also met

andwill vest at maximum.

As set out in the table above, Strategic Progress is based equally on the three metrics of operational excellence, ROCE and advance technology

metrics. Operational excellence, measured by the metric of on-time delivery, achieved improvements in the three-year average which were

inexcess of stretch performance for all sectors. Return on capital employed over the period exceeded the stretch performance requirement.

Inrelation to the advance technology metric, not all the key project milestones were met in relation to the advanced technology programmes,

andaccordingly this metric will vest at 75%.

Before approving the outcomes, the Committee considered the overall financial performance and whether there had been a windfall gain due

to market volatility at around the time of grant in March 2021. Having considered the share price movements at the time of grant, and also

having retrospectively reviewed share price performance since grant, the Committee was satisfied that the level of vesting and values for the

2021 Performance Shares are appropriate. Therefore, given the Company’s underlying business performance over the three-year performance

period and share price history, the Committee believes the vesting outturn of 97.9% for the 2021 Performance Share award is appropriate.

124

BAE Systems plc Annual Report 2023

Directors’ report

Description of share plans

Long-term incentives operate under the BAE Systems LTIP approved by shareholders at the 2014 AGM and the BAESystems Long-Term Incentive

Plan 2023. The latter was approved by shareholders at the 2023 AGM, the terms ofwhich remain substantially the same as the BAE Systems

Long-Term Incentive Plan 2014. The main vehicles in use arePerformance Shares and Restricted Shares.

From 2018 executive directors no longer receive share option awards. Up to and including 2022, share options have beenused below executive

director level without performance conditions and are generally exercisable between three andten years from grant.

LTIP Performance Shares

Since 2018, awards to UK executive directors are subject to a three-year performance period but will not vest until the fifth anniversary of

grantand will be exercisable until the seventh anniversary of grant. For US executive directors, the awards are automatically delivered in three

equal tranches at the end of years three, four and five, subject to the performance condition being achieved. Shares under award attract

notional reinvested dividends prior to tranche vesting.

For existing awards granted up to and including 2024 the following metrics and weightings apply.

Metric

Awards granted up to

and including 2020

Awards granted

in 2021 and 2022

Awards granted

from 2023

Earnings per share (EPS) 50% 25% 30%

Total Shareholder Return (TSR) 50% 25% 15%

Free or Operational cash flow 25% 30%

Operational excellence 8.3%

Return on Capital Employed (ROCE) 8.3% 15%

Advance technology 8.3%

Environmental, social and governance (ESG) 10%

The description of the performance conditions are shown below. Details of the performance conditions attached to the 2019 award are set out

in the 2021 Annual Report and those in respect of the 2020 award are set out in the 2022 Annual Report, available on the Company’s website.

Metric Performance condition

EPS Rate of average annual diluted underlying EPS growth over the three-year performance period, with 25% vesting at3%

average growth per annum, 50% vesting at 5% average growth per annum and 100% vesting at 7% average growth per

annum, with vesting on a straight-line basis between these parameters.

TSR The proportion of the award capable of vesting is determined by:

(i) The Company’s TSR measured against a single comparator group of the companies in the FTSE100 index. No shares vest

ifthe Company’s TSR is less than the median TSR achieved by the comparator group, with 25% vesting at median, 100%

vesting if the Company’s TSR is in the top quintile and vesting on astraight-line basis between these two parameters; and

(ii) whether there has been a sustained improvement in the Company’s underlying financial performance. In taking such a

view, the Committee may consider (but not exclusively) the following financial metrics: net cash/debt; EBIT¹; order book;

turnover; risk; and project performance.

Free or Operational cash flow Three-year cumulative free cash flow (FCF) at a Group level for UK executive directors, and three-year Operating Cash Flow

(OCF) in respect of BAE Systems, Inc. business for the US executive director. 25% vesting at threshold, 50% vesting at target

and 100% vesting at stretch, with vesting on a straight-line basis between these parameters. Due to commercial sensitivity,

the targets will be disclosed retrospectively after the end of the relevant financial year.

Operational excellence Focuses on the adherence to project plans of mission-critical projects. Measured by the metric of On Time Delivery, evaluated

against an approved set of customer contracts, in a manner consistent with the normal course of business. Contracts are

representative of each main business sector, having regard to execution risk, scale and duration. For our US executive director,

On Time Delivery will be measured against BAE Systems, Inc. contracts only. The Company’s robust quality and safety processes

will continue to apply. Target performance achieved for equal orbetter than aggregated On Time Delivery three-year average.

Threshold and stretch performance levels will also apply, with final vesting outturn between 0% and 100% of this element.

ROCE 25% vesting for 25bps reduction in ROCE compared to prior year IBP, 50% vesting for three-year ROCE consistent with prior

year IBP and 100% vesting for 25bps improvement in ROCE compared to prior year IBP, with vesting on a straight-line basis

between these parameters. Due to commercial sensitivity, the targets will be disclosed retrospectively after the end of the

relevant financial year.

Advance technology Effective programme delivery for major technology programmes will be used to measure our effectiveness at driving technology

adoption. Over the three-year performance period, the selected projects will be measured against their key project milestones.

The vesting outcome will be derived from the outturn of each of the projects (between 0% and 100% of this element). Due

tocommercial sensitivity, the projects will be disclosed retrospectively after the end of the relevant financial year.

ESG Objective to reduce Group GHG emissions (Scope 1 and 2) aligned to a science-based pathway of 1.5°C, year-on-year over ten

years. Measurement over three-year performance period. 25% vesting for minimum 5% reduction, 50%vesting for 12.6%

reduction and 100% vesting for 14% reduction. Vesting on a straight-line basis between these targets.

1. With effect from 2021, the Group adopted the underlying EBIT profitability measure in place of the previously reported EBITA measure. Details of this areprovided in the

Alternative performance measures section on page 227.

Note that in accordance with the Directors’ remuneration policy, Performance Share awards granted to executive directors are subject

toapplication of reasonableness discretion in light of other important factors in the business.

125

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Annual remuneration report continued

Description of share plans continued

LTIP Restricted Shares

Restricted Shares are not subject to a performance condition as they are designed to help ensure remuneration for seniorUS executives is

competitive in the local market and also to assist in mitigating retention risks in respect of certain key executives. The shares are subject only

tothe condition that the participant remains employed by the Group at the vesting date (three years after the award date). Shares under award

attract notional reinvested dividends prior to vesting. Awards made to the US executive director are subject to a further two-year clawback

period after the initial three-year vesting period.

Share interests

Scheme interests awarded during the financial year (audited)

Scheme Type of interest Date of grant

Number

of shares

Basis of award

(%of salary)

Face value

of award

Exercise

price

Date to which

performance

ismeasured

(three years to)

Performance

condition

Percentage

ofinterests

receivable

ifminimum

performance

achieved

Charles Woodburn

LTIP PS

TSR

Performance

Shares/nil

costoption

24.03.23 67, 205 55.5% 655,249 nil 31.12.25 TSR/secondary

financial measure

25%

LTIP PS

EFRG

Performance

Shares/nil

costoption

24.03.23 380,830 314.5% 3,713,092 nil 31.12.25 EFRG 25%

Brad Greve

LTIP PS

TSR

Performance

Shares/nil

costoption

24.03.23 38,661 50.25% 376,945 nil 31.12.25 TSR/secondary

financial measure

25%

LTIP PS

EFRG

Performance

Shares/nil

costoption

24.03.23 219,082 284.75% 2,136,049 nil 31.12.25 EFRG 25%

Tom Arseneault

LTIP PS

TSR

Performance

24.03.23 41,260 44.7% 402,285 n/a 31.12.25 TSR/secondary

financial measure

25%

LTIP PS

EORG

Performance

24.03.23 233,804 253.3% 2,279,589 n/a 31.12.25 EORG 25%

LTIP PS

TSR

Performance

05.05.23 18,864 21.3% 187,357 n/a 31.12.25 TSR/secondary

financial measure

25%

LTIP PS

EORG

Performance

05.05.23 106,898 120.7% 1,061,711 n/a 31.12.25 EORG 25%

LTIP RS Retention 24.03.23 138,455 150% 1,349,936 n/a n/a n/a n/a

1. The value of the award is calculated on the date of grant by reference to the middle market quotation at the close of the preceding day (£9.75 for the grants made

on24 March 2023 and £9.932 for the grants made on 5 May 2023).

2. Each of the four performance conditions in the EFRG and EORG metrics are measured separately.

Key: LTIP – Long-Term Incentive Plan. PS – Performance Shares. RS – Restricted Shares. TSR – Total Shareholder Return. EFRG – Earnings per share, Free cash flow, Return

onCapital Employed and ESG measure. EORG – Earnings per share, BAE Systems, Inc. Operating Cash Flow, Return on Capital Employed and ESG measure.

The Performance Share awards set out above have five performance conditions with these conditions weighted as follows: EPS: 30%; TSR: 15%; Cash generation: 30%;

ROCE: 15%; and ESG measure: 10%. Further detail on these performance conditions is set out on page 125.

Tom Arseneault’s May 2023 Performance Share grant reflects the increase in Performance Share award level from 298% of salary to 440% ofsalary in the 2023

Remuneration Policy agreed by shareholders at the 2023 AGM.

Note: Performance Shares and Restricted Shares – Shares under award attract notional reinvested dividends prior to vesting. Performance Shares areintended to be free

share awards and for UK executive directors are structured as a nil cost option to give the participant more flexibility as tothetiming of the benefit. For the US executive

director, awards of Performance Shares are classified as conditional share awards (rather than shareoptions) and are deliverable on the third, fourth and fifth anniversary

ofgrant, subject to attainment of the performance condition. For the UKexecutive directors, shares vest on the fifth anniversary of grant.

The table above has been subject to audit.

126

BAE Systems plc Annual Report 2023

Directors’ report

Statement of directors’ shareholdings and share interests

Minimum Shareholding Requirement (MSR)

Executive directors are required to establish and maintain a minimum personal shareholding equal to a set percentage of base salary as set

outin the table below. Executive directors are required to achieve their Initial Value as quickly as possible, and achieve their Subsequent Value

within a five-year time period. Where an executive director has not achieved their MSR, the consequence is a restriction on the number

ofshares that can be sold on exercise or release, until their MSR Subsequent Value is met. Where an executive director has met less than the

Initial Value (50% of their MSR), they must retain 50% of the net value (i.e. the value after the deduction of exercise/sale costs and tax) of

shares acquired through the various share schemes; if they have met the Initial Value but not the Subsequent Value (i.e. between 50% and

100% of their MSR), they must retain 25% of the net value. In the event that the executive director has not met the Subsequent Value at the

end of the five-year period, the Committee will set out their proposed remedial actions at that time. The Committee has discretion to increase

the Initial Value and/or Subsequent Value. Shares owned beneficially by the director and his/her spouse count towards the MSR.

Where an executive director leaves employment for any reason, a post-cessation shareholding policy will apply. For UK executive directors,

thepolicy is based on the full MSR continuing to apply for a period of two years. For US executive directors, the policy is based on the MSR

of300% of salary applying for a period of one year. Executive directors will be required to sign acontract on leaving employment to ensure

compliance with this policy. Any case of non-compliance would be dealt with by the Committee.

The following table sets out MSR Initial Value and Subsequent Value and actuals as at 31 December 2023.

Charles Woodburn and Tom Arseneault have shareholdings in excess of their respective MSRs. Brad Greve has been gradually building up his

shareholding. His first LTI award will vest in 2025, having already met the performance condition, and being subject to continued employment.

Initial Value Subsequent Value Actual Achieved MSR

Charles Woodburn 150% 300% 485% Yes

Brad Greve 100% 200% 150% Expected within the required 5 years

Tom Arseneault 212.5% 425% 1,176% Yes

The actual MSR figures in the table are provided as at 31 December 2023, based on the year-end share price of £11.105.

The higher MSR values applicable to Tom Arseneault recognise the higher LTI opportunity and broader US market practice.

There are MSR requirements in place for the majority of the employee population who receive LTIPs.

There are no shareholding requirements for the Chair or the non-executive directors.

127

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Annual remuneration report continued

Statement of directors’ shareholdings and share interests continued

Share interests as at 31 December 2023 (audited)

The interests of the directors who served during the year ended 31 December 2023 in the shares of BAE Systems plc, orscheme interests

inrelation to those shares, were as follows:

Shares Scheme interests: Options and awards over shares

Share awards

with performance

conditions

Share awards

without performance

conditions

Share options

with performance

conditions

Share options

with performance

conditions, vested

but unexercised

Share options

without performance

conditions

Total

scheme

interests

Charles Woodburn 515,815 – – 3,563,332 – – 3,563,332

Brad Greve 101,802 – – 1,386,630 – – 1,386,630

Tom Arseneault 908,712 1,477,502 521,305 – – 1,435,729 3,434,536

Note: The share options without performance conditions were granted to Tom Arseneault prior to him being appointed as an executive director. These options are vested but

unexercised. The related breakdown of these options is shown on page 129.

The interests of the non-executive directors who served during the year ended 31 December 2023 in the shares ofBAESystems plc were as follows:

Chair

Sir Roger Carr

166,549

C M Hogg –

Non-executive directors

N J Anderson 14,000

C E Ashby –

A G Cockburn

2,000

Dame Elizabeth Corley 19,000

J V Griffiths 10,117

C M Grigg

24,555

E M Kirk –

S T Pearce 10,000

N W Piasecki –

Lord Sedwill –

1. Figures shown as at 4 May 2023, the date of retirement from the Board.

2. Appointed to the Board on 6 November 2023.

3. Retired from the Board on 31 December 2023.

The interests of directors include those of their connected persons. Details of the share interests in options and awards held by the

executivedirectors as at 31 December 2023 are given on page 129 together with details of options exercised in 2023.

Performance Shares granted under the LTIP are classified as share awards with performance conditions for the US executive director

andasnil-cost options with performance conditions for the UK executive directors.

Since 31 December 2023, both Charles Woodburn and Brad Greve have each acquired an additional 37 shares under the Partnership

andMatching Shares elements of the Share Incentive Plan so that their beneficial shareholdings at the dateof this report stood at

515,852and101,839 respectively.

There have been no other changes in the interests of the directors in the shares of BAE Systems plc between 31 December 2023 and

20 February 2024 (the latest practicable date for inclusion in this report).

128

BAE Systems plc Annual Report 2023

Directors’ report

Breakdown of scheme interests (audited)

Charles Woodburn

Options and awards held as at 31 December 2023

31 December

2023

Date of

grant

Exercise

price

Date from which

exercisable or part

exercisable

LTIP PS

TSR

285,227

20.03.18 nil 20.03.23

LTIP PS

EPS

285,227

20.03.18 nil 20.03.23

LTIP PS

TSR

55,416

20.03.19 nil 20.03.24

LTIP PS

EPS

350,737

20.03.19 nil 20.03.24

LTIP PS

TSR

373,737

25.03.20 nil 25.03.25

LTIP PS

EPS

373,737

25.03.20 nil 25.03.25

LTIP PS

TSR

204,936

25.03.21 nil 25.03.26

LTIP PS

EFS

614,806

25.03.21 nil 25.03.26

LTIP PS

TSR

142,869

24.03.22 nil 24.03.27

LTIP PS

EFS

428,605

24.03.22 nil 24.03.27

LTIP PS

TSR

67,205

24.03.23 nil 24.03.28

LTIP PS

EFRG

380,830

24.03.23 nil 24.03.28

3,563,332

Brad Greve

Options and awards held as at 31 December 2023

31 December

2023

Date of

grant

Exercise

price

Date from which

exercisable or part

exercisable

LTIP PS

TSR

210,626

25.03.20 nil 25.03.25

LTIP PS

EPS

210,627

25.03.20 nil 25.03.25

LTIP PS

TSR

104,239

25.03.21 nil 25.03.26

LTIP PS

EFS

312,718

25.03.21 nil 25.03.26

LTIP PS

TSR

72,669

24.03.22 nil 24.03.27

LTIP PS

EFS

218,008

24.03.22 nil 24.03.27

LTIP PS

TSR

38,661

24.03.23 nil 24.03.28

LTIP PS

EFRG

219,082

24.03.23 nil 24.03.28

1,386,630

Tom Arseneault

Options and awards held as at 31 December 2023

31 December

2023

Date of

grant

Exercise

price

Date from which

exercisable or part

exercisable

LTIP PS

TSR

4,560

20.03.19 n/a 20.03.24

LTIP PS

EPS

28,858

20.03.19 n/a 20.03.24

LTIP PS

TSR

141,331

25.03.20 n/a 25.03.24

LTIP PS

EPS

141,331

25.03.20 n/a 25.03.24

LTIP PS

TSR

108,764

25.03.21 n/a 25.03.24

LTIP PS

EOS

326,290

25.03.21 n/a 25.03.24

LTIP PS

TSR

81,386

24.03.22 n/a 24.03.25

LTIP PS

EOS

24 4,156

24.03.22 n/a 24.03.25

LTIP PS

TSR

41,260

24.03.23 n/a 24.03.26

LTIP PS

EORG

233,804

24.03.23 n/a 24.03.26

LTIP PS

TSR

18,864

05.05.23 n/a 05.05.26

LTIP PS

EORG

106,898

05.05.23 n/a 05.05.26

1,477,502

LTIP SO 258,380 25.03.15 5.43 25.03.18

LTIP SO 289,258 23.03.16 4.99 23.03.19

LTIP SO 267,026 21.03.17 6.49 21.03.20

LTIP SO 268,594 20.03.18 5.82 20.03.21

LTIP SO 352,471 20.03.19 4.85 20.03.22

1,435,729

LTIP RS 218,987 25.03.21 n/a 25.03.24

LTIP RS 163,863 24.03.22 n/a 24.03.25

LTIP RS 138,455 24.03.23 n/a 24.03.26

521,305

Share Options – options exercised during 2023

Exercised

during the

year

Exercise

price

Date of

grant

Date of

exercise

Market price

on exercise

LTIP SO 304,245 4.12 26.03.14 27.03.23 9.81

Note: The Share Options granted to Tom Arseneault between 2014 and 2019 as

setoutabove were granted prior to him being appointed as an executive director

anddo not have performance conditions attached to them. Options are normally

exercisable between the third and tenth anniversary of their grant. Share options

granted to him from 2015 onwards are subject to a two-year clawback period

afterthe initial three-year vesting period.

1. All shares vested in accordance with agreed terms.

2. Subject to a performance condition that has been met.

3. A small portion of the outstanding option or award will partially lapse after the end of the financial year having not met the full performance condition.

4. Subject to a performance condition that is yet to be tested.

Note: As reported in the Remuneration Committee Chair’s report in the 2021Annual Report, in light of the volatility in the market during March 2021, theCommittee

attached an additional condition to the 2021 awards to retain theability to exercise discretion to ensure that the value of the 2021 awards atvesting is appropriate.

Theoutcome is reported on page 124.

The tables above have been subject to audit. Performance conditions for the LTIP are detailed on pages 125 to 126.

Executive directors’ service contracts

All executive directors have rolling service agreements which may be terminated in accordance with the terms of those agreements.

Dates of appointment for executive directors:

Name Date of appointment Expiry of current term

Charles Woodburn

1 July 2017 12 months either party

Brad Greve 1 April 2020 12 months either party

Tom Arseneault

1 April 2020 60 days either party

1. Appointed to the Board as Chief Operating Officer on 9 May 2016; appointed as Chief Executive with effect from 1 July 2017.

2. Tom Arseneault’s contract of employment automatically renews for a one-year period from 31 December each year, unless one party gives the other at least

60days’notice.

Details of notice periods and terms of the Chair and non-executive directors are on page 131.

In accordance with the UK Corporate Governance Code, all directors are subject to annual election or re-election at the Company’s AGM.

129

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Annual remuneration report continued

‘Single figure’ of remuneration for the Chair and non-executive directors (audited)

Fixed Variable

Committee

membership as at

31December 2023

Fees

£’000

Benefits

£’000

Other

£’000

Total fixed

remuneration

£’000

Total variable

remuneration

£’000

Total

£’000

2023 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 2022

Chair

Sir Roger Carr

– 243 700 – – – – 243 700 – – 243 700

C M Hogg

486 14 – – – – 486 14 – – 486 14

Non-executive directors

N J Anderson

110 85 8 1 – 9 118 95 – – 118 95

C E Ashby

99 85 6 4 9 9 114 98 – – 114 98

A G Cockburn

16 n/a – n/a – n/a 16 n/a – – 16 n/a

Dame Elizabeth Corley

121 85 2 1 – 9 123 95 – – 123 95

Dame Carolyn Fairbairn

– n/a 30 n/a 1 n/a – n/a 31 – – n/a 31

J V Griffiths

120 110 3 1 – 9 123 120 – – 123 120

C M Grigg

143 110 – – – 9 143 119 – – 143 119

E M Kirk

131 110 3 1 – 9 134 120 – – 134 120

S T Pearce

120 110 1 1 – 9 121 120 – – 121 120

N W Piasecki

143 101 11 6 9 14 163 121 – – 163 121

Lord Sedwill

99 14 – – – – 99 14 – – 99 14

I P Tyler

– n/a 38 n/a 1 n/a – n/a 39 – – n/a 39

1. Retired from the Board and as Chair on 4 May 2023.

2. Appointed to the Board on 1 November 2022 and as Chair on 4 May 2023.

3. Appointed to the Board on 6 November 2023.

4. Retired from the Board on 5 May 2022.

5. Retired from the Board on 31 December 2023.

6. Appointed to the Board on 1 November 2022.

Committee Chair

Audit Committee

Environmental, Social and GovernanceCommittee

Innovation and Technology Committee

Nominations Committee

Remuneration Committee

The amounts in the ‘Benefits’ column relate to travel expenses and subsistence and theamounts in the ‘Other’ column relate to the travel

allowance discontinued from 1 April 2023. There were no payments to former directors in 2023.

Chair of the Board

The fee for the Chair of the Board is set by the Remuneration Committee.

Sir Roger Carr’s fee was at the rate of £700,000 per annum through to his retirement at the close of the 2023 AGM. Cressida Hogg succeeded

Sir Roger Carr as Chair on 4 May 2023, and receives the same fee and benefits as her predecessor. Her fee will not be reviewed again until

1 April 2025.

Non-executive directors

Fees for the non-executive directors, which are reviewed periodically, were reviewed in February 2024 by the Board without any of the

non-executive directors present, i.e. by the Chair and executive directors. It was agreed that from 1 April 2024, the base fee paid to each

non-executive director should be increased by 4.6%;the supplementary fee paid to the Senior Independent Director and each of the Committee

Chairs (except the Nominations Committee Chair) be increased by 4.3%; and the Committee membership fee be increased by 33.3% to better

reflect the time commitment and bring them more in line with the market.

The fee structure on a per annum basis is as follows:

Fee per annum up to

31 March 2023

Fee per annum from

1 April 2023

Fee per annum from

1 April 2024

Fee paid to all non-executive directors £85,000 £88,400 £92,500

Supplementary fees

Senior Independent Director £25,000 £35,000 £36,500

Audit Committee Chair £25,000 £35,000 £36,500

Remuneration Committee Chair £25,000 £35,000 £36,500

Environmental, Social and Governance Committee Chair £25,000 £35,000 £36,500

Innovation and Technology Committee Chair £25,000 £35,000 £36,500

Committee membership fee (per Committee except Nominations) nil £15,000 £20,000

Travel allowance per meeting for air travel of more than five hours

(one way) subject to a maximum of six travel allowances per annum £4,500 nil nil

The single figure table of remuneration for the executive directors is on page 120.

130

BAE Systems plc Annual Report 2023

Directors’ report

Annual percentage change in directors’ remuneration

As required by regulations, thetable below shows the percentage change in remuneration between the years ended 31 December 2023

and2022, andprior years, for executive directors, non-executive directors and average employee remuneration. As required by legislation,

employees are those employed by the BAE Systems plc entity on a full-time equivalent basis. The percentage increases represent the change

intotal remuneration between each reported year, and therefore may indicate significant increases when comparing with a prior part-year.

2022/2023

% change

2021/2022

% change

2020/2021

% change

2019/2020

% change

Salary/

fees Benefits¹

Annual

bonus

Salary/

fees Benefits

Annual

bonus

Salary/

fees Benefits¹

Annual

bonus

Salary/

fees Benefits¹

Annual

bonus

Executive directors

C N Woodburn +4.0 +11.0 +4.9 +2.5 +56.4 +2.9 +12.7 +17.7 +39.1 +6.9 –3.9 –12.1

B M Greve

+14.1 +14 .2 +43.6 +5.6 +79.3 +6.0 +36.0 +44.2 +68.7 n/a n/a n/a

T A Arseneault

+3.3 +7.1 +4.0 +15.0 +24.1 +15.8 +27.9 +156.9 +115.4 n/a n/a n/a

Current non-executive

directors

C M Hogg

+3,333.6 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

N J Anderson

+29.5 +642.4 n/a 0.0 –42.7 n/a +500.0 +81.0 n/a n/a n/a n/a

C E Ashby

+16.2 +51.7 n/a +200.0 n/a n/a n/a n/a n/a n/a n/a n/a

A G Cockburn

n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Dame Elizabeth Corley +42.7 +69.7 n/a 0.0 – 47.6 n/a +1.5 0.0 n/a +4.7 –100.0 n/a

J V Griffiths

+9.1 +288.3 n/a 0.0 –82.2 n/a +72.5 0.0 n/a n/a n/a n/a

E M Kirk

+19. 4 +101.7 n/a +75.8 +92.6 n/a n/a n/a n/a n/a n/a n/a

S T Pearce

+9.1 –20.3 n/a 0.0 –50.0 n/a +1.1 +90.4 n/a +133.0 –4.0 n/a

N W Piasecki

+40.7 +72.2 n/a +19.2 n/a n/a +1.5 –100.0 n/a +79.5 –35.5 n/a

Lord Sedwill

+597.4 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Former non-executive

directors

Sir Roger Carr

–65.2 0.0 n/a 0.0 0.0 n/a 0.0 0.0 n/a 0.0 0.0 n/a

Dame Carolyn Fairbairn

3,4

n/a n/a n/a –58.2 n/a n/a n/a n/a n/a n/a n/a n/a

C M Grigg +29.6 n/a n/a 0.0 n/a n/a +7.3 0.0 n/a +28.1 –100.0 n/a

I P Tyler

n/a n/a n/a –65.2 –8.8 n/a +1.1 +8.9 n/a +3.6 –64.7 n/a

Average employee

+6.0 +6.0 +63.3 +4.5 +4.5 +9.2 +1.5 +1.5 +28.4 +2.5 +2.5 –2.0

1. Where benefit figures are £nil as is often the case for non-executive directors, the benefits percentage change is shown as n/a.

2. 2020 remuneration for Brad Greve, Tom Arseneault, Nick Anderson and Jane Griffiths reflects their part-year from joining the Board during 2020.

3. 2023 remuneration for Cressida Hogg reflects her appointment as Chair on 4 May 2023; 2022 remuneration for Cressida Hogg and Lord Sedwill reflects their part-year

from joining the Board during 2022; and reflects part-year for Dame Carolyn Fairbairn andIan Tyler on stepping down from the Board during 2022.

4. 2021 remuneration for Crystal Ashby, Dame Carolyn Fairbairn and Ewan Kirk reflects their part-year from joining the Board during 2021.

5. 2023 remuneration for Angus Cockburn reflects his part-year from joining the Board during 2023; and reflects part-year for Sir Roger Carr on stepping down from

theBoard during 2023.

6. 2019 remuneration for Stephen Pearce and Nicole Piasecki reflects their part-year from joining the Board during 2019.

7. Figures are provided in respect of the relevant median average employee of BAE Systems plc as determined on a full-time equivalent basis and with the annual bonus

estimated on the accrued expected financial outturn in respect of 2023. The relatively large change in average employee annual bonus for 2023 partly reflects the

increasein bonus opportunity for our executive grades in line with the market.

Chair and non-executive directors – letters of appointment

The appointment of Cressida Hogg as Chair is documented in a letter of appointment. Her appointment as Chair will automatically terminate if

she ceases to be a director of the Company. Her appointment is for three years ending on 4 May 2026 unless terminated earlier in accordance with

the Company’s Articles of Association or by the Company or by the Chair giving not less than six months’ notice. The Chair’s appointment is to

be reviewed by the Nominations Committee prior to the end of the three-year term and the Chair may be invited to serve for an additional period.

Non-executive directors do not have service contracts but do have letters of appointment detailing the basis of their appointment. The non-

executive directors are normally appointed for an initial three-year term that, subject to review, may be extended subsequently for further

suchterms. Non-executive directors do not have notice periods. The dates of their original appointment and expiry of their current term are

shown below:

Name Date of appointment Expiry of current term

Nick Anderson 1 November 2020 31 October 2026

Crystal E Ashby 1 September 2021 31 August 2024

Angus Cockburn 6 November 2023 5 November 2026

Dame Elizabeth Corley 1 February 2016 31 January 2025

Jane Griffiths 1 April 2020 31 March 2026

Ewan Kirk 1 June 2021 31 May 2024

Stephen Pearce 1 June 2019 1 June 2025

Nicole Piasecki 1 June 2019 1 June 2025

Lord Sedwill 1 November 2022 31 October 2025

In accordance with the UK Corporate Governance Code, all directors are subject to annual election or re-election at the Company’s AGM.

Details of service contracts and notice periods of the executive directors are on page 129.

131

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Annual remuneration report continued

Pay comparisons

Pay ratio of Chief Executive to UK average employee

The Committee is mindful of the relationship between the Chief Executive’s remuneration and the remuneration of BAESystems’ employees

more generally. The table below shows the ratio of total remuneration for the Chief Executive tothat of other UK employees at 25th percentile,

median (50th percentile) and 75th percentile.

Year Method

25th

percentile

pay ratio

Median

pay ratio

75th

percentile

pay ratio

2023 Option B 264:1 191:1 181:1

2022 Option B 256:1 185:1 168:1

2021 Option B 171:1 140:1 99:1

2020 Option B 121:1 103:1 89:1

2019 Option B 90:1 72:1 59:1

2018 Option B 61:1 48:1 38:1

The reporting regulations permit three different calculation methodologies for determining the pay ratio:

– Option A – using actual remuneration for all UK employees to determine median, 25th and 75th percentiles for the relevant financial year;

– Option B – using representative data points for median, 25th and 75th percentiles (consistent with our gender pay gapreporting); and

– Option C – using any other available pay data.

The table above has been calculated using Option B, which is considered the most appropriate and consistent methodology for reporting.

Thecalculations for the relevant representative employees were undertaken as at 31 December 2023. BAESystems has around 40,000

employees in the UK, operating on different human resources and payroll systems, with 2023 bonus amounts for some employees not able

tobe determined until after publication of this report. Accordingly, it is not possible to determine the exact 2023 total remuneration for all

employees within the reporting timescale, and therefore it is not possible to accurately report using Option A.

To ensure Option B provides a sufficiently accurate representation of the UK workforce, we consider the total pay and benefits for a number

ofemployees centred around each of the quartiles. This allows any anomalies that may arise (such as if an employee left part way through

theyear) to be adjusted or excluded. Taking an average of the remaining figures provides a robust representation of each quartile.

The total full-time equivalent pay and benefits for the relevant employees have been calculated on the same basis as the Chief Executive’s

singletotal figure remuneration. For pension-related benefits, employer pension costs have been estimated using the employer contribution

rates applicable to the member’s pension scheme. No other estimates or adjustments have been used in the calculation and no remuneration

items have been omitted.

Our reward framework across the Group is based on a consistent set of principles, including managing reward by reference to external

competitor benchmarks (see page 116). Our Chief Executive’s total remuneration comprises a significant proportion in variable pay and

thereforethe single total figure will vary considerably depending on the outturn of the Annual and Long-Term Incentive Plans. The employees

inthe calculation would not typically participate in any long-term incentive plans and receive a significantly higher proportion of their

remuneration in the form of fixed pay. The ratio at the three quartiles is consistent with our market-based approach to reward, with the ratio

increasing as the Chief Executive’s remuneration is compared with that of more junior employees. The overall picture presented by the ratios

isalso consistent with our pay, reward and progression policies.

25th

percentile

50th

percentile

75th

percentile

Total pay and benefits 50,923 70,473 74,344

Salary component 39,087 45,527 57,34 4

The pay ratio in 2023 has increased by approximately 3% at 25th and 50th percentiles, and 8% at the 75th percentile relative to 2022. Thetotal

pay and benefits figures have increased at each quartile in part reflecting the actions taken by the Company to address the increased cost of

living and other salary and incentive improvements. The pay ratio has been impacted by the increase in the Chief Executive’s remuneration for

2023, primarily as a resultof share price appreciation on the 2021 Performance Share award between the grant and vesting dates. In considering

the median pay ratio since 2018, the recent upward trend corresponds to the increased LTI vesting payouts as shown on page 133.

Gender pay

The BAE Systems 2023 gender pay gap report is available on the Company’s website atbaesystems.com. The average (mean) gender pay

gapfor ourUKworkforce was 7.7% in favour of men (2022 8.6%). Werely onemploying large numbers of employees with STEM qualifications

and we, likeothercompanies, face challenges recruiting women with thesequalifications because there are significantly fewer women who

study and work in these fields. As a result, a greater proportion ofourworkforce and our senior leadership population are men and this is a

major factor inour gender pay gap. We continue to work hard toimproveour gender balance and remain steadfast in our commitment to

delivering the plans we have in place to increase the number ofwomen in BAE Systems and support the progression of women into senior

executive positions.

Ethnicity pay

BAE Systems voluntarily published its first UK ethnicity pay gap report in December 2023. We are committed to progressing racial and ethnic

minority representation and in order to do this, we need to understand our ethnicity pay gap and supporting data. For 2023, we have an

average (mean) ethnicity pay gap of 3.9%. 86.3% of our employees have voluntarily disclosed their ethnicity; 82.3% identify as White and

4%identify as All Other Ethnic Groups. We already have a number of programmes underway to progress racial and ethnic minority talent,

andare committing to growing our ethnic minority population year-on-year.

132

BAE Systems plc Annual Report 2023

Directors’ report

Total Shareholder Return (TSR) performance and Chief Executive pay

The chart below shows the value as at 31 December 2023 of £100 invested in BAE Systems shares on 31 December 2013, compared to £100

invested in the FTSE 100 on the same date. If invested in BAE Systems that shareholding would be worth £381.74 on 31 December 2023,

compared to £167.98 if invested in the FTSE 100.

The FTSE 100 was chosen as the comparator because it is a broad equity index of which BAE Systems is a constituent member, and reflects

theinvestment interests of our UK shareholder base. In addition, the FTSE 100 forms 100% of the TSR performance measure for Long-Term

Incentive (LTI) awards made since 2021, and 50% for LTI awards between 2016 and 2020.

The chart demonstrates the strong long-term alignment of our Chief Executive pay with the returns to shareholders. This alignment is achieved

by ensuring a high proportion of the Chief Executive’s remuneration is in shares, with performance conditions based on measures that directly

support the implementation of our strategy.

Value at 31 December 2023 of £100 investment at 31 December 2013

2013 2014 2015 2016 2017

2018 2019 2020 2021 2022 2023

Change in Chief Executive’s remuneration over ten years

2014 2015 2016 2017

2018 2019 2020 2021 2022 2023

Chief Executive’s single

totalfigure(£’000)

Charles Woodburn – – – 1,279 2,416 3,747

6,080 7,071 12,008 13,451

Ian King 3,519 2,929 3,463 2,086 n/a n/a n/a n/a n/a n/a

3,519 2,929 3,463 3,365 2,416 3,747

6,080 7,071 12,008 13,451

Bonus paid as a percentage

ofmaximum

Charles Woodburn – – – 75.8% 65.6% 95.6% 78.7% 97.1% 97.5% 98.4%

Ian King 74.3% 72.4% 82.3% 75.9% n/a n/a n/a n/a n/a n/a

LTI as a percentage

ofmaximumvesting

Charles Woodburn – – – n/a nil 10.9%

100% 57.9% 100% 97.9%

Ian King 16.8% nil nil 11.3% n/a n/a n/a n/a n/a n/a

1. In 2017, Charles Woodburn succeeded Ian King as Chief Executive on the latter’s retirement. Ian King’s remuneration is shown from thestart of 2017 until

30 June 2017 and Charles Woodburn’s remuneration is shown from 1 July 2017 to the end of thatyear.

2. Plotted as a bar chart on the secondary y-axis.

3. Total remuneration includes the value of share plans vesting that were granted prior to appointment as Chief Executive.

Relative importance of spend on pay

The chart below shows the relative importance of expenditure on pay

compared to returns toshareholders

. Underlying EBIT

is shown

forinformation.

Underlying EBIT

£0m

£2,000m

£4,000m

£6,000m

£8,000m

10,000m

2022

£2,479m

£2,682m

2023

Returns to shareholders

2022

£1,590m

£1,418m

2023

Total employee costs

2022

£7,495m

£8,091m

2023

1. Wages and salaries increased by approximately 5.45% per employee in 2023, excluding the impact of exchange translation.

2. Returns to shareholders comprise dividends to ordinary shareholders paid in the year and share repurchases in 2022 (£788m) and 2023 (£561m).

3. Underlying EBIT is the Group’s principal measure of operational profitability as defined in the Alternative performance measures section on page 227.

£0

£50

£100

1,000

£150

£200

2,000

3,000

£300

4,000

£350

£400

5,000

11,000

7,000

8,000

9,000

10,000

6,000

£450

£500

£550

£250

BAE Systems

FTSE 100

Chief Executive

remuneration

12,000

13,000

£’000

133

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Annual remuneration report continued

Remuneration Committee composition and advisers

The Committee members comprise Nicole Piasecki as Chair, Angus Cockburn (from 1 January 2024), Dame Elizabeth Corley, and Ewan Kirk

(from1 March 2023). Chris Grigg also served as a Committee member throughout the year until he retired from the Board on

31 December 2023. Committee attendance is shown on page 83. Advisers to the Remuneration Committee are shown below.

During the year under review, the Committee received material assistance and advice on remuneration policy from the Group Reward Director,

Roger Fairhead, and the Group Human ResourcesDirector, Tania Gandamihardja. Charles Woodburn in his role as Chief Executive alsoprovided

advice that was of material assistance to the Committee.

Adviser Services provided Appointment Governance

Fees (in respect of services

provided to the Committee)

Willis Towers Watson

(WTW)

Since July 2022, independent adviser

tothe Committee, including attendance

at Remuneration Committee meetings.

Also provided information on

remuneration market practice, market

trends and benchmarking of the

remuneration packages for the senior

executive population.

Committee

appointment.

By the Company

attherequest of

theCommittee.

The Committee is aware that WTW

provides unrelated services to theCompany

in the areas of benefits andpensions.

The Committee is satisfied that the

WTWlead adviser and team who provide

remuneration advice to the Committee do

not have connections with the Group, or

the individual directors, that could impair

their independence or objectivity.

WTW is a member of the Remuneration

Consultants Group (RCG) and is a signatory

tothe RCG’s code of conduct.

£101,510

Fee basis: Fixed fee/hourly

Linklaters Provided legal services principally advice

relating to remuneration policy.

By the Company

with the approval

of the Committee.

Only provides legal compliance, legal

drafting and review services, and does

notadvise the Committee.

The Committee is aware that Linklaters is

one of a number of legal firms that provide

legal advice and services to the Company

on a range of matters.

Linklaters is regulated by the Law Society.

£4,559

Fee basis: Hourly

January

Committee (Videoconference)

– Assessed outturn of 2022 annual

incentivekey strategic objectives.

– Agreed 2023 annual incentive key

strategicobjectives.

– Received an update on provisional

2022financial performance for

incentivepurposes.

– Approved 2023 weightings remuneration

for ExecutiveCommittee members.

February

Committee (London, UK)

– Determined 2022 bonuses for executive

directors andExecutive Committee

members forpayment in March 2023.

– Approved 2022 Group All-Employee

FreeShare Plans payments.

– Determined vesting outcome for Spring

2020 Long-Term Incentive awards.

– Approved grant of 2023 Long-Term

Incentive awards and associated

performance targets.

– Reviewed feedback from shareholder

consultation on proposed 2023 Policy.

– Approved 2022 Directors’

remunerationreport.

May

Committee (London, UK)

– Reviewed feedback from shareholder

consultation and May 2023 Annual General

Meeting.

– Noted the findings of the Gender Pay Gap

and Ethnicity Pay Gap reports.

– Received a performance update on

annualincentive and in-flight long-term

incentive awards.

November

Committee (West Sussex, UK)

– Received a deep-dive into specific areas

ofwider workforceremuneration.

– Provided feedback on the proposed

re-structure and key features of the draft

2023 Directors’ remuneration report.

– Reviewed level of executive directors’

andExecutive Committee members’

shareholdings relative to their Minimum

Shareholding Requirement.

– Received an executive remuneration

marketand regulatory update.

– Noted the performance update on

annualincentive and in-flight long-term

incentive awards.

December

Committee (Videoconference)

– Approved executive directors’ salary

increases from 1 January 2024.

– Agreed the structure and financial

metricsfor the 2024 annual

incentiveplan.

– Agreed the structure, weightings

andmetrics for the 2024 Long-Term

Incentive awards.

February

Committee

May

Committee

November

Committee

December

Committee

The Remuneration Committee’s year

January

Committee

Directors’ Remuneration Report

The Directors’ Remuneration Report was approved by the Board of directors on 20 February 2024.

Nicole Piasecki

Chair, Remuneration Committee

134

BAE Systems plc Annual Report 2023

Directors’ report

Statutory and other regulatory information

Other information that is relevant to the Directors’ report, andwhich

isincorporated by reference into this report

Company registration

BAE Systems plc is a public company limited

by shares registered in England and Wales

with the registered number 01470151.

Directors

The current directors who served during

the2023 financial year are listed on pages

81to 83. On 6 November 2023, Angus

Cockburn was appointed to the Board as

anon-executive director.

Cressida Hogg, who was appointed to the

Board as a non-executive director and Chair

designate on 1 November 2022, succeeded

Sir Roger Carr as Chair at the conclusion

ofthe Company’s Annual General Meeting

(AGM) on 4 May 2023 when Sir Roger retired

from the Board. Chris Grigg also served on

the Board until 31 December 2023.

Dividend

An interim dividend of 11.5p per share was

paid on 30 November 2023. The directors

propose a final dividend of 18.5p per ordinary

share. Subject to shareholder approval, the

final dividend will be paid on 3 June 2024

toshareholders on the share register on

19April 2024.

AGM

The Company’s AGM will be held on

9May2024.

Disclosures required under Listing

Rule 9.8.4

There are no disclosures required to be made

under the FCA’s Listing Rule 9.8.4 which have

not already been disclosed elsewhere in this

Report. Details of Long-term incentives can

be found within the Annual Remuneration

Report on page 115 and details of dividend

waivers can be found in note 26 of the

Consolidated financial statements on

page204.

Office of Fair Trading undertakings

As a consequence of the merger between

British Aerospace and the former Marconi

Electronic Systems businesses in 1999, the

Company gave certain undertakings to the

Secretary of State for Trade and Industry

(nowthe Secretary of State for Business

andTrade). In February 2007, the Company

was released from the majority of these

undertakings and the remainder have been

superseded and varied by a new set of

undertakings. Compliance with the

undertakings is monitored by a compliance

officer. Further information regarding the

undertakings and the contact details of

thecompliance officer may be obtained

through the Company Secretary atthe

Company’s registered office or through

theCompany’s website.

Trades Unions

We have structures in place to work with

Trades Union representatives in our local

markets, where it is appropriate and legally

acceptable. Of our UK workforce, 71% are

covered by collective bargaining agreements.

Approximately 55% of the UK workforce

areTrades Union members. In the US,

approximately 12% of the workforce is

covered by a collective bargaining agreement.

In Australia, approximately 20% of the

workforce is covered by a collective

bargaining agreement.

Profit forecast

In its half year results announcement

published on 2 August 2023, the Group

made the following statement in respect of

the year ending 2023, which is regarded as a

profit forecast for the purposes of the FCA’s

Listing Rule 9.2.18 and which replaced the

profit forecast made in the Company’s 2022

AnnualReport.

“While the Group is subject togeopolitical

and other uncertainties, the following

upgraded guidance is provided on current

expected operational performance. The

guidance is based on the measures usedto

monitor the underlying financial performance

of the Group. Guidance is provided on the

basis of an exchange rate of $1.24:£1, which

is in line with the actual 2022 exchange rate,

therefore guidance is the same for both

reported and constant exchange rates.

For the year ending 31 December 2023,

underlying EBIT is expected to increase in

therange of 6% to 8%. Underlying earnings

per share is expected to increase in the

rangeof 10% to 12%.”

For the year ended 31 December 2023,

Underlying EBIT was £2,682m and Underlying

earnings per share was 63.2p.

See Financial review on pages 28 to 33 for

more information.

Political donations

No political donations were made in 2023.

Issued share capital

As at 31 December 2023, BAE Systems’

issued share capital of £80,964,698

comprised 3,238,587,861 ordinary shares

of2.5p each and one Special Share of £1.

This figure includes 360,315 ordinary

sharespurchased under the share buyback

programme immediately prior to the year

end, but not yet settled at that point, which

the Company deems to have been cancelled

on purchase.

Further information Reference

Disclosures in relation to the use of

financialinstruments

Financial statements Page 181

Particulars of important events affecting

theGroupwhich have occurred since

31 December2022

Chief Executive’s review Page 8

Segmental review Page 35

An indication of likely future developments

inthebusiness of the Group

Chief Executive’s review Page 8

Our investment in technology Page 20

Segmental review Page 35

An indication of the activities of the Group

inthefield of research and development

Our business model Page 14

Actions taken to introduce, maintain or

developarrangements aimed at employees

Social Page 56

GHG emissions

Other sustainability

information Page 234

Employee engagement (including regarding

employee interests and encouraging employees

tobe shareholders)

Social Page 56

Fostering business relationships with

suppliers,customers and others

Our stakeholders Page 24

Policy in relation to employment

ofdisabledpersons

Social Page 56

135

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Statutory and other regulatory information continued

Share buyback

During the year, 58,689,756 ordinary

sharesof 2.5p each were repurchased

underthe buyback programme of up to

£1.5bn announced on 28 July 2022 and

suchrepurchased shares have been cancelled.

The total consideration for the purchase of

these shares, including commission and

stamp duty, was £557,736,206.

The percentage of called up share capital

(excluding treasury shares) as at 31 December

2023, which the shares repurchased in 2023

represents, is 1.93%.

Treasury shares

As at 1 January 2023, the number of shares

held in treasury totalled 220,086,959 (having

a total nominal value of £5,502,174 and

representing 6.7% of the Company’s called

up share capital as at 31 December 2022).

During 2023, the Company used 16,045,254

treasury shares (having a total nominal

valueof £401,131 and representing 0.5%

ofthe Company’s called up share capital

asat31 December 2023) to satisfy awards

under the Free and Matching elements of

theShare Incentive Plan (4,131,918 shares

inaggregate), awards under the Free and

Matching elements of the International Share

Incentive Plan (412,848 shares in aggregate),

awards vested under the Performance Shares

element of the Long-Term Incentive Plan

(4,897,752 shares), awards vested under the

Restricted Shares element of the Long-Term

Incentive Plan (1,895,084 shares) and options

exercised under the Share Options element

ofthe Long-Term Incentive Plan and Executive

Share Option Plan (4,707,652 shares).

Thetreasury shares utilised in respect of the

Share Incentive Plan, the International Share

Incentive Plan, and the Performance and

Restricted Shares elements of the Long-Term

Incentive Plan were disposed of by the

Company for nil consideration. The 4,707,652

shares disposed of by the Company in respect

of the Share Options element of the

Long-Term Incentive Plan and the Executive

Share Option Plan were disposed of by the

Company for an aggregate consideration

of£23,367,600. As at 31 December 2023,

the number of shares held in treasury totalled

204,041,705 (having a total nominal value

of£5,101,043 and representing 6.3% of

theCompany’s called up share capital at

31 December 2023).

The rights to treasury shares are restricted

inaccordance with the Companies Act

and,in particular, the voting and dividend

rights attaching to these shares are

automatically suspended.

Rights and obligations

ofordinaryshares

On a show of hands at a general meeting

every holder of ordinary shares present in

person and entitled to vote shall have one

vote, and every proxy entitled to vote shall

have one vote (unless the proxy is appointed

by more than one member in which case the

proxy has one vote for and one vote against

ifthe proxy has been instructed by one or

more members to vote for the resolution and

by one or more members to vote against the

resolution; or if the proxy has been instructed

by one or more shareholders to vote either

for or against a resolution and by one or

more of those shareholders to use their

discretion how to vote). On a poll, every

member present in person or by proxy and

entitled to vote shall have one vote for every

ordinary share held. Subject to the relevant

statutory provisions and the Company’s

Articles of Association, holders of ordinary

shares are entitled to a dividend where

declared or paid out of profits available

forsuch purposes. Subject to the relevant

statutory provisions and the Company’s

Articles of Association, on a return of capital

on a winding-up, holders of ordinary shares

are entitled, after repayment of the £1 Special

Share, to participate in such a return. There

are no redemption rights in relation to the

ordinary shares.

Rights and obligations

oftheSpecialShare

The Special Share is held on behalf of the

Secretary of State for Business and Trade

(the‘Special Shareholder’). Certain provisions

of the Company’s Articles of Association

cannot be amended without the consent

ofthe Special Shareholder. These provisions

include the requirement that no foreign

person, or foreign persons acting in concert,

can have more than a 15% voting interest

inthe Company, the requirement that the

majority of the directors are British, and

therequirement that the Chief Executive

orany executive Chair are British.

The holder of the Special Share is entitled

toattend a general meeting, but the Special

Share carries no right to vote or any other

rights at any such meeting, other than to

speak in relation to any business in respect

ofthe Special Share. Subject to the relevant

statutory provisions and the Company’s

Articles of Association, on a return of capital

on a winding-up, the holder of the Special

Share shall be entitled to repayment of the

£1capital paid up on the Special Share in

priority to any repayment of capital to any

other members.

The holder of the Special Share has the

rightto require the Company to redeem the

Special Share at par or convert the Special

Share into one ordinary share at any time.

Restrictions on transfer of securities

The restrictions on the transfer of shares

inthe Company are as follows:

– the Special Share may only be issued

to,held by and transferred to the Special

Shareholder or their successor or nominee;

– the directors shall not register any

allotment or transfer of any shares to

aforeign person, or foreign persons acting

in concert, who at the time have more than

a 15% voting interest in the Company, or

who would, following such allotment or

transfer, have such an interest;

– the directors shall not register any person

as a holder of any shares unless they have

received: (i) a declaration stating that upon

registration, the share(s) will not be held

byforeign persons or that upon registration

the share(s) will be held by a foreign person

or persons; (ii) such evidence (if any) as

thedirectors may require of the authority

of the signatory of the declaration; and

(iii)such evidence or information (if any) as

to the matters referred to in the declaration

as the directors consider appropriate;

– the directors may also refuse to register any

instrument of transfer of shares unless the

instrument of transfer is in respect of only

one class of share and it is lodged at the

place where the register of members is

kept, accompanied by a relevant certificate

or such other evidence as the directors may

reasonably require to show the right of the

transferor to make the transfer;

– the directors may refuse to register an

allotment or transfer of shares in favour

ofmore than four persons jointly;

– where a shareholder has failed to provide

the Company with certain information

relating to their interest in shares, the

directors can, in certain circumstances,

refuse to register a transfer of such shares;

– certain restrictions may from time to

timebe imposed by laws and regulations

(for example, insider trading laws);

– restrictions may be imposed pursuant to

the Listing Rules of the Financial Conduct

Authority whereby certain of the Group’s

employees require the Company’s approval

to deal in shares; and

– awards of shares made under the

Company’s Long-Term Incentive Plan 2023,

Long-Term Incentive Plan 2014, Deferred

Bonus Plan, Share Incentive Plan,

International Share Incentive Plan, Group

All-Employee Free Shares Plan and

International Profit Sharing Scheme are

subject to restrictions on the transfer of

shares prior to vesting and/or release.

The Company is not aware of any

arrangements between its shareholders

thatmay result in restrictions on the transfer

of shares and/or voting rights.

136

BAE Systems plc Annual Report 2023

Directors’ report

Significant direct and indirect

holdersof securities

As at 31 December 2023, the Company

hadbeen advised of the following significant

direct and indirect interests in the issued

ordinary share capital of the Company:

Name of shareholder

Percentage

notified

Barclays PLC 3.98%

BlackRock, Inc. 9.90%

The Capital Group Companies, Inc. 12.98%

Investco Limited 4.97%

Silchester International

Investors LLP 3.01%

WCM Investment Management, LLC 3.00%

No disclosable interests have been notified

tothe Company between 31 December 2023

and 20 February 2024 (the latest practicable

date for inclusion in this report). As far as

BAESystems plc is aware, all of the

shareholders listed in the table above have

held more than 3% of, or 3% of voting

rightsattributable to BAE Systems plc’s

ordinary shares.

Exercise of rights of shares

inemployee share schemes

The trustees of the employee trusts do not

seek to exercise voting rights on shares held

in the employee trusts other than on the

direction of the underlying beneficiaries.

Novoting rights are exercised in relation to

shares unallocated to individual beneficiaries.

The trustees of the employee trusts also

waive their entitlement to receive dividends

inrespect of shares that are the beneficial

property of the trusts.

Restrictions on voting deadlines

The notice of any general meeting shall

specify the deadline for exercising voting

rights and appointing a proxy or proxies to

vote in relation to resolutions to be proposed

at the general meeting. The number of proxy

votes for, against or withheld in respect of

each resolution are publicised on the

Company’s website after the meeting.

Appointment and replacement

ofdirectors

Subject to certain nationality requirements

mentioned below, the Company may by

ordinary resolution appoint any person to

bea director.

The directors also have the power to make

appointments to the Board at any time. Any

individual so appointed will hold office until

the next AGM and shall then be eligible for

re-election.

The majority of directors holding office must

be British. Otherwise, the directors who are

not British shall vacate office in such order

that those who have been in office for the

shortest period since their appointment shall

vacate their office first, unless all of the

directors otherwise agree among themselves.

Any director who holds the office of either

Chair (in an executive capacity) or Chief

Executive shall also be British.

The Company must have not less than six

directors holding office at all times. If the

number is reduced to below six, then such

number of persons shall be appointed as

directors as soon as is reasonably practicable

to reinstate the number of directors to six.

The Company may by ordinary resolution

from time to time vary the minimum

numberof directors.

All directors will stand for election or

re-election in 2024 as required by the

Company’s Articles of Association and

incompliance with the UK Corporate

Governance Code.

Amendment of the Company’s

Articles of Association

The Company’s Articles of Association may

only be amended by a special resolution at

ageneral meeting of shareholders. Where

class rights are varied, such amendments

must be approved by the members of each

class of shares separately.

In addition, certain provisions of the Articles

of Association cannot be amended without

the consent of the Special Shareholder. These

provisions include the requirement that no

foreign person, or foreign persons acting in

concert, can have more than a 15% voting

interest in the Company, the requirement that

the majority of the directors are British, and

the requirement that the Chief Executive or

any executive Chair are British.

Powers of the directors

The directors are responsible for the

management of the business of the Company

and may exercise all powers of the Company

subject to applicable legislation and

regulation, and the Articles of Association.

At the 2023 AGM, the directors were given

the power to buy back a maximum number

of 305,567,916 ordinary shares at a minimum

price of 2.5p each. The maximum price was

the higher of (i) an amount equal to 105% of

the average of the middle market quotations

of the Company’s ordinary shares as

derivedfrom the London Stock Exchange

Daily Official List for the five business days

immediately preceding the day on which

suchordinary shares are contracted to be

purchased, and (ii) the higher of the price

ofthe last independent trade and the

highestcurrent independent bid on the

London Stock Exchange.

This power will expire at the earlier of

theconclusion of the 2024 AGM or if earlier,

at the close of business on 30 June 2024.

Aspecial resolution will be proposed at the

2024 AGM to renew the Company’s authority

to acquire its own shares.

At the 2023 AGM, the directors were given

the power to issue new shares up to a

nominal amount of £25,461,446. This power

will expire on the earlier of the conclusion of

the 2024 AGM or if earlier, at the close of

business on 30 June 2024. Accordingly, a

resolution will be proposed at the 2024 AGM

to renew the Company’s authority toissue

further new shares.

Conflicts of interest

As permitted under the Companies Act 2006,

the Company’s Articles of Association contain

provisions which enable the Board to authorise

conflicts or potential conflicts that individual

directors may have.

To avoid potential conflicts of interest the

Board requires the Nominations Committee

to check that any individuals it nominates

forappointment to the Board are free of

potential conflicts. In addition, the Board’s

procedures and the induction programme for

new directors emphasise a director’s personal

responsibility for complying with the duties

relating to conflicts of interest. The procedure

adopted by the Board for the authorisation

ofconflicts reminds directors of the need

toconsider their duties as directors and

notgrant an authorisation unless they

believe, in good faith, that this would be

likelyto promote the success of the Company.

As required by law, the potentially conflicted

director cannot vote on an authorisation

resolution or be counted in the quorum.

Anyauthorisation granted may be terminated

at any time and the director is informed of

the obligation to inform the Company

without delay should there be any material

change in the nature of the conflict or

potential conflict so authorised.

Directors’ indemnities

The Company has entered into deeds of

indemnity with all of its current directors and

those persons who were directors for any

part of 2023 which are qualifying indemnity

provisions for the purpose of the Companies

Act 2006.

The directors of BAE Systems Pension Funds

Trustees Limited, BAE Systems 2000 Pension

Plan Trustees Limited, BAE Systems Executive

Pension Scheme Trustees Limited and

AlvisPension Scheme Trustees Limited

benefitfrom indemnities in the governing

documentation of the BAE Systems Pension

Scheme, the BAE Systems 2000 Pension Plan,

the BAE Systems Executive Pension Scheme

and the Alvis Pension Scheme, respectively,

which are qualifying indemnity provisions

forthe purpose of the Companies Act 2006.

All such indemnity provisions are in force

asat the date of this Directors’ report.

137

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Statutory and other regulatory information continued

Change of control –

significantagreements

The following significant agreements contain

provisions entitling the counterparties to

exercise termination, alteration or other

similar rights in the event of a change of

control of the Company:

– The Company and BAE Systems Holdings

Inc. have entered into a £2bn Revolving

Credit Facility dated 27 September 2023.

The facility provides that,in the event

ofachange of control ofthe Company,

thelenders are entitled torenegotiate

terms, orif no agreement isreached on

negotiated terms within a certain period,

tocall for the repayment orcancellation

ofthe facility. The Revolving Credit Facility

was undrawn as at 31 December 2023.

– The Company and BAE Systems Holdings

Inc. have entered into a $5.525bn Bridge

Loan Facility dated 21 August 2023, as

amended on 8 December 2023. The facility

provides that, in the event of a change of

control of the Company, the lenders are

entitled to renegotiate terms, or if no

agreement is reached on negotiated terms

within a certain period, to call for the

repayment or cancellation of the facility.

The Bridge Loan Facility was undrawn as

at31 December 2023.

– The Company has entered into a Restated

and Amended Shareholders Agreement

with European Aeronautic Defence and

Space Company EADS N.V. (EADS) and

Finmeccanica S.p.A. (Finmeccanica) relating

to MBDA S.A.S. dated 18 December 2001

(as amended). In the event that control of

the Company passes to certain specified

third-party acquirors, the agreement allows

EADS and Finmeccanica to exercise an

option to terminate certain executive

management level nomination and voting

rights, and certain shareholder information

rights of the Company in relation to the

MBDA joint venture. Following the exercise

of this option, the Company would have

the right to require the other shareholders

to purchase its interest in MBDA at fair

market value.

– The Company and EADS have agreed

thatif Finmeccanica acquires a controlling

interest in the Company, EADS will increase

its shareholding in MBDA to 50% by

purchasing the appropriate number of

shares in MBDA at fair market value.

– The Company, BAE Systems, Inc.,

BAESystems (Holdings) Limited and

BAESystems Holdings Inc. entered into

arenewed Special Security Agreement,

effective date of 5 January 2023, with

theUS Department of Defense regarding

the management of BAE Systems, Inc. in

order to comply with the US government’s

national security requirements. In the event

of a change of control of the Company, the

Agreement may be terminated or altered

by the US Department of Defense.

– In June 2017, BAE Systems Surface Ships

Limited entered into a contract with the

UKMinistry of Defence (MoD) for the

manufacture of the first batch of three

Type26 frigates. This contract was amended

and restated in November 2022 to include

the manufacture of the second batch

offive Type 26 frigates. Where the MoD

considers that a proposed change of

control of BAE Systems Surface Ships

Limited (or its direct or indirect holding

company) would be contrary to the

defence, national security or national

interest of the UK or where the change

ofcontrol would result in increased costs

tothe MoD under the contract, then the

change of control shall not proceed until

agreement with the MoD is established.

Ifthere is a change of control without

notice or notwithstanding the objection

ofthe MoD on such grounds, then the

MoD may terminate the contract with

immediate effect.

– The FMSP Ships Engineering Management

and Delivery agreement between

BAESystems Surface Ships Limited and

theMoD was entered into on 31 March

2021 for the provision of surface ship

engineering management and delivery

services relating to HM Naval Base

Portsmouth. Where the MoD considers

that a proposed change of control of

BAESystems Surface Ships Limited

(oritsdirect or indirect holding company)

would be contrary to the defence,

nationalsecurity or national interest of

theUK, then the change of control shall

not proceed until agreement with the

MoDisestablished. If there is a change of

control without notice or notwithstanding

the objection of the MoD on such grounds,

the MoD shall be entitled to terminate

theagreement.

– In November 2020, BAE Systems Global

Combat Systems Munitions Limited and the

MoD entered into a 15-year agreement for

the provision of ammunition to UK forces

(the Next Generation Munitions Solution

(NGMS) agreement) from 2023 to 2037.

Where the MoD has any concerns

regarding a proposed change of control

ofBAE Systems Global Combat Systems

Munitions Limited (or its direct or indirect

holding company) and such concerns

arenot resolved, then if the change of

control proceeds, the MoD may terminate

the contract.

– In November 2015, BAE Systems Marine

Limited entered into a contract with the

MoD for the design, construction, testing

and commissioning of Boat 5 of the

AstuteClass programme. In March 2016,

BAE Systems Marine Limited entered into

acontract with the MoD for the design,

construction, testing and commissioning

ofBoat 6 of the Astute Class Programme.

In March 2018, BAE Systems Marine

Limited entered into a contract with the

MoD for the design, construction, testing

and commissioning of Boat 7 of the

AstuteClass Programme. Where the

MoDconsiders that a proposed change

ofcontrol of BAE Systems Marine Limited

(or its direct or indirect holding company)

would be contrary to the defence, national

security or national interest of the UK,

thenthe change of control shall not

proceed until agreement is established

withthe MoD. In the event that there is

achange of control notwithstanding the

objection of the MoD on such grounds,

theMoD shall be entitled to terminate

theagreements immediately.

– In December 2011, BAE Systems Marine

Limited entered into a contract with the

MoD for the design of the Dreadnought

submarines. Where the MoD considers

thata proposed change of control of

BAESystems Marine Limited (or its direct

orindirect holding company) would be

contrary to the defence, national interest

ornational security of theUK, then the

change of control shall not take place

untilagreement is reached with the MoD

on how to proceed. In the event that there

is a change of control notwithstanding

theobjection of the MoD on such grounds,

the MoD shall be entitled to terminate the

contract with immediate effect.

– In September 2016, BAE Systems Marine

Limited entered into a contract with the

MoD for the initial phase of manufacturing

activities for the Dreadnought Class

programme. This contract was extended

and amended in March 2022 to include

continuation of manufacturing and

associated activities on all four boats

intheclass. Where the MoD considers

thataproposed change of control of

BAESystems Marine Limited (or its direct

orindirect holding company) would be

contrary to the defence, national security

ornational interest of the UK, then the

change of control shall not proceed until

agreement is established with the MoD. In

the event that there is a change of control,

notwithstanding the objection of the MoD

on such grounds, theMoD shall be entitled

to terminate theagreements immediately.

138

BAE Systems plc Annual Report 2023

Directors’ report

– In June 2023, BAE Systems Marine Limited

entered into a contract with the MoD for

the funding of facilities required for the

SSN-AUKUS Class programme. In July

2023, BAE Systems Marine Limited entered

into a contract with the MoD for the

development of the design of the SSN-

AUKUS Class of submarines and long lead

item procurement for that programme. In

each contract where the MoD considers

that a proposed change of control of BAE

Systems Marine Limited (or its direct or

indirect holding company) would be

contrary to the defence, national security or

national interest of the UK, then the

change of control shall not proceed until

agreement isestablished with the MoD. In

the event that there is a change of control

notwithstanding the objection of the MoD

on such grounds, the MoD shall be entitled

to terminate the agreements immediately.

– In December 2018, BAE Systems’

subsidiary, ASC Shipbuilding Pty Limited,

entered into a contract providing the

framework for the design and manufacture

of Hunter Class Frigates for the Royal

Australian Navy (Head Contract). As part

ofthe acquisition of ASC Shipbuilding Pty

Limited from the Australian Commonwealth,

BAE Systems Australia Limited entered into

a Sovereign Capability and Option Deed

(SCOD). Under the Head Contract and

theSCOD, if there is a change of control

ofASC Shipbuilding Pty Limited or

BAESystems Australia Limited or, in the

case of the Head Contract, there is a

change of control of the Company as

guarantor, consent is required from the

Australian Commonwealth Government

prior to any change of control occurring.

Ifthere is a change of control without

notice or notwithstanding an objection,

theCommonwealth may terminate the

Head Contract, take any action to mitigate

an actual or potential threat to Australia’s

national security interests, or exercise its

call option under the SCOD and regain

ownership of ASC Shipbuilding Pty Limited.

– In March 2022, the Hawk Integrated

Support contract was entered into between

BAE Systems (Operations) Limited and the

MoD for the provision of support services

to the Royal Air Force’s fleet of Hawk fast

jet trainer aircraft and the Royal Air Force

Aerobatic Team Aircraft. Where the MoD

has any concerns about the actual or

proposed change of control of BAE Systems

(Operations) Limited (or its direct or indirect

holding company), which may include, but

not limited to, potential threats of national

security, then the MoD shall advise the

contractor in writing of any concerns itmay

have. The MoD may terminate the contract

within six months of such actual

orproposed change of control.

– In June 2021, BAE Systems Australia

Limitedentered into a contract providing

the framework for the provision of

in-service support for the Hawk aircraft

until June 2031. If there is a change of

control of BAE Systems Australia Limited

orBAE Systems plc without consent from

the Australian Commonwealth Government,

the Australian Commonwealth may

terminate the contract.

– In April 2019, BAE Systems (Operations)

Limited, Rolls Royce, MBDA and Leonardo

entered into a contract with the MoD

forthe Tempest Programme to develop

andmature future combat air-related

technologies and concepts. Since then

further contract funding has been

awarded. This contract provides that

wherethe MoD has any concerns about

the actual or proposed change of control

ofBAE Systems (Operations) Limited (or its

direct or indirect holding company), which

may include, but not limited to, such

change of control having an impact on

thereputation or public perception of

theMOD or national security, then the

MoD shall advise the contractor in writing

of any concerns it may have and the MoD

may terminate the contract.

– In June 2021, BAE Systems (Operations)

Limited entered into a contract with the

MoD for the Future Combat Air System

Acquisition Programme Concept and

Assessment Phase Contract to advance

theconcepting and technology of the

next-generation Combat aircraft. In 2023,

additional MoD funding of approximately

£800m was awarded. This contract

provides that where the MoD has any

concerns about the actual or proposed

change of control of BAE Systems

(Operations) Limited (or its direct or indirect

holding company), which may include, but

not limited to, potential threats of national

security, then the MoD shall advise the

contractor in writing of any concerns it may

have. The MoD may terminate the contract

within six months of it being notified of

such actual or proposed change of control.

– In May 2024, BAE Systems Hägglunds AB

entered into a contract with Försvarets

Materielverk and the Ministry of Defence of

the Czech Republic (MoD Czech Republic)

for the manufacture of 246 CV90 MkIV

infantry fighting vehicles. The contract

provides that any change of control of

BAESystems Hägglunds AB (or its direct

orindirect holding company) is subject

tothe MoD Czech Republic’s consent.

In addition, the Company’s share plans

contain provisions as a result of which options

and awards may vest and become exercisable

on a change of control of the Company in

accordance with the rules of the plans.

Auditor

Deloitte LLP has indicated its willingness to be

re-appointed as the Company’s auditor and a

resolution proposing its re-appointment will

be put to the 2024 AGM.

Statement of directors’ responsibilities

in respect of the Annual Report and

the financial statements

The directors are responsible for preparing

the Annual Report, and the Group and parent

company financial statements in accordance

with applicable law and regulations.

Company law requires the directors to

prepare Group and parent company financial

statements for each financial year. Under that

law, they are required to prepare the Group

financial statements in accordance with

International Financial Reporting Standards

asadopted by the UK (IFRS) and applicable

law, and have elected to prepare the parent

company financial statements in accordance

with UK accounting standards, including

Financial Reporting Standard (FRS) 101,

Reduced Disclosure Framework.

Under company law, the directors must not

approve the financial statements unless they

are satisfied that they give a true and fair

view of the state of affairs of the Group and

parent company, and of their profit or loss

forthat period. In preparing each of the

Group and parent company financial

statements, the directors are required to:

– select suitable accounting policies and then

apply them consistently;

– make judgements and estimates that are

reasonable, relevant, reliable and prudent;

– for the Group financial statements, state

whether they have been prepared in

accordance with IFRSs as adopted by

theUK;

– for the parent company financial

statements, state whether applicable UK

accounting standards have been followed,

subject to any material departures disclosed

and explained in the parent company

financial statements;

– assess the Group and parent company’s

ability to continue as a going concern,

disclosing, as applicable, matters related

togoing concern; and

– use the going concern basis of accounting

unless they either intend to liquidate the

Group or the parent company or to cease

operations, or have no realistic alternative

but to do so.

The directors are responsible for keeping

adequate accounting records that are

sufficient to show and explain the parent

company’s transactions and disclose with

reasonable accuracy at any time the financial

position of the parent company and enable

them to ensure that its financial statements

comply with the Companies Act 2006.

139

BAE Systems plc Annual Report 2023

Financial statements Additional informationGovernanceStrategic report

Statutory and other regulatory information continued

Directors’ report

The Directors’ report was approved by the Board of directors on 20 February 2024.

David Parkes

Company Secretary

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 (which together comprise a management report

for the purposes of DTR 4.1.8R), 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.

Cressida Hogg Chair

Charles Woodburn Chief Executive

Tom Arseneault President and Chief Executive Officer ofBAESystems, Inc.

Brad Greve Chief Financial Officer

Nick Anderson Non-executive director

Crystal Ashby Non-executive director

Angus Cockburn Non-executive director

Dame Elizabeth Corley Non-executive director

Jane Griffiths Non-executive director

Ewan Kirk Non-executive director

Stephen Pearce Non-executive director

Nicole Piasecki Non-executive director

Lord Sedwill Non-executive director

On behalf of the Board

Cressida Hogg

Chair

20 February 2024

The directors are responsible for such

internalcontrol as they determine is

necessaryto enable the preparation of

financial statements that are free from

material misstatement, whether due to

fraudor error, and have general responsibility

for taking such steps as are reasonably

opento them to safeguard the assets

oftheGroup and to prevent and detect

fraudand other irregularities.

Under applicable law and regulation,

thedirectors are also responsible for

preparing a strategic report, directors’

report,directors’ remuneration report

andcorporate governance statement that

comply with that law and regulation.

The directors are responsible for the

maintenance and integrity of the corporate

and financial information included on the

Company’s website. Legislation in the UK

governing the preparation and dissemination

of financial statements may differ from

legislation in other jurisdictions.

Controls over financial reporting

Through implementation of the Operational

Framework, internal control procedures are in

place to support the approval of the financial

statements of the Group.

Management is responsible for reviewing

thefinancial reports and disclosures to ensure

that they have been subject to adequate

verification and comply with applicable

standards and legislation (including reviewing

data for consolidation into the Group’s

financial statements to ensure that it gives

atrue and fair view of the Group’s results

incompliance with applicable accounting

policies). Where appropriate, management

reports its conclusions to the Audit Committee,

which debates such conclusions and provides

further challenge. Finally, the Board scrutinises

and approves results announcements and the

Annual Report and ensures that appropriate

disclosures have been made.

This governance process ensures that both

management and the Board are given

sufficient opportunity to debate and challenge

the financial statements of the Group and

other significant disclosures before they are

made public.

Statement of disclosure

ofinformationto auditor

The directors who held office at the date

ofapproval of this Directors’ report confirm

that, so far as they are each aware, there is

no relevant audit information of which the

Company’s auditor is unaware; and each

director has taken all the steps that he/she

ought to have taken to make himself/herself

aware of any relevant audit information and

to establish that the Company’s auditor is

aware of that information.

140

BAE Systems plc Annual Report 2023

Directors’ report

Financial statements

Auditor’s report

Independent Auditor‘s report 142

Consolidated financial statements

Consolidated income statement 152

Consolidated statement

of comprehensive income 153

Consolidated statement

of changes in equity 154

Consolidated balance sheet 155

Consolidated cash flow statement 156

1. Preparation of the Consolidated

financial statements 157

2. Segmental analysis and

revenue recognition 160

3. Operating costs 165

4. Employees 166

5. Other income 166

6. Net finance costs 167

7. Tax expense 168

8. Earnings per share 170

9. Intangible assets 171

10. Property, plant and equipment 174

11. Leases 176

12. Equity accounted investments 178

13. Other investments 180

14. Trade, contract and other receivables 180

15. Other financial assets and liabilities

andfinancial risk management 181

Group accounting policies

Material accounting policies are included within therelevant note to the Consolidated financial statements.

16. Deferred tax 186

17. Inventories 188

18. Current tax 188

19. Cash and cash equivalents 188

20. Geographical analysis of assets 189

21. Loans and overdrafts 189

22. Contract liabilities 190

23. Trade and other payables 190

24. Post-employment benefits 191

25. Provisions 203

26. Share capital and other reserves 204

27. Movement in assets and liabilities

arising from financing activities 207

28. Fair value measurement 208

29. Share-based payments 209

30. Related party transactions 210

31. Contingent liabilities 211

32. Acquisition of businesses 211

33. Business disposals 212

34. Events after the reporting period 213

35. Information about

related undertakings 214

Company financial statements

Company statement

of changes in equity 218

Company balance sheet 219

Notes to the Company

financial statements 220

141

BAE Systems plc Annual Report 2023

Additional informationGovernance Financial statementsStrategic report

Independent Auditor’s report

to the members of BAE Systems plc

Report on the audit of

thefinancial statements

1. Opinion

In our opinion:

– the financial statements of BAE Systems

plc (the “Company”) and its subsidiaries

(the “Group”) give a true and fair view

of the state of the Group’s and of the

Company’s affairs as at 31 December

2023 and of the Group’s profit for the

year then ended;

– the Group financial statements have

been properly prepared in accordance

with United Kingdom adopted

international accounting standards;

– the Company financial statements have

been properly prepared in accordance

with United Kingdom Generally

Accepted Accounting Practice, including

Financial Reporting Standard 101

“Reduced Disclosure Framework”; and

– the financial statements have been

prepared in accordance with the

requirements of the Companies

Act2006.

We have audited the financial statements

which comprise:

– the Consolidated income statement;

– the Consolidated and Company

statementsof comprehensive income;

– the Consolidated and Company

statementsof changes in equity;

– the Consolidated and Company

balancesheets;

– the Consolidated cash flow statement;

– the related notes 1 to 35 in the

Consolidated financial statements; and

– the related notes 1 to 13 in the Company

financial statements.

The financial reporting framework that has

been applied in the preparation of the Group

financial statements is applicable law and

United Kingdom adopted international

accounting standards. The financial reporting

framework that has been applied in the

preparation of the Company financial

statements is applicable law and United

Kingdom Accounting Standards, including

FRS 101 “Reduced Disclosure Framework”

(United Kingdom Generally Accepted

Accounting Practice).

2. Basis for opinion

We conducted our audit in accordance with

International Standards on Auditing (UK)

(“ISAs (UK)”) and applicable law. Our

responsibilities under those standards

arefurther described in the Auditor’s

responsibilities for the audit of the financial

statements section of our report.

We are independent of the Group and the

Company in accordance with the ethical

requirements that are relevant to our audit

ofthe financial statements in the UK,

including the Financial Reporting Council’s

(the “FRC’s”) Ethical Standard as applied to

listed public interest entities, and we have

fulfilled our other ethical responsibilities in

accordance with these requirements. The

non-audit services provided to the Group and

Company for the year are disclosed in note 3

to the financial statements. We confirm that

we have not provided any non-audit services

prohibited by the FRC’s Ethical Standard to

the Group or the Company.

We believe that the audit evidence we have

obtained is sufficient and appropriate to

provide a basis for our opinion.

142

BAE Systems plc Annual Report 2023

Auditor’s report

3. Summary of our audit approach

Key audit matters

The key audit matters that we identified

inthe current year were:

– revenue and margin recognition on

long-term contracts; and

– valuation of post-employment

benefitobligations.

Within this report, key audit matters are

identified as follows:

Increased level of risk

Similar level of risk

Decreased level of risk

Materiality

The materiality that we used for the audit of

the Group financial statements was £100.0m

(2022: £87.5m) which was determined on the

basis of profit before tax excluding adjusting

items and fair value and foreign exchange

movements relating to financial instruments,

as described further in section 6 below.

Scoping

We performed a combination of full scope

audit procedures and audits of specified

account balances on certain components.

Together these procedures addressed:

– 85% of revenue (2022 – 89%);

– 85% of profit before tax (2022 – 86%); and

– and 91% of total assets (2022 – 91%).

The remaining components were subject

toother procedures, including conducting

analytical reviews, making enquiries of

management, and evaluating the Group’s

control environment.

Significant changes in our approach

Last year goodwill was included as a key

auditmatter. As a result of the level of

headroom, we consider the risk to have

significantly reduced and concluded the

valuation of goodwill no longer represents

akey audit matter.

4. Conclusions relating

togoingconcern

In auditing the financial statements, we have

concluded that the directors’ use of the going

concern basis of accounting in the preparation

of the financial statements is appropriate.

Our evaluation of the directors’ assessment

ofthe Group’s and Company’s ability to

continue to adopt the going concern basis

ofaccounting included:

– obtaining an understanding of the directors’

process for determining the appropriateness

of the going concern basis;

– evaluating the Group’s existing access

tosources of financing, including

existingdebt, undrawn committed

bankfacilities and financing for the

BallAerospace acquisition;

– obtaining an understanding of relevant

controls over the going concern models

prepared by management, including the

review of the inputs and assumptions

usedin those models;

– testing the accuracy of management’s

models, including agreement to the

mostrecent Board approved budgets

andforecasts;

– challenging the key assumptions

underpinning these forecasts by:

– reading analyst reports, industry

dataand other external information

andcomparing these with

management’sestimates;

– comparing forecast revenue with

theGroup’s order book and

historicalperformance;

– evaluating the historical accuracy of

forecasts prepared by management;

– considering potential macro-economic

impacts on the forecasts as a

consequence of the current geo-political

environment;

– assessing the sensitivity of the headroom

to key assumptions; and

– assessing the appropriateness of

theGroup’s disclosure concerning

thegoing concern basis.

Based on the work we have performed, we

have not identified any material uncertainties

relating to events or conditions that,

individually or collectively, may cast significant

doubt on the Group’s and Company’s ability

to continue as a going concern for a period

ofat least twelve months from when the

financial statements are authorised for issue.

In relation to the reporting on how the Group

has applied the UK Corporate Governance

Code, we have nothing material to add or

draw attention to in relation to the directors’

statement in the financial statements

aboutwhether the directors considered

itappropriate to adopt the going concern

basis of accounting.

Our responsibilities and the responsibilities

ofthe directors with respect to going

concernare described in the relevant

sectionsof this report.

5. Key audit matters

Key audit matters are those matters that, in

our professional judgement, were of most

significance in our audit of the financial

statements of the current period and include

the most significant assessed risks of material

misstatement (whether or not due to fraud)

that we identified. These matters included

those which had the greatest effect on the

overall audit strategy, the allocation of

resources in the audit, and directing the

efforts of the engagement team.

These matters were addressed in the context

of our audit of the financial statements as a

whole, and in forming our opinion thereon,

and we do not provide a separate opinion

onthese matters.

143

BAE Systems plc Annual Report 2023

Additional informationGovernance Financial statementsStrategic report

Independent Auditor’s report continued

5.1. Revenue and margin recognition

onlong-term contracts

Refer to page 97 (Audit Committee Report), Note 1

(key sources of estimation uncertainty) and Note 2

(accounting policy and financial disclosures)

Revenue:

£23,078m (2022: £21,258m)

Operating profit:

£2,573m (2022: £2,384m)

Key audit matter description

The estimation of both overall lifetime

contract margin and the appropriate level

ofrevenue and profit to recognise in any

single accounting period requires the exercise

of judgement. Within the Group’s contract

portfolio there are a number of programmes

where there is a high degree of estimation

required in reaching these judgements. Key

estimates include forecast costs to complete

on contracts, the impact of assumed learning

efficiencies over the life of a programme,

theschedule completion dates, and the

appropriateness of contingency held against

the risk of future cost growth. Consequently,

we consider that revenue and margin

recognition represent a key audit matter.

We focussed a greater proportion of audit

effort on a number of contracts where

weconsider there to be a higher degree

ofjudgement required and designed

contract-specific procedures to mitigate

theassociated risks.

In order to identify contracts where there

isthe greatest risk of material misstatement,

we undertook a contract risk assessment

process at each reporting unit utilising data

analytics, the latest contract information,

ourunderstanding of the business, the

resultsof prior audits and review of external

information about market and geo-political

conditions which might impact certain

contracts. We held meetings with key finance

and contract managers, attended quarterly

business review meetings and other key

management meetings, read and understood

underlying contract documentation and

obtained support for key contract

judgements. In addition, we looked for

contracts that might have higher levels of

judgement associated with the risk of

schedule delivery or technical complexity,

fixed price contracts which increase the risk

of contract losses and other indicators that

could increase the risk of a material impact

onthe financial statements.

As a result of our risk assessment,

weidentified one contract where we

considerthere to be an elevated risk of

misstatement, owing to the high degree

ofjudgement required in estimating the

trading margin position impacting the

2023financial statements.

How the scope of our audit

respondedto the key audit matter

Our contract testing approach included:

Testing the relevant controls

– We obtained an understanding of and

tested relevant financial and IT controls

across the Group’s project accounting

processes established to ensure that

contracts are appropriately forecast,

managed, controlled and reported.

– We observed the controls in operation

byattending a sample of project contract

status review meetings, quarterly business

review meetings and Group-level meetings

to validate the various levels of challenge

applied to the forecasts.

Challenging assumptions andestimates

To gain assurance over the contract

judgements and estimates made, our

workincluded:

– inspection of customer contracts –

inspecting customer contracts to gain an

understanding of key contractual terms;

– enquiry – making enquiries of programme

management and other operational

personnel to obtain an understanding

ofthe performance of the projects

throughout the year and at year-end;

– historical forecasting accuracy –

evaluating historical forecasting accuracy

ofcosts against actual costs, including on

similar programmes, and challenging future

cost expectations with reference to those

data points;

– site visits – conducting production site

visits to inform our challenge of the cost

tocomplete estimates and understanding

of contract status;

– tests of detail of costs to date and

estimates to complete – testing the

underlying calculations used in the contract

assessments for sensitivity, accuracy and

completeness, including the estimated

costs to complete the contract alongside

associated contingencies and testing a

sample of expenditure to date. In auditing

the cost to complete, we have challenged

the key assumptions with reference to

previous programmes and current run-rate

data, resource availability, supply chain

issues (such as inflation and contract

delivery schedule) and other factors that

could impact on contract and schedule risk;

– inspection and validation of external

evidence – examining external evidence

toassess contract status, timeframe for

delivery and any variation of consideration

(including associated recoverability of

contract balances), such as customer

correspondence. For certain contracts,

thisevidence was validated by meeting

with the customer directly;

– legal – enquiring with in-house legal

counsel regarding contract-related litigation

and claims and analysing legal opinions

where applicable; and

– stand back assessment – considering

whether there were any indicators of

management override of controls or bias

inarriving at their reported position,

including a stand back assessment of

thecontract position.

Key observations

As a result of the audit procedures outlined

above, we consider the judgements made by

the Group in recognising revenue and profit

to be reasonable.

144

BAE Systems plc Annual Report 2023

Auditor’s report

5.2. Valuation of post-employment benefit

obligations

Refer to page 97 (Audit Committee report), Note 1

(key sources of estimation uncertainty) and Note 24

(accounting policy and financial disclosures)

The Group’s share of the net IAS 19 Employee

benefits surplus was: £229m (2022: £646m

net surplus), and comprised scheme assets of

£23,985m (2022: £25,343m) and defined

benefit obligations of £23,247m

(2022: £23,868m).

Key audit matter description

The post-employment schemes are held

across the group in the UK and US, as well

asan end of service benefit provided to

employees in Saudi Arabia and other

locations. The key audit matter set out

belowis in relation to the UK post-

employment schemes.

We identified the following two areas

offocus of our procedures as a key audit

matter in the current year:

Scheme assets

Given the size and nature of the schemes’

assets, there is significant audit effort

required in ensuring the valuation of assets

isappropriate.

Certain asset classes are inherently more

judgmental to value and have a higher level

of associated valuation risk, namely:

– Private Equity investments;

– Pooled Investment Vehicles without

published market prices;

– Private Placements;

– Longevity swap derivatives; and

– Property assets.

In addition, on 1 December 2023, the

Groupmoved its primary investment

manager to a third-party service provider.

This has resulted in a transfer of the

established control environment to the

third-party service provider.

Defined benefit obligations

The key judgements relating to the post-

employment benefit obligation liabilities

include:

– discount rates;

– inflation assumptions for the UK schemes,

including the basis for determining the

inflation risk premium; and

– mortality assumptions.

Given the significant size of the post-

employment benefit obligations at year-end,

small changes to these input assumptions can

lead to material changes in the net surplus.

How the scope of our audit

respondedto the key audit matter

Scheme assets

In relation to asset valuations, we have

performed the following procedures with

increased focus on those assets with a

highervaluation risk as noted above:

– we obtained a detailed understanding and

performed walkthroughs of management’s

process and reviewed relevant internal

controls reports from service providers,

with specific focus on understanding key

controls relating to the valuation of certain

asset classes;

– we tested the pension asset valuation

controls for a number of the asset classes

operated both by management and

relevant service providers;

– we sought and obtained third party

confirmations from asset managers and/or

custodians or other supporting evidence to

test existence and valuation as appropriate;

– in conjunction with our actuarial specialists,

we challenged the fair value assumptions

used to value the longevity swaps including

the future projected mortality rates and

discount rates;

– we assessed publicly available information

on the assets (including fact sheets and

prospectuses), comparing to internal

andexternal benchmarks (i.e. market

prices, relevant indices or comparably

priced instruments);

– in the case of specialist asset classes, such

as properties, we involved our specialists

tochallenge the third-party valuations

performed with reference to recent market

transactions, rental yields, and movements

in relevant indices; and

– we tested relevant controls and

performedsubstantive procedures over

thetransfer of data to the new third-party

service provider.

Defined benefit obligations

In relation to post-employment benefit

obligations, we have performed the

followingprocedures:

– we obtained a detailed understanding

andperformed walkthroughs of

management’s process, with specific focus

on understanding relevant controls relating

to the valuation of the post-employment

benefit obligation;

– we assessed the relevant control

environment of the third-party

administrators who maintain membership

data on behalf of the Group through

review of their ISAE 3402 controls

reporting, and considered and responded

to any findings therein;

– we assessed the competence, capability

and objectivity of the actuaries engaged

bymanagement to perform the valuations

of the schemes;

– in conjunction with our actuarial specialists,

we challenged the assumptions used in the

valuation of the defined benefit obligation,

including assessing and challenging the

reasonableness of the assumptions against

available market data and benchmarking

against peers;

– we made enquiries regarding the climate

impact on the underlying assumptions;

– we considered the adjustment made to the

Continuous Mortality Investigation (“CMI”)

2022 mortality projections that applies an

increased weighting factor to reflect the

potential long-term impacts of Covid-19

onfuture mortality rates, with reference

toadvice the Group has received from

itsactuaries; and

– we agreed a sample of cash contributions

made into the pension funds.

Key observations

We concluded our testing of the assets

andare satisfied that they are appropriately

valued. When taken together, we consider

the discount rate, inflation and other key

pension assumptions used in calculating

theUK post-employment benefit obligation

to be within our independently developed

reasonable range.

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Independent Auditor’s report continued

6. Our application of materiality

6.1. Materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a

reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in

evaluating the results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Group financial statements Company financial statements

Materiality

£100.0m (2022: £87.5m) £65.0m (2022: £34.2m)

Basis for determining

materiality

4.3% of adjusted profit before tax of £2,352m (2022: 4.3%

ofadjusted profit before tax of £2,034m).

This metric excludes adjusting items of £40m and fair value

adjustments and foreign exchange movements on financial

instruments of £66m, as detailed in note 2 and 6 of the

financialstatements.

0.4% of total assets of £18,369m, capped at 65% of

group materiality (2022: 0.7% of net assets of £4,712m).

Rationale for the

benchmark applied

Adjusted profit before tax was considered to be the most

relevantbenchmark as it is considered the most stable and

comparable profit metric. The adjustments relate to items

weconsider appropriate to exclude and not reflective of

theunderlying performance of the business.

We consider the measure suitable having also considered the

otherrelevant benchmarks such as revenue, where our materiality

equates to 0.8%, and net assets, where our materiality equates

to1.0%.

We consider total assets to be the key benchmark

usedbymembers of the Company in assessing financial

position as the primary purpose of the entity is to

holdinvestments.

Component

materiality

The work performed on components identified in our Group audit scope (excluding the Company) was completed to

acomponent materiality level between £20.4m and £40.9m (2022: £20.0m and £33.7m).

Component

materiality range

£20.4m to £40.9m

Audit Committee

reporting threshold

£5.0m

Adjusted

profit before tax

£2,352m

Group

materiality

£100.0m

6.2. Performance materiality

We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected

misstatements exceed the materiality for the financial statements as a whole.

Group financial statements Company financial statements

Performance materiality

70% (2022: 70%) of Group materiality 70% (2022: 70%) of Company materiality

Basis and rationale

fordetermining

performance materiality

In determining performance materiality, we considered the following factors:

– the quantum and nature of the uncorrected misstatements identified in the prior year audit;

– our assessment of the potential for uncorrected misstatements in the current year;

– our risk assessment, including our assessment of the overall control environment;

– no substantial changes to the business have been noted from the prior year; and

– the size and nature of the contract-based significant risks of material misstatement identified.

6.3. Error reporting threshold

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £5m (2022: £4.375m), as well

asdifferences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on

disclosure matters that we identified when assessing the overall presentation of the financial statements.

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7. An overview of the scope

ofouraudit

7.1. Identification and scoping

ofcomponents

We performed our scoping of the

Groupaudit by obtaining an understanding

of the Group and its environment, including

Group-wide controls, and assessing the audit

risks. This exercise has considered the relative

size of each reporting unit’s contribution to

revenue, profit before tax and adjusted

profitbefore tax, alongside further financial

or contractual risks, which we consider to

bepresent.

We determined which reporting units

arefinancially significant by reference to

anumber of factors, including financial

contribution and risk profile. This resulted in

us performing full scope audits for six (2022:

six) reporting units located in the UK, Saudi

Arabia and the US, and included the Group’s

largest joint venture, MBDA S.A.S. (“MBDA”).

Additionally, our audit planning identified

twenty-one non-financially significant

reporting units, located in the UK, Saudi

Arabia, Australia, Sweden and the US, where

we considered there to be a reasonable

possibility of material misstatement in specific

balances within the financial statements.

As a result of our risk assessment procedures

and the detailed scoping exercise performed

at the planning stage of our audit, we

determined that it was appropriate to rotate

certain non-financially significant reporting

units in and out of our Group audit scope in

the current year. We directed component

auditors to perform an audit of specified

account balances or specified audit

procedures on the respective income

statements and balance sheets for these

reporting units.

For all other reporting units not included

infull scope, specified account balance

scopeor specified audit procedure scope, we

performed centrally directed analytical review

procedures to confirm our conclusion that

there was no significant risk of material

misstatement in the residual population.

We also audited the consolidation process

and performed audit procedures on centrally

managed balances including treasury,

post-employment benefit obligations,

litigation and claims, goodwill, tax, and

headoffice costs.

As each of the reporting units maintains

separate financial records, we engaged

component auditors from the Deloitte

member firms in the US, UK, Saudi Arabia,

Sweden and Australia to perform procedures

at all the wholly owned components under

our direction, supervision and review. This

approach also allowed us to engage local

in-scope auditors who have appropriate

knowledge of local regulations to perform

the audit work, under a common Deloitte

audit approach.

In respect of MBDA, we engaged with the

entity’s non-Deloitte auditors to perform a

full scope audit under our direction,

supervision and review.

The Company is located in the United

Kingdom and audited directly by the

Groupaudit team.

The twenty-six reporting units within

eitherfull or specified account balance

scopecontribute the following proportions

tototal Group results.

Revenue

A Full audit scope 41%

B Specified account balances 44%

C Specified audit procedures

andreviewatGroup level

15%

Profit before tax

A Full audit scope 49%

B Specified account balances 36%

C Specified audit procedures

andreviewatGroup level

15%

Total assets

A Full audit scope 51%

B Specified account balances 40%

C Specified audit procedures

andreviewatGroup level

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Independent Auditor’s report continued

7.2. Our consideration of the

controlenvironment

We focussed our controls assessment on

theGroup’s contract accounting processes.

For each reporting unit where revenue is

inscope, we obtain an understanding of

keycontract controls, such as with respect

tothe estimation of contract costs and the

amount of contract revenue to recognise in

the period. We also tested certain relevant

revenue controls. At each reporting unit we

also considered key controls relevant to other

income statement and balance sheet items

where they were considered relevant to our

audit for risk assessment purposes.

The Group operates a range of IT systems

which underpin the financial reporting

process. These vary by business and/or

bygeography. For all reporting units that

were subject to either a full scope or audit

ofspecified balances, we identified relevant

IT systems for the purpose of our audit work.

These were typically the principal Enterprise

Resource Planning (“ERP”) systems for each

reporting unit that underpin the general

ledger and contract accounting balances,

andin some cases also included ancillary/

feeder systems into the main ERP.

In the current year our controls approach

wasprincipally designed to inform our risk

assessment and also to allow us to test the

operating effectiveness of certain relevant

revenue controls. We also assessed relevant

general IT controls. The Group continues

toinvest in its IT systems and there is an

ongoing programme of remediating any

control findings where they are identified

through its own assurance framework,

including Internal Audit, or through the

external audit. As part of our controls work,

we identified certain control deficiencies that

management is in the process of remediating

as disclosed in the Audit Committee report

on page 97. Where deficiencies have been

identified and the remediation activity

remained ongoing during the year, or the

remediated controls were not effective

throughout the whole accounting period,

wedid not seek to place reliance on those

relevant controls for the purpose of our audit.

We also considered head office controls

relating to central balances and processes

such as post-employment benefit obligations,

consolidation and financial reporting,

treasury, tax, and the Group’s planning

andbudgeting process.

During the course of our audit, we placed

reliance on a number of relevant contract

accounting controls and certain valuation

controls in relation to pension scheme assets.

7.3. Our consideration of climate-

relatedrisks

We have engaged with both the central

finance and sustainability functions to gain an

understanding of the Group’s assessment of,

and the process undertaken to both identify

and quantify, the Group’s climate-related

risks. We have engaged our climate specialists

in our assessment to consider broader

industry and market-wide practice.

We completed an independent climate-based

risk assessment in order to consider the

potential impact of climate change on the

Group’s financial statements incorporating

both business specific knowledge and wider

industry awareness. We used this to assess

the completeness of the Group’s identified

risks. In addition, component teams have

considered the local regulatory and legal

environment, and therefore the likelihood

ofunidentified environmental claims arising.

As set out by management in pages 158

and159 to the financial statements, the areas

of financial reporting principally impacted

arethose reliant on future forecasts or

futureperformance, notably recoverability

ofgoodwill.

In relation to the Group’s future forecasts,

weconsidered the appropriateness of

amounts included by management in relation

to climate change in the context of the

underlying businesses’ specific needs and

existing asset base, including engaging with

segment management to understand the

process undertaken to identify required

activities to achieve the Group’s Net Zero

target. We also assessed whether these

disclosures reflect our understanding of

theGroup’s approach to climate. With

respect to the financial statements, we

considered whether the current assessed

impact of climate change required further

orenhanced disclosure as part of critical

accounting estimates. However, we

concluded the current presentation as

afactor within the estimate of goodwill,

ratherthan a material driver of these

estimates, is proportionate to the relative

riskof the Group and currently assessed

potential financial impact.

7.4. Working with other auditors

Our oversight of component auditors

included directing the planning of their audit

work and understanding their risk assessment

process to identify key areas of estimates

andjudgement, as well as supervising the

execution of their audit work. We issued

detailed referral instructions to the

component auditors, reviewed and

supervised their work through a number

ofvisits to each of the component auditors

during the planning and performance stages

of our audit, alongside frequent remote

communication. Further, we challenged the

related component inter-office reporting and

findings from their work, reviewed underlying

audit files, attended component audit closing

meetings in person, or virtually where in

person attendance was not possible, and

heldregular remote communication to

interact on any related audit and accounting

matters which arose. Additionally, all teams

were involved in our annual planning

workshop, which was led by the Group

auditteam. Visits to meet with component

teams in the UK, US, Australia and Kingdom

of Saudi Arabia were also conducted by

either the leadaudit partner or senior

members of theengagement team.

The BAE Systems, Inc. reporting units in the

US and businesses owned via BAE Systems,

Inc., such as Hägglunds a Swedish subsidiary,

are subject to a Department of Defence

Special Security Arrangement (“SSA”), which

is a USgovernment requirement setting out

specific protocols that foreign controlled

companies must comply with in order to

beable to undertake government defence

contracts. As part of this there is restriction

on the flow of information outside of the US.

Therefore, for the US and related reporting

units there are restrictions around access to

the audit files and specific workpapers for

non-US nationals. As such, and consistent

with previous years, we have designed

alternative procedures, including

involvementof an additional independent

USnational partner, to ensure appropriate

direction, supervision and review of the

UScomponent team.

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8. Other information

The other information comprises the

information included in the annual report,

other than the financial statements and

ourauditor’s report thereon. The directors

areresponsible for the other information

contained within the annual report.

Our opinion on the financial statements

doesnot cover the other information and,

except to the extent otherwise explicitly

stated in our report, we do not express

anyform of assurance conclusion thereon.

Our responsibility is to read the other

information and, in doing so, consider

whether the other information is materially

inconsistent with the financial statements,

orour knowledge obtained in the course

ofthe audit, or otherwise appears to be

materially misstated.

If we identify such material inconsistencies

orapparent material misstatements, we are

required to determine whether this gives rise

to a material misstatement in the financial

statements themselves. If, based on the

workwe have performed, we conclude

thatthere is a material misstatement of this

other information, we are required to report

that fact.

We have nothing to report in this regard.

9. Responsibilities of directors

As explained more fully in the directors’

responsibilities statement, the directors

areresponsible for the preparation of the

financial statements and for being satisfied

that they give a true and fair view, and

forsuch internal control as the directors

determine is necessary to enable the

preparation of financial statements that

arefree from material misstatement,

whetherdue to fraud or error.

In preparing the financial statements,

thedirectors are responsible for assessing

theGroup’s and the Company’s ability

tocontinue as a going concern, disclosing

asapplicable, matters related to going

concern and using the going concern basis

ofaccounting unless the directors either

intend to liquidate the Group or the

Companyor to cease operations, or have

norealistic alternative but to do so.

10. Auditor’s responsibilities for the

audit of the financial statements

Our objectives are to obtain reasonable

assurance about whether the financial

statements as a whole are free from material

misstatement, whether due to fraud or

error,and to issue an auditor’s report that

includes our opinion. Reasonable assurance

isa high level of assurance but is not

aguarantee that an audit conducted in

accordance with ISAs (UK) will always

detecta material misstatement when it

exists.Misstatements can arise from fraud

orerror and are considered material if,

individually or in the aggregate, they could

reasonably be expected to influence the

economic decisions of users taken on the

basis of these financial statements.

A further description of our responsibilities

for the audit of the financial statements

islocated on the FRC’s website at:

www.frc.org.uk/auditorsresponsibilities.

Thisdescription forms part of our

auditor’sreport.

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Independent Auditor’s report continued

11. Extent to which the audit was

considered capable of detecting

irregularities, including fraud

Irregularities, including fraud, are instances

ofnon-compliance with laws and regulations.

We design procedures in line with our

responsibilities, outlined above, to detect

material misstatements in respect of

irregularities, including fraud. The extent

towhich our procedures are capable of

detecting irregularities, including fraud

isdetailed below.

11.1. Identifying and assessing potential

risks related to irregularities

In identifying and assessing risks of material

misstatement in respect of irregularities,

including fraud and non-compliance

withlaws and regulations, we considered

thefollowing:

– the nature of the industry and sector,

control environment and business

performance including the design of the

Group’s remuneration policies, key drivers

for directors’ remuneration, bonus levels

and performance targets;

– the Group’s own assessment of the risks

that irregularities may occur either as a

result of fraud or error;

– results of our enquiries of management,

internal legal counsel, internal audit,

directors and the Audit Committee about

their own identification and assessment of

the risks of irregularities, including those

that are specific to the Group’s industry;

– the matters discussed among the audit

engagement team including significant

component audit teams and involving

relevant internal specialists, including tax,

valuations, pensions and IT specialists

regarding how and where fraud might

occur in the financial statements and any

potential indicators of fraud; and

– any matters we identified having obtained

and reviewed the Group’s documentation

of their policies and procedures relating to:

– identifying, evaluating and complying

with laws and regulations and whether

they were aware of any instances of

non-compliance;

– detecting and responding to the risks

offraud and whether they have

knowledge of any actual, suspected

oralleged fraud; and

– the internal controls established to

mitigate risks of fraud or non-compliance

with laws and regulations, including

obtaining an understanding of the

Group’s bribery and corruption and

whistleblowing policies.

As a result of these procedures, we

considered the opportunities and incentives

that may exist within the organisation for

fraud and identified the greatest potential

forfraud in the level of judgement involved

inestimating costs to complete on long-term

contracts and the subsequent impact on

revenue and margin recognition. In common

with all audits under ISAs (UK), we are also

required to perform specific procedures to

respond to the risk of management override.

We also obtained an understanding of the

legal and regulatory frameworks that the

Group operates in, focusing on provisions

ofthose laws and regulations that had a

direct effect on the determination of material

amounts and disclosures in the financial

statements. The key laws and regulations

weconsidered in this context included the

UKCompanies Act, Listing Rules, pension

legislation, and taxation legislation.

In addition, we considered provisions of

otherlaws and regulations that do not have

adirect effect on the financial statements but

compliance with which may be fundamental

to the Group’s ability to operate or to avoid

amaterial penalty, including in respect of

export controls, defence contracting and

anti-bribery and corruption legislation.

11.2. Audit response to risks identified

As a result of performing the above, we

identified revenue and margin recognition

onlong-term contracts as a key audit matter,

and identified the contract with the greatest

judgement related to the potential risk of

fraud owing to the level of estimation

uncertainty and exercise of management

judgement required. The key audit matters

section of our report explains the matter in

more detail and also describes the specific

procedures we performed in response to

thatkey audit matter.

In addition to the above, our procedures

torespond to risks identified included

thefollowing:

– reviewing the financial statement

disclosures and testing to supporting

documentation to assess compliance with

provisions of relevant laws and regulations

described as having a direct effect on the

financial statements;

– enquiring of management, the Audit

Committee, in-house legal counsel and

where appropriate, circularising external

legal counsel, concerning actual and

potential litigation and claims;

– performing analytical procedures to identify

any unusual or unexpected relationships

that may indicate risks of material

misstatement due to fraud;

– reading minutes of meetings of those

charged with governance, reviewing

internal audit reports, and reviewing

correspondence with relevant regulatory

authorities; and

– in addressing the risk of fraud through

management override of controls, testing

the appropriateness of journal entries and

other adjustments; assessing whether the

judgements made in making accounting

estimates are indicative of a potential bias;

and evaluating the business rationale of any

significant transactions that are unusual or

outside the normal course of business.

We also communicated relevant identified

laws and regulations and potential fraud risks

to all engagement team members including

internal specialists and significant component

audit teams and remained alert to any

indications of fraud or non-compliance with

laws and regulations throughout the audit.

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Report on other legal and regulatory requirements

12. Opinions on other matters

prescribed by the Companies

Act2006

In our opinion the part of the directors’

remuneration report to be audited has

been properly prepared in accordance

with the Companies Act 2006.

In our opinion, based on the work

undertaken in the course of the audit:

– the information given in the strategic

report and the directors’ report for the

financial year for which the financial

statements are prepared is consistent

with the financial statements; and

– the strategic report and the

directors’report have been prepared

inaccordance with applicable

legalrequirements.

In the light of the knowledge and

understanding of the Group and the

Company and their environment

obtainedin the course of the audit,

wehave not identified any material

misstatements in the strategic report

orthe directors’ report.

13. Corporate Governance Statement

The Listing Rules require us to review the

directors’ statement in relation to going

concern, longer-term viability and that part

ofthe Corporate Governance Statement

relating to the Group’s compliance with the

provisions of the UK Corporate Governance

Code specified for our review.

Based on the work undertaken as part

ofour audit, we have concluded that

eachof the following elements of the

Corporate Governance Statement is

materially consistent with the financial

statements and our knowledge obtained

during the audit:

– the directors’ statement with regards

tothe appropriateness of adopting the

going concern basis of accounting and

any material uncertainties identified

setout on page 79;

– the directors’ explanation as to its

assessment of the Group’s prospects,

the period this assessment covers and

why the period is appropriate set out

onpage 78;

– the directors’ statement on fair,

balanced and understandable set

outonpage 140;

– the board’s confirmation that it has

carried out a robust assessment of the

emerging and principal risks set out

onpage 68;

– the section of the annual report that

describes the review of effectiveness

ofrisk management and internal control

systems set out on page 90;and

– the section describing the work of the

Audit Committee set out on page 97.

14. Matters on which we are required

to report by exception

14.1. Adequacy of explanations received

and accounting records

Under the Companies Act 2006 we are

required to report to you if, in our opinion:

– we have not received all the information

and explanations we require for our

audit;or

– adequate accounting records have not been

kept by the Company, or returns adequate

for our audit have not been received from

branches not visited by us; or

– the Company financial statements are not

in agreement with the accounting records

and returns.

We have nothing to report in respect

ofthese matters.

14.2. Directors’ remuneration

Under the Companies Act 2006 we are

alsorequired to report if in our opinion

certain disclosures of directors’ remuneration

have not been made or the part of the

directors’ remuneration report to be audited

is not in agreement with the accounting

records and returns.

We have nothing to report in respect

ofthese matters.

15. Other matters which we are

required to address

15.1. Auditor tenure

Following the recommendation of the

AuditCommittee, we were appointed by

themembers on 10 May 2018 to audit the

financial statements for the year ending

31 December 2018 and subsequent financial

periods. The period of total uninterrupted

engagement including previous renewals

andreappointments of the firm is six years

covering the years ended 31 December 2018

to 31 December 2023.

15.2. Consistency of the audit

reportwiththe additional report

totheAudit Committee

Our audit opinion is consistent with the

additional report to the Audit Committee we

are required to provide in accordance with

ISAs (UK).

16. Use of our report

This report is made solely to the Company’s

members, as a body, in accordance with

Chapter 3 of Part 16 of the Companies Act

2006. Our audit work has been undertaken

so that we might state to the Company’s

members those matters we are required

tostate to them in an auditor’s report and

forno other purpose. To the fullest extent

permitted by law, we do not accept or

assume responsibility to anyone other than

the Company and the Company’s members

as a body, for our audit work, for this report,

or for the opinions we have formed.

As required by the Financial Conduct

Authority (FCA) Disclosure Guidance and

Transparency Rule (DTR) 4.1.15R – DTR

4.1.18R, these financial statements will

formpart of the Electronic Format Annual

Financial Report filed on the National Storage

Mechanism of the FCA in accordance with

DTR 4.1.15R – DTR 4.1.18R. This auditor’s

report provides no assurance over whether

the Electronic Format Annual Financial

Reporthas been prepared in compliance

withDTR 4.1.15R – DTR 4.1.18R. We have

been engaged to provide assurance on

whether the Electronic Format Annual

Financial Report has been prepared in

compliance with DTR 4.1.15R – DTR 4.1.18R

and will publicly report separately to the

members on this.

Claire Faulkner

Senior Statutory Auditor

For and on behalf of

Deloitte LLP Statutory Auditor

London, United Kingdom

20 February 2024

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Consolidated income statement

for the year ended 31 December

		2023		2022
			Total		Total
	Note	£m	£m	£m	£m
Continuing operations
Revenue	2		2 3,07 8		21, 2 5 8
Operating costs	3		(20,91 7)		(19, 2 6 9)
Other income	5		204		2 15
Share of results of equity accounted investments	2,12		20 8		18 0
Operating profit	2		2 ,573		2, 38 4
Finance income		17 2		47
Finance costs		(41 9)		(4 42)
Net finance costs	6		(2 47)		(395)
Profit before tax			2, 326		1, 9 8 9
Tax expense	7		(38 6)		(3 15)
Profit for the year			1,9 4 0		1, 6 74
Attributable to:
Equity shareholders			1, 85 7		1, 59 1
Non-controlling interests			83		83
			1,9 4 0		1, 6 74
Earnings per share	8
Basic earnings per share			61. 3p		51 .1p
Diluted earnings per share			60.4p		50 .5p

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Consolidated financial statements

Consolidated statement of comprehensive income

for the year ended 31 December

			2023			2022
		Other	Retained		Other	Retained
		reserves	earnings	Total	reserves	earnings	Total
	Note	£m	£m	£m	£m	£m	£m
Profit for the year		–	1, 9 4 0	1,9 4 0	–	1 , 6 74	1, 6 74
Other comprehensive income
Items that will not be reclassified to the income statement:
Consolidated:
Remeasurements on post-employment benefit schemes
andotherinvestments	13,24	–	(6 69)	(6 69)	–	2 , 8 51	2 , 8 51
Tax on items that will not be reclassified to the income statement	7	–	4	4	–	(357)	(357)
Share of the other comprehensive (expense)/income of associates
and joint ventures accounted for using the equity method
(netoftax)	12	–	(25)	(2 5)	–	11 6	11 6
Items that may be reclassified to the income statement:
Consolidated:
Currency translation on foreign currency net investments		(510)	–	(510)	1,17 2	–	1 ,17 2
Reclassification of cumulative currency translation reserve
ondisposal of subsidiaries	33	–	–	–	(17)	–	(17)
Fair value loss arising on hedging instruments during theyear	15	(4)	–	(4)	(1 02)	–	(10 2)
Cumulative fair value (gain)/loss on hedging instruments
reclassified tothe income statement		(19)	–	(19)	5	–	5
Tax on items that may be reclassified to the income statement	7	3	–	3	24	–	24
Share of the other comprehensive income/(expense) of associates
and joint ventures accounted for using the equity method (net of tax)	12	11	–	11	(8)	–	(8)
Total other comprehensive (expense)/income for the year
(netof tax)		(51 9)	(6 90)	(1, 2 0 9)	1, 0 74	2 , 61 0	3,6 8 4
Total comprehensive (expense)/income for the year		(519)	1, 2 50	731	1, 0 74	4, 28 4	5, 358
Attributable to:
Equity shareholders		(511)	1 ,17 5	66 4	1, 0 5 3	4 ,1 8 6	5,23 9
Non-controlling interests		(8)	75	67	21	98	11 9
		(51 9)	1, 25 0	731	1, 0 74	4, 28 4	5,35 8
1. An analysis of other reserves is provided in note 26.

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Consolidated statement of changes in equity

	for the year ended 31 December
				Attributable to equity holders of BAE Systems plc
		Issued					Non-
		share	Share	Other	Retained		controlling	Total
		capital	premium	reserves	earnings	Total	interests	equity
	Note	£m	£m	£m	£m	£m	£m	£m
At 1 January 2022		85	1, 2 5 2	5,8 87	212	7, 4 3 6	232	7, 6 6 8
Profit for the year		–	–	–	1, 5 91	1, 5 91	83	1, 6 74
Total other comprehensive income for the year		–	–	1, 0 5 3	2,59 5	3, 6 4 8	36	3,6 8 4
Total comprehensive income for the year		–	–	1, 0 5 3	4 ,1 8 6	5, 239	119	5, 358
Share-based payments (inclusive of tax)	29	–	–	–	12 7	127	–	12 7
Cumulative fair value loss on hedging instruments
transferred to the balance sheet (net of tax)		–	–	8	–	8	–	8
Ordinary share dividends	26	–	–	–	(8 02)	(8 02)	(16 6)	(9 68)
Purchase of own shares	26	(3)	–	3	(793)	(793)	–	(793)
At 31 December 2022		82	1, 2 5 2	6 , 9 51	2,93 0	11 , 2 1 5	18 5	11, 4 0 0
Profit for the year		–	–	–	1, 85 7	1,8 57	83	1, 9 4 0
Total other comprehensive expense for the year		–	–	(5 11)	(6 82)	(1 ,1 9 3)	(1 6)	(1, 2 0 9)
Total comprehensive (expense)/income for the year		–	–	(511)	1 ,17 5	664	67	7 31
Share-based payments (inclusive of tax)	29	–	–	–	13 2	13 2	–	13 2
Cumulative fair value gain on hedging instruments
transferred to the balance sheet (net of tax)		–	–	(3 8)	–	(38)	–	(38)
Ordinary share dividends	26	–	–	–	(85 7)	(857)	(8 8)	(9 45)
Purchase of own shares	26	(1)	–	1	(558)	(558)	–	(558)
Proceeds from unclaimed asset programme		–	1	–	–	1	–	1
At 31 December 2023		81	1, 253	6,403	2 ,822	10,559	16 4	10 ,72 3
1. An analysis of other reserves is provided in note 26.

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Consolidated financial statements

		2023	2022
	Note	£m	£m
Non-current assets
Intangible assets	9	12 , 0 9 9	12 , 6 4 4
Property, plant and equipment	10	3,635	3,235
Right-of-use assets	11	1 , 3 11	1, 4 2 5
Investment property		57	63
Equity accounted investments	12	832	787
Other investments	13	84	99
Contract and other receivables	14	6 33	618
Post-employment benefit surpluses	24	804	1, 2 9 7
Other financial assets	15	2 27	322
Deferred tax assets	16	609	33 8
	20	20 , 291	20, 828
Current assets
Inventories	17	1 ,1 5 6	976
Trade, contract and other receivables	14	6 ,1 8 5	6 ,1 6 6
Current tax	18	16 0	13 3
Other financial assets	15	205	252
Cash and cash equivalents	19	4, 067	3 ,1 0 7
		11 , 7 7 3	10 , 6 3 4
Total assets		32, 064	31, 4 6 2
Non-current liabilities
Loans	21	(4 , 4 32)	(5, 189)
Lease liabilities	11	(1, 2 73)	(1, 3 7 5)
Contract liabilities	22	(1 , 9 5 5)	(9 45)
Other payables	23	(1, 5 9 4)	(1, 4 4 1)
Post-employment benefit obligations	24	(575)	(6 51)
Other financial liabilities	15	(227)	(272)
Deferred tax liabilities	16	(10)	(5)
Provisions	25	(332)	(33 8)
		(10,398)	(10 , 216)
Current liabilities
Loans and overdrafts	21	(679)	(53)
Lease liabilities	11	(14 7)	(2 41)
Contract liabilities	22	(3, 865)	(3, 8 82)
Trade and other payables	23	(5, 43 6)	(4 ,99 0)
Other financial liabilities	15	(295)	(328)
Current tax	18	(2 85)	(10 3)
Provisions	25	(236)	(249)
		(10 , 9 4 3)	(9, 8 4 6)
Total liabilities		(21, 3 41)	(20,0 62)
Net assets		10,7 23	11, 4 0 0
Capital and reserves
Issued share capital	26	81	82
Share premium		1, 25 3	1, 25 2
Other reserves	26	6,403	6 , 9 51
Retained earnings		2,8 22	2,930
Total equity attributable to equity holders of BAE Systems plc		10,559	11 , 2 1 5
Non-controlling interests		16 4	18 5
Total equity		10,7 23	11, 4 0 0

Approved by the Board of BAE Systems plc on 20 February 2024 and signed on its behalf by:

C N Woodburn B M Greve

Chief Executive Chief Financial Officer

Consolidated balance sheet

as at 31 December

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Note

		2023	2022
		£m	£m
Profit for the year		1,9 4 0	1, 6 74
Tax expense	7	386	3 15
Adjustment in respect of research and development expenditure credits	5	(53)	(35)
Share of results of equity accounted investments	2,12	(208)	(18 0)
Net finance costs	6	2 47	3 95
Depreciation, amortisation and impairment	3	787	76 7
Net gain on disposal of property, plant and equipment, and investment property	3,5	(1 0)	(3)
Gain in respect of business disposals	3,5	–	(93)
Gain on disposal of non-current investments	5	–	(7)
Cost of equity-settled employee share schemes	4	11 0	101
Movements in provisions		–	(5 4)
Difference between pension funding contributions paid and the pension charge		(1 6 9)	1
(Increase)/decrease in working capital:
Inventories		(2 23)	(93)
Trade, contract and other receivables		(287)	(1, 0 6 9)
Trade and other payables, and contract liabilities		1,6 35	1, 4 8 5
Tax paid net of research and development expenditure credits received		(395)	(3 65)
Net cash flow from operating activities		3, 760	2,8 39
Dividends received from equity accounted investments	12	13 4	94
Interest received		12 6	32
Principal element of finance lease receipts		10	9
Purchase of property, plant and equipment, and investment property		(826)	(599)
Purchase of intangible assets		(1 31)	(9 4)
Purchase of non-current other investments		–	(8)
Proceeds from funding related to assets		14 9	15 7
Proceeds from sale of property, plant and equipment, and investment property		19	18
Proceeds from sale of non-current other investments		–	7
Purchase of subsidiary undertakings and equity accounted investments, net of cash and cash equivalents acquired	12,32	(14)	(16 2)
Cash flow in respect of business disposals, net of cash and cash equivalents disposed	33	(8)	12 4
Net cash flow from investing activities		(5 41)	(42 2)
Interest paid		(356)	(269)
Equity dividends paid	26	(857)	(8 02)
Purchase of own shares	26	(5 61)	(788)
Dividends paid to non-controlling interests		(88)	(1 6 6)
Principal element of lease payments		(29 2)	(236)
Cash inflow from derivative financial instruments (excluding cash flow hedges)		193	533
Cash outflow from derivative financial instruments (excluding cash flow hedges)		(3 89)	(20 5)
Cash inflow from draw-down of loans		162	–
Cash outflow from repayment of loans		–	(4 0 0)
Net cash flow from financing activities	27	(2, 188)	(2,333)
Net increase in cash and cash equivalents		1,0 31	84
Cash and cash equivalents at 1 January		3 ,1 0 7	2 , 9 17
Effect of foreign exchange rate changes on cash and cash equivalents		(7 1)	10 6
Cash and cash equivalents at 31 December	19	4 ,0 67	3 ,1 0 7

Consolidated cash flow statement

for the year ended 31 December

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Consolidated financial statements

1. Preparation of the Consolidated financial statements

Basis of preparation

BAE Systems plc (the parent company) is a public company limited by shares incorporated in the United Kingdom under the Companies Act

and is registered in England and Wales. The address of the parent company’s registered office is shown on page 236.

Following review, the directors have concluded that it is appropriate to adopt the going concern basis for these financial statements and have

not identified any material uncertainties concerning the Group’s ability to do so in the 12-month period from the date of approving them.

Accordingly, the Consolidated financial statements of BAE Systems plc have been prepared on a going concern basis, and in accordance with

UK-adopted international accounting standards and the Companies Act 2006.

The Consolidated financial statements are presented in pounds sterling and, unless stated otherwise, rounded to the nearest million. They have

been prepared under the historical cost convention, as modified by the revaluation of certain financial assets and financial liabilities (including

derivative financial instruments).

Transactions in foreign currencies are translated at the exchange rates ruling at the date of the transactions. Monetary assets and liabilities

denominated in foreign currencies are retranslated at the exchange rates ruling at the balance sheet date, with the resulting exchange

differences recognised in the income statement.

Material accounting policies

The material accounting policies applied in the preparation of these Consolidated financial statements are set out in the relevant notes. These

policies have been applied consistently to all the years presented, unless otherwise stated. The directors believe that the Consolidated financial

statements reflect appropriate judgements and estimates, and provide a true and fair view of the Group’s financial performance and position.

Key sources of estimation uncertainty

The application of the Group’s accounting policies requires the use of estimates. In response to the potential impact of risks and uncertainties,

the Group undertakes risk assessments and scenario planning in order to be able to respond to potential rapid changes in circumstances.

The Group considers a range of estimates and assumptions in the application of its accounting policies and management’s assessment of the

carrying value of assets and liabilities. In the event that these estimates or assumptions prove to be inaccurate, there may be an adjustment to

the carrying values of assets and liabilities within the next year. Potential areas of the Group’s financial statements which could be materially

impacted may include, but are not limited to:

Accounting policy Description Note

Revenue and profit

recognition

The Group accounts for revenue in accordance with IFRS 15 Revenue from Contracts with Customers.

For most of the Group’s contracts, revenue and associated margin are recognised progressively over

time as costs are incurred, and as risks have been mitigated or retired.

The ultimate profitability of contracts is based on estimates of revenue and costs, including allowances

for technical and other risks which are reliant on the knowledge and experience of the Group’s project

managers, engineers and finance and commercial professionals. Material changes in these estimates

could affect the profitability of individual contracts. Revenue and cost estimates are reviewed and updated

at least quarterly, or more frequently as determined by events or circumstances.

The long-term nature of many of the Group’s contracts means that judgements are made in estimating

future costs on a contract, as well as when risks will be mitigated or retired. The impact of global supply

chain issues, volatility in global gas and energy prices, and the ongoing response to climate change, have

increased uncertainty in relation to these judgements and estimates. The Group continues to work closely

and collaboratively with its key customers to deliver effectively on its contracts and commitments.

However, the volume, scale, complexity and long-term nature of its programmes mean that potential

sensitivities would be wide-ranging and not practicable to calculate. Owing to the potential future impact

of current uncertainties, the Group’s estimates and assumptions related to revenue recognition could be

impacted by issues such as reduced productivity as a result of operational disruption, production delays

and increased costs as a result of disruption to the supply chain, changing working practices to move

towards our net zero ambitions, or where there is uncertainty as to the recovery from customers of

programme costs incurred.

The Group has recognised £0.3bn of revenue in respect of performance obligations satisfied or partially

satisfied in previous years (2022 £0.3bn). This continues to provide an approximation of the potential

revenue sensitivity arising as a result of management’s estimates and assumptions for variable

consideration, future costs, and technical and other risks, however it may not reflect the full potential

impact on the contract receivables and contract liabilities balances.

Notes to the Consolidated

financial statements

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Notes to the Consolidated financial statements continued

1. Preparation of the Consolidated financial statements continued

Accounting policy Description Note

Post-employment

benefit obligations

A number of actuarial assumptions are made in assessing the value of post-employment benefit

obligations, including the discount rate, inflation rate and mortality assumptions. For each of the actuarial

assumptions used, there is a wide range of possible values and management estimates a point within

that range that most appropriately reflects the Group’s circumstances.

If estimates relating to these actuarial assumptions are no longer valid or change due to changing economic

and social conditions, then the potential obligations due under these schemes could change significantly.

Discount and inflation rates could change significantly as a result of a prolonged economic downturn,

monetary policy decisions and interventions or other macroeconomic issues. The impact of estimates

made with regard to mortality projections may also change.

Similarly, the values of many assets are subject to estimates and assumptions, in particular those which

are held in unquoted pooled investment vehicles. The associated fair value of these unquoted pooled

investments is estimated with consideration of the most recently available valuations provided by the

investment or fund managers. These valuations inherently incorporate a number of assumptions, including

the impact of climate change, on the underlying investments. The overall level of estimation uncertainty in

valuing these assets could therefore give rise to a material change in valuation within the next 12 months.

Furthermore, estimates are required around the Group’s ability to access its defined benefit surpluses,

and on what basis, which then determines the associated rate of tax to apply. Depending on the outcome,

judgement is then required to determine the presentation of any tax payable in recovering a surplus.

Note 24 provides information on the key assumptions and analysis of their sensitivities.

Critical judgements made in applying accounting policies

In the course of preparing the Consolidated financial statements and when applying its accounting policies, the Group has been required to

make judgements with regard to the actions required to enable the business to continue to meet customers’ requirements in an operating

environment still dominated by global economic uncertainties. No critical judgements have been made in the process of applying the Group’s

accounting policies, other than those involving estimates, that have had a significant effect on the amounts recognised in the Consolidated

financial statements.

Impact of climate ambitions on the Consolidated financial statements

In preparing the Consolidated financial statements management has considered the potential impact of climate change, both in the context

of the disclosures included in the Strategic report, and the impact of climate-related risks and opportunities and the Group’s net zero ambitions

and decarbonisation activities on the Group’s financial results.

As a responsible defence business, sustainability is embedded in our strategic framework, with one of the Group’s long-term objectives to

advance and integrate our ESG agenda. The products and services we provide are complex, diverse and developed over extended periods

of time. Sustainability and the impact of our operations is considered in the planning and ongoing production of our products and services,

including incorporation of the impact of the Group’s net zero ambitions and decarbonisation activities. These are embedded in our financial

reporting, forecasting and governance processes.

Estimates and judgement are required in determining how the Group will pursue its net zero ambitions. These, as well as mitigating actions

required from the detailed review of climate risks and opportunities identified within the TCFD disclosures on page 53, have been factored

into the current and future plans of the Group through the Integrated Business Plan (IBP). The IBP is the Group’s annual long-term strategy

review and five-year plan for each segment, including the investment case to decarbonise.

There are a number of core practices and processes that support the business to remain resilient and adapt to the impacts of climate change,

whilst controlling the financial impacts to the Group. These include:

– Maintenance and investment in our infrastructure – our products are designed and built to remain in service for decades to come, and

require development and construction over a significant period of time. In order to deliver complex engineering and technologically advanced

products, we continuously invest in the maintenance and upkeep of our global sites and facilities. The Group regularly invests in its facilities to

ensure they are maintained and adapted to enable our operations. Regular maintenance and investing in Group infrastructure is embedded in

our strategy, and the expected associated costs are reflected in our IBP. Insurance also provides underlying cover for more immediate

and unexpected impacts of climate change.

– Investment in renewable energy – during the year, the Group has entered into a number of Power Purchase Agreements (PPAs) to invest

in renewable energy, providing long-term security of energy and pricing.

– Proactive estate management – a large part of our business is based on sites that are leased to the Group, as reflected in our right-of-

use assets in the Consolidated financial statements. Although some facilities, such as shipyards, are required to be in certain locations, many

of our operations are not tied to a particular location. Given the long-term outlook of our business, future physical impacts of climate change

could be mitigated through movement of activities on these sites to facilities that will be less impacted by climate change. As and when sites

are identified that would benefit from relocation, the associated costs are reflected within the IBP. We have not currently identified any sites

which require relocation due to climate change. We also use opportunities of new building and refurbishment to upgrade energy efficiency.

The more immediate financial impacts of climate-related risks, and the actions being taken to address them, are reflected in the financial

results of the Group for the year. These are not considered to have had a material impact. Areas impacted by climate-related risks and

opportunities include:

– Intangible assets – the annual impairment review uses cash flow projections from the IBP, which incorporates any financial impact

of climate-related risks and opportunities identified. This includes product repair and adaptation, as well as investment in facilities to

progress the Group’s net zero ambitions. All Cash-Generating Units showed sufficient headroom after incorporation of climate-related

costs and opportunities.

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Consolidated financial statements

1. Preparation of the Consolidated financial statements continued

– Property, plant and equipment – the useful economic life of existing capitalised assets across the Group has been reviewed in light of

any repairs, upgrades to existing infrastructure, or future investment in facilities that will be required as a result of the climate-related risks

and opportunities identified across our sites. No significant impairment of assets has been identified from this review.

– Right-of-use assets, lease liabilities, and financial assets and liabilities – the Group has entered into a number of PPAs during the year

to provide more sustainable energy from renewable sources, including a new wind farm development and a number of solar projects across

our UK enterprise, which will be completed in Q4 2026 and 2024 respectively. Once the projects are completed, and where the accounting

for these agreements falls within the scope of IFRS 16 Leases, the relevant right-of-use assets and corresponding liabilities will be recognised

in the Consolidated financial statements. The associated costs of the arrangement will be recognised in line with the term of the agreement.

The Group has also considered whether any embedded derivatives have arisen, within the scope of IFRS 9 Financial Instruments, as a result

of the PPAs entered into during the year. None are considered to exist at the balance sheet date, however this will continue to be monitored

as the associated contractual arrangements are refined and the construction of the facility approaches completion.

– Pension plans – in assessing the value of pension assets for the UK schemes, the Group has considered the impact of climate change which

is incorporated into the cash flow projections used in valuing infrastructure investment assets and pooled investment vehicle cash flows upon

which the Group bases its assessment. There is also alignment between the UK Main Scheme and the Group’s climate change objectives with

consistent long-term net zero ambitions. This has not materially impacted the Group’s net pension position during the year.

– Deferred tax assets – the recoverability of deferred tax assets are dependent on the future availability of profits, which in turn could be

impacted by climate-related matters. The recoverability of deferred tax assets have been reviewed against the Group’s future forecasts

resulting from the IBP process, which incorporate identified climate-related risks and opportunities. No material risk to the recoverability

of deferred tax assets has been identified.

– Recoverability of contract and trade receivables – our customers are also impacted by climate-related matters. The Group actively

monitors credit risk in relation to defence-related sales to government customers or subcontractors to governments, which is considered

extremely low as the probability of default is insignificant. For non-government commercial customers the Group assesses the impact of

any credit losses but this is not considered to be material to the financial statements.

– Share-based payments – the award of Performance Shares within the 2023 Director’s Long-Term Incentive framework has a 10%

weighting based on the reduction of Group GHG emissions (Scope 1 and 2) aligned to a science-based pathway. The ability to meet

this target will impact the amount and timing of any share-based payments over the term of the policy. The introduction of this condition

has not materially impacted the financial results of the Group for the current year.

Changes in accounting policies

The following standards, interpretations and amendments to existing standards became effective on 1 January 2023 and have not had

a material impact on the Group:

– IFRS 17 Insurance Contracts, effective from 1 January 2023;

– Amendments to IAS 1: Presentation of Financial Statements, effective from 1 January 2023;

– Amendments to IFRS Practice Statement 2: Disclosure of Accounting Policies, effective from 1 January 2023;

– Amendments to IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors, effective from 1 January 2023; and

– Amendments to IAS 12: Income Taxes, effective from 1 January 2023.

The following other standards, interpretations and amendments to existing standards have been issued but were not mandatory for accounting

periods beginning on 1 January 2023. These either have been, or are expected to be, endorsed by the UK Endorsement Board and are not

expected to have a material impact on the Group:

– Amendments to IAS 1: Classification of Liabilities as Current or Non-current, effective from 1 January 2024;

– Amendments to IAS 1: Non-current Liabilities with Covenants, effective from 1 January 2024;

– Amendments to IAS 7 and IFRS 7: Supplier Finance Arrangements, effective from 1 January 2024;

– Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or joint venture; and

– Amendments to IFRS 16: Lease Liability in a Sale and Leaseback, effective from 1 January 2024.

Consolidation

The financial statements of the Group consolidate the results of the Company and its subsidiary entities, and include its share of results

of equity accounted investments accounted for under the equity method.

A subsidiary is an entity controlled by the Group. The Group controls a subsidiary when it is exposed, or has the rights, to variable returns from

its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. The results of subsidiaries

are included in the income statement from the date of acquisition, or up until the date of disposal.

Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in

preparing the Consolidated financial statements.

Joint ventures are accounted for under the equity method and the Consolidated income statement includes the Group’s share of their profits

and losses, the Consolidated statement of comprehensive income includes its share of their other comprehensive income and expense, and the

Consolidated balance sheet includes its share of their net assets within equity accounted investments.

The assets and liabilities of overseas subsidiaries and equity accounted investments are translated at the exchange rates ruling at the balance

sheet date. The income statements of such entities are translated at average rates of exchange during the year. All resulting exchange

differences are recognised directly in a separate component of equity. Translation differences that arose before the transition date to IFRS

(1 January 2004) are presented in equity, but not as a separate component. When a foreign operation is sold, the cumulative exchange

differences recognised in equity since 1 January 2004 are recognised in the income statement as part of the profit or loss on sale.

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Notes to the Consolidated financial statements continued

2. Segmental analysis and revenue recognition

Revenue and profit recognition

Revenue represents income derived from contracts for the provision of goods and services, over time or at a point in time, by the Group

to customers in exchange for consideration in the ordinary course of the Group’s activities.

The Group accounts for revenue in accordance with IFRS 15 Revenue from Contracts with Customers. For most of the Group’s contracts,

revenue and associated margin are recognised progressively over time as costs are incurred, and as risks have been mitigated or retired.

The ultimate profitability of contracts is based on estimates of revenue and costs, including allowances for technical and other risks which

are reliant on the knowledge and experience of the Group’s project managers, engineers, and finance and commercial professionals.

Revenue and cost estimates are reviewed and updated at least quarterly, or more frequently as determined by events and circumstances.

The Group typically enters into the following types of contracts with customers:

– to design, build or create assets uniquely available to the customer such as ships and aircraft;

– to service or maintain assets over a period of time;

– to give access to software and licences; and

– to offer bespoke services to customers, for example through training or the offering of cyber, intelligence and security capabilities.

Revenue is recognised against each of these types of contracts in line with the following accounting policies.

Performance obligations

Upon approval by the parties to a contract, the contract is assessed to identify each promise to transfer either a distinct good or service

or a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Goods and

services are distinct and accounted for as separate performance obligations in the contract if the customer can benefit from them either

on their own or together with other resources that are readily available to the customer and they are separately identifiable in the contract.

In some cases, the Group provides warranties to its customers to give them assurance that its products and services will function in line

with agreed-upon specifications. Warranties are not provided separately and, therefore, do not represent separate performance obligations.

As they are not provided separately, these are not considered to be insurance contracts in scope of IFRS 17 Insurance Contracts. A provision

for warranties is recognised when the underlying products and services are sold (see note 25 for further details).

Transaction price

At the start of the contract, the total transaction price is estimated as the amount of consideration to which the Group expects to be

entitled in exchange for transferring the promised goods and services to the customer, excluding sales taxes. Variable consideration, such

as variable price mechanisms, is included based on the expected value or most likely amount only to the extent that it is highly probable

that there will not be a reversal in the amount of cumulative revenue recognised. The transaction price does not include estimates of

consideration resulting from contract modifications, such as change orders, until they have been approved by the parties to the contract.

The total transaction price is allocated to the performance obligations identified in the contract in proportion to their relative stand-alone

selling prices. Given the bespoke nature of many of the Group’s products and services, which are designed and/or manufactured under

contract to the customer’s individual specifications, there are typically no observable stand-alone selling prices. Instead, stand-alone selling

prices are typically estimated based on expected costs plus contract margin consistent with the Group’s pricing principles.

Whilst payment terms vary from contract to contract, on many of the Group’s contracts, an element of the transaction price is received

in advance of delivery. When cash is received in advance of goods or services being delivered a contract liability is recognised. The Group

therefore has significant contract liabilities (note 22). The Group’s contracts are not considered to include significant financing components

on the basis that there is no difference between the consideration and the cash selling price. UK Ministry of Defence contracting rules

prohibit the inclusion of financing in the sales price. Negotiations on competitive international export contracts do not make allowance

for the cash payment profile.

Revenue and profit recognition

Revenue is recognised as performance obligations are satisfied and control of the goods and services is transferred to the customer.

For each performance obligation within a contract, the Group determines whether it is satisfied over time or at a point in time.

Performance obligations are satisfied over time if one of the following criteria is satisfied:

– the customer simultaneously receives and consumes the benefits provided by the Group’s performance as it performs;

– the Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or

– the Group’s performance does not create an asset with an alternative use to the Group and it has an enforceable right to payment

for performance completed to date.

The Group has determined that most of its contracts satisfy the over-time criteria, either because the customer simultaneously receives

and consumes the benefits provided by the Group’s performance as it is performed (typically services or support contracts, for example

in the case of ongoing maintenance and support of aircraft and flying capability), or the Group’s performance does not create an asset

with an alternative use to the Group and it has an enforceable right to payment for performance completed to date (typically development

or production contracts, such as in the production of ships or aircraft to customers’ unique specifications).

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2. Segmental analysis and revenue recognition continued

For each performance obligation to be recognised over time, the Group recognises revenue using an input method, based on costs incurred

in the year. Revenue and attributable margin are calculated by reference to reliable estimates of the transaction price and total expected

costs, after making suitable allowances for technical and other risks including the impact of global economic uncertainties and climate

change. Revenue and associated margin are therefore recognised progressively as costs are incurred and as risks have been mitigated or

retired. The Group has determined that this method appropriately depicts the Group’s performance in transferring control of the goods

and services to the customer.

If the over-time criteria for revenue recognition are not met, revenue is recognised at the point in time that control is transferred to the

customer which is usually when legal title passes to the customer and the business has the right to payment, for example, on delivery.

When it is probable that total contract costs will exceed total contract revenue the expected loss is recognised immediately as an expense.

Software licences

The Group sells software licences either separately or together with other goods and services, including computer hardware and

implementation, hosting and support. Revenue recognition in respect of software licences sold as part of a bundle of goods and services

is considered separately when the licence is determined to be a separate performance obligation. Software licences either represent a right

to access the Group’s intellectual property as it exists throughout the licence period or a right to use the Group’s intellectual property as it

exists at the point in time at which the licence is granted. Revenue in respect of a right to access licence is recognised over the licence term

or, in relation to perpetual licences, over the related customer relationship. Revenue in respect of a right to use licence is recognised on

delivery of the software to the customer or, if the customer chooses not to access and take delivery of the software, on expiry of the licence

arrangement. A software licence is considered to be a right to access the Group’s intellectual property as it exists throughout the licence

period if all of the following criteria are satisfied:

– the contract requires, or the customer reasonably expects, that the Group will undertake activities that significantly affect the intellectual

property;

– the licence directly exposes the customer to the effects of those activities; and

– those activities do not result in the transfer of a good or service to the customer.

Contract modifications

The Group’s contracts are often amended for changes in customers’ requirements and specifications. A contract modification exists

when the parties to the contract approve a modification that either changes existing, or creates newly enforceable, rights and obligations.

The effect of a contract modification on the transaction price, and the Group’s measure of progress towards the satisfaction of the

performance obligation to which it relates, is recognised in one of the following ways:

1. prospectively, as an additional, separate contract;

2. prospectively, as a termination of the existing contract and creation of a new contract; or

3. as part of the original contract using a cumulative catch-up.

The majority of the Group’s contract modifications are treated under either 1 (for example, the requirement for additional distinct goods

or services) or 3 (for example, a change in the specification of the distinct goods or services for a partially completed contract), although

the facts and circumstances of any contract modification are considered individually as the types of modifications will vary and may result

in different accounting outcomes.

Costs to obtain a contract

The Group expenses pre-contract bidding costs which are incurred regardless of whether a contract is awarded. The Group does not

typically incur costs to obtain contracts that it would not have incurred had the contracts not been awarded, such as sales commission.

Costs to fulfil a contract

Contract fulfilment costs in respect of over-time contracts are expensed as incurred. Contract fulfilment costs in respect of point in time

contracts are accounted for under IAS 2 Inventories.

Reporting segments

The Group has five sectors which, together with HQ, make its six reporting segments as defined by IFRS 8 Operating Segments:

– Electronic Systems comprises the US- and UK-based electronics activities, including electronic warfare systems, navigation systems,

electro-optical sensors, military and commercial digital engine and flight controls, precision guidance and seeker solutions, next-generation

military communications systems and data links, persistent surveillance capabilities, space electronics and electric drive propulsion systems.

– Platforms & Services, with operations in the US, Sweden and UK, manufactures and upgrades combat vehicles, weapons and munitions,

and delivers services and sustainment activities, including naval ship repair, and the management and operation of two government-owned

ammunition plants.

– Air comprises the Group’s UK-based air build and support activities for European and international markets, US programmes, development

of Future Combat Air Systems and FalconWorks

, alongside our business in the Kingdom of Saudi Arabia and interests in our European joint

ventures: Eurofighter and MBDA.

– Maritime comprises the Group’s UK-based maritime and land activities, including major submarine, ship build and support programmes

as well as our Australian business.

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Notes to the Consolidated financial statements continued

2. Segmental analysis and revenue recognition continued

Reporting segments continued

– Cyber & Intelligence comprises the US-based Intelligence & Security business and UK-headquartered Digital Intelligence business,

which have been aggregated together due to the similarities of the services offered. Together, they cover the Group’s cyber security activities

for national security, central government and government enterprises.

– HQ comprises the Group’s head office and UK-based shared services activities, together with a 49% interest in Air Astana as at

31 December 2023.

The Board (the chief operating decision maker as defined by IFRS 8 Operating Segments) monitors the results of these reporting segments

to assess performance and make decisions about the allocation of resources. Segmental performance is evaluated based on key performance

indicators – sales

and underlying EBIT

. Net finance costs and tax expense are managed on a Group basis.

Sales

and revenue by reporting segment

				Deduct		Add
				Group’s share of revenue		Subsidiaries’ revenue
				of equity accounted		from equity accounted
	Sales		investments		investments		Revenue
	2023	2022	2023	2022	2023	2022	2023	2022
	£m	£m	£m	£m	£m	£m	£m	£m
Electronic Systems	5,458	5,057	(255)	(73)	253	73	5,456	5,057
Platforms & Services	3,922	3,688	(80)	(90)	–	–	3,842	3,598
Air	8,058	7,698	(2,946)	(2,651)	1,405	1,239	6,517	6,286
Maritime	5,536	4,598	(150)	(119)	5	5	5,391	4,484
Cyber & Intelligence	2,321	2,205	–	–	–	–	2,321	2,205
HQ	471	420	(461)	(410)	–	–	10	10
	25,766	23,666	(3,892)	(3,343)	1,663	1,317	23,537	21,640
Intra-group sales/revenue	(482)	(410)	–	1	23	27	(459)	(382)
	25,284	23,256	(3,892)	(3,342)	1,686	1,344	23,078	21,258

			Revenue from
		Intra-group revenue	external customers
	2023	2022	2023	2022
	£m	£m	£m	£m
Electronic Systems	157	115	5,299	4,942
Platforms & Services	46	43	3,796	3,555
Air	33	29	6,484	6,257
Maritime	86	71	5,305	4,413
Cyber & Intelligence	127	114	2,194	2,091
HQ	10	10	–	–
	459	382	23,078	21,258

Sales

and revenue by customer location

	Sales		Revenue
	2023	2022	2023	2022 2
	£m	£m	£m	£m
UK	6,629	5,428	6,102	4,918
Rest of Europe	2,706	2,201	1,533	1,230
US	10,672	10,166	10,700	10,157
Canada	177	125	177	125
Kingdom of Saudi Arabia	2,688	2,539	2,687	2,540
Qatar	711	1,156	450	885
Rest of Middle East	225	263	178	225
Australia	949	854	943	853
Rest of Asia and Pacific	421	420	264	283
Africa, and Central and South America	106	104	44	42
	25,284	23,256	23,078	21,258

1. Sales and underlying EBIT are alternative performance measures defined in the Alternative performance measures section on page 227. Sales includes both revenue from

the Group’s own subsidiaries as well as recognising the strategic importance in its industry of its equity accounted investments. It is presented here as our internal measure

of segmental performance and to provide additional information on performance to the user.

2. Sales and revenue figures for 2022 to UK and Rest of Europe have been re-presented to reflect the workshare on the Typhoon programme.

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2. Segmental analysis and revenue recognition continued

Revenue from external customers by domain

			2023					2022
	Air	Maritime	Land	Cyber	Total	Air	Maritime	Land	Cyber	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Electronic Systems	4,611	170	518	–	5,299	4,404	145	393	–	4,942
Platforms & Services	37	1,099	2,660	–	3,796	41	1,043	2,471	–	3,555
Air	6,380	104	–	–	6,484	6,223	34	–	–	6,257
Maritime	200	4,714	391	–	5,305	268	3,778	367	–	4,413
Cyber & Intelligence	637	305	234	1,018	2,194	250	274	127	1,440	2,091
	11,865	6,392	3,803	1,018	23,078	11,186	5,274	3,358	1,440	21,258

Revenue by major customer

Revenue from the Group’s three principal customers, which individually represent over 10% of total revenue, is as follows:

	2023	2022
	£m	£m
US Department of Defense	7,518	7,439
UK Ministry of Defence	5,766	4,721
Kingdom of Saudi Arabia Ministry of Defence and Aviation	2,607	2,425

Revenue from the UK Ministry of Defence and the US Department of Defense was generated by the five reporting segments, excluding HQ.

Revenue from the Kingdom of Saudi Arabia Ministry of Defence and Aviation was generated by the Air segment.

Operating profit/(loss) by reporting segment

					Amortisation of	programme, customer-
					related and other intangible			Finance and tax expense
					assets, and impairment			of equity accounted	Operating
	Underlying EBIT		Adjusting items		of intangibles		investments		profit/(loss)
	2023	2022	2023	2022	2023	2022	2023	2022	2023	2022
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Electronic Systems	878	838	21	–	(93)	(91)	–	–	806	747
Platforms & Services	354	326	21	–	–	–	(2)	(4)	373	322
Air	949	849	–	(1)	–	(1)	(1)	(38)	948	809
Maritime	425	356	–	–	–	–	(2)	(4)	423	352
Cyber & Intelligence	199	232	–	78	(20)	(19)	–	–	179	291
HQ	(123)	(122)	(2)	14	(3)	–	(28)	(29)	(156)	(137)
	2,682	2,479	40	91	(116)	(111)	(33)	(75)	2,573	2,384
Net finance costs									(247)	(395)
Profit before tax									2,326	1,989
Tax expense									(386)	(315)
Profit for the year									1,940	1,674

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Notes to the Consolidated financial statements continued

2. Segmental analysis and revenue recognition continued

Share of results of equity accounted investments within reporting segments

					Amortisation of	programme, customer-
					related and other intangible
					assets, and impairment		Net finance and			Share of results of equity
	Underlying EBIT			Adjusting items	of intangibles		tax expense			accounted investments
	2023	2022	2023	2022	2023	2022	2023	2022	2023	2022
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Electronic Systems	10	4	–	–	–	–	–	–	10	4
Platforms & Services	(1)	11	–	–	–	–	(2)	(4)	(3)	7
Air	164	164	–	–	–	–	(1)	(38)	163	126
Maritime	13	11	–	–	–	–	(2)	(4)	11	7
HQ	55	65	–	–	–	–	(28)	(29)	27	36
	241	255	–	–	–	–	(33)	(75)	208	180

3. Underlying EBIT is an alternative performance measure defined in the Alternative performance measures section on page 227. It provides a measure of operating

profitability, excluding one-off events or adjusting items that are not considered to be part of the ongoing operational transactions of the business, to enable management

to monitor the performance of recurring operations over time, and which is comparable across the Group. It is presented here as our internal measure of segmental

performance and to provide additional information on performance to the user.

Adjusting items

Adjusting items are items of financial performance which have been determined by management as being material by their size or incidence

and not relevant to an understanding of the Group’s underlying business performance. Adjusting items include profit or loss on business

transactions, the impact of substantively enacted tax rate changes, and costs incurred which are one-off in nature, for example non-routine

costs or income relating to post-retirement benefit schemes, and other items which management has determined as not being relevant to

an understanding of the Group’s underlying business performance.

2023

Adjusting items in 2023 comprises a £60m settlement gain on a US pension annuity buy-out recognised within Electronic Systems, Platforms

& Services and Cyber & Intelligence, partially offset by £13m costs related to the Ball Aerospace acquisition in Electronic Systems, and £7m

related to current and historical business acquisitions in Cyber & Intelligence and HQ.

2022

Adjusting items in 2022 comprises a £94m gain on the disposal of the Financial Services business in Digital Intelligence, £16m costs related to

current and historical business transactions, and a £13m gain related to past service on the pension schemes.

Performance obligations

The Group’s order book, which represents its unsatisfied performance obligations, as at 31 December 2023 was £58.0bn (2022 £48.9bn).

The Group expects that approximately 34% (2022 33%) of the order book will be recognised as revenue during the next year, with the

remainder largely recognised over the following four (2022 four) years.

For each performance obligation to be recognised over time, the Group recognises revenue using an input method, based on costs incurred

in the year. Revenue and attributable margin are calculated by reference to reliable estimates of transaction price and total expected costs, after

making suitable allowances for technical and other risks. Revenue and associated margin are therefore recognised progressively as costs are

incurred, and as risks have been mitigated or retired. The Group has determined that this method appropriately depicts the Group’s

performance in transferring control of the goods and services to the customer. Accordingly, revenue of £0.3bn (2022 £0.3bn) was recognised

during the year in respect of performance obligations satisfied or partially satisfied in previous years.

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Consolidated financial statements

3. Operating costs

Research and development

The Group undertakes research and development activities either on its own behalf or on behalf of customers, including research and

development expenditure in relation to the Group’s Sustainability Accelerator Fund.

Group-funded expenditure on research, and on development activities not meeting the conditions for capitalisation, is written off as

incurred and charged to the income statement.

		2023	2022
	Note	£m	£m
Inventories recognised as an expense		7,873	7,094
Staff costs	4	8,091	7,495
Depreciation		564	549
Amortisation	9	218	215
Impairment – intangible assets	9	5	1
Impairment – property, plant and equipment and right-of-use assets	10,11	–	2
Current and historical business transaction costs	32	20	16
Loss on disposal of property, plant and equipment, and investment property		1	2
Other operating charges		4,145	3,895
Operating costs		20,917	19,269

Operating costs includes research and development expenditure of £274m (2022 £276m) funded by the Group. Development investment of

£8m (2022 £11m) was capitalised during the year (see note 9).

Fees payable to the Company’s auditor and its associates included in operating costs

		2023			2022
	UK	Overseas	Total	UK	Overseas	Total
	£’000	£’000	£’000	£’000	£’000	£’000
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts	3,043	–	3,043	2,963	–	2,963
Fees payable to the Company’s auditor and its associates
for other services to the Group:
The audit of the Company’s subsidiaries	5,444	6,953	12,397	5,184	7,413	12,597
Total audit fees	8,487	6,953	15,440	8,147	7,413	15,560
Audit-related assurance services	1,281	52	1,333	805	3	808
Other non-audit services	13	–	13	1	–	1
Total non-audit fees	1,294	52	1,346	806	3	809
Total fees payable to the Company’s auditor and its associates	9,781	7,005	16,786	8,953	7,416	16,369

1. Audit-related assurance services principally comprises fees in respect of the review of the Group’s half-yearly report, along with ESEF, controls and ESG assurance work.

2. In addition to the amounts shown above, the auditor received fees of £518k (2022 £446k) for the audit of the BAE Systems UK pension schemes and £423k (2022 £534k)

for the audit of BAE Systems pension schemes in the US.

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Notes to the Consolidated financial statements continued

4. Employees

The average and year-end numbers of employees, excluding employees of equity accounted investments, were as follows:

	Average		At year end
	2023	2022	2023	2022
	Number	Number	Number	Number
	’000	’000	’000	’000
Electronic Systems	17	16	18	16
Platforms & Services	12	12	12	12
Air	20	19	20	19
Maritime	26	23	28	24
Cyber & Intelligence	11	11	11	11
HQ	3	2	3	2
	89	83	92	84

The aggregate staff costs of Group employees, excluding employees of equity accounted investments, were as follows:

		2023	2022
	Note	£m	£m
Wages and salaries		6,983	6,350
Social security costs		536	485
Share-based payments	29	110	101
Pension costs – defined contribution plans	24	309	299
Pension costs – defined benefit plans	24	128	230
Other post-employment benefit costs	24	25	30
		8,091	7,495

5. Other income

		2023	2022
	Note	£m	£m
Research and development expenditure credits		53	35
Operating lease income from investment property		3	3
Operating lease income from subleasing right-of-use assets		1	1
Profit on disposal of businesses	33	–	94
Profit on disposal of non-current investment		–	7
Gain on sale of property, plant and equipment		–	1
Profit on disposal of investment property		11	4
Management recharges to equity accounted investments	30	8	8
Royalties		28	30
Pensions settlement gain	24	60	–
Other		40	32
Other income		204	215

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Consolidated financial statements

6. Net finance costs

Finance income and finance costs

Finance income and finance costs are recognised in the income statement in the year in which they are incurred.

		2023	2022
	Note	£m	£m
Interest income on cash and other financial instruments		130	34
Interest income on finance lease receivables	11	1	1
Net present value gains on provisions and other payables		–	12
Net interest income on post-employment benefit obligations	24	41	–
Finance income		172	47
Interest expense on loans and other financial instruments		(286)	(221)
Facility fees		(14)	(4)
Interest expense on lease liabilities	11	(53)	(48)
Net present value expenses on provisions and other payables		(9)	(4)
Net interest expense on post-employment benefit obligations	24	–	(37)
(Loss)/gain on remeasurement of financial instruments at fair value through profit or loss		(267)	396
Foreign exchange gains/(losses)		210	(524)
Finance costs		(419)	(442)
Net finance costs		(247)	(395)

1,2

2,3

1. Comprises gains and losses on derivative financial instruments, principally held to manage the Group’s exposure to interest rate fluctuations on current and anticipated

external borrowings and exchange rate fluctuations on balances with the Group’s subsidiaries and equity accounted investments.

2. The net gain or loss on remeasurement of financial instruments at fair value through profit or loss and the net gain or loss on foreign exchange are presented within

finance costs as the gains and losses relate to the same underlying transactions.

3. The foreign exchange gains/losses primarily reflects exchange rate movements on US dollar-denominated borrowings.

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Notes to the Consolidated financial statements continued

7. Tax expense

Income tax expense comprises current and deferred tax. Current and deferred tax is recognised in the Consolidated income statement,

except to the extent that it relates to a business combination or items recognised directly in equity or other comprehensive income.

Current tax

Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively

enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting

purposes and the amounts used for tax purposes. Deferred tax is not recognised for temporary differences:

– on the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither accounting

nor taxable profit or loss, except for transactions giving rise to equal taxable and deductible temporary differences, or to temporary

differences associated with right-of-use assets and lease liabilities;

– related to investments in subsidiaries and equity accounted investments to the extent that it is probable that they will not reverse in the

foreseeable future; and

– arising on the initial recognition of goodwill.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws

that have been enacted or substantively enacted by the reporting date.

The Group’s underlying effective tax rate is sensitive to the geographical mix of profits and shall be impacted, from 2024 onwards, by

the UK’s enactment of the Organisation for Economic Co-operation and Development’s Global Anti-Base Erosion Model Rules (Pillar Two).

The Group has applied the temporary exemption issued by the International Accounting Standards Board from the accounting for deferred

taxes under IAS 12. Accordingly the Group neither recognises nor discloses information about deferred tax assets and liabilities related to

Pillar Two income taxes. Whilst the Group does not anticipate a material quantitative impact from Pillar Two legislation for the 2024

financial year there are expected to be significant and complex compliance obligations.

Tax expense

	2023	2022
	£m	£m
Current tax
UK:
Current year	(103)	(115)
Adjustments in respect of prior years	(8)	(1)
	(111)	(116)
Overseas:
Current year	(477)	(354)
Adjustments in respect of prior years	(132)	(15)
	(609)	(369)
Total current tax	(720)	(485)
Deferred tax
UK:
Origination and reversal of temporary differences	(11)	11
Adjustments in respect of prior years	(13)	(3)
Tax rate adjustment	1	4
	(23)	12
Overseas:
Origination and reversal of temporary differences	228	132
Adjustments in respect of prior years	129	27
Tax rate adjustment	–	(1)
	357	158
Total deferred tax	334	170
Tax expense	(386)	(315)
UK	(134)	(104)
Overseas	(252)	(211)
Tax expense	(386)	(315)

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7. Tax expense continued

Reconciliation of tax expense

The following table reconciles the theoretical income tax expense, using the UK corporation tax rate, to the reported tax expense. The UK

corporation tax rate increased from 19% to 25% with effect from 1 April 2023. A blended rate of 23.5% is used in the reconciliation below to

reflect this change (2022 19.0%). The reconciling items represent, besides the impact of tax rate differentials and changes, non-taxable benefits

or non-deductible expenses arising from differences between the local tax base and the reported financial statements.

	2023	2022
	£m	£m
Profit before tax	2,326	1,989
UK corporation tax rate	23.5%	19.0%
Expected income tax expense	(547)	(378)
Effect of tax rates in foreign jurisdictions, including US state taxes	(7)	(54)
Expenses not tax effected	(19)	(19)
Income not subject to tax	125	68
Research and development tax credits	22	15
Adjustments in respect of prior years	(24)	8
Adjustments in respect of equity accounted investments	48	34
Tax rate adjustment	1	3
Other	15	8
Tax expense	(386)	(315)

Tax recognised in other comprehensive income

		2023			2022
		Tax			Tax
	Before	benefit/		Before	(expense)/
	tax	(expense)	Net of tax	tax	benefit	Net of tax
	£m	£m	£m	£m	£m	£m
Items that will not be reclassified to the income statement:
Consolidated:
Remeasurements on post-employment benefit schemes and other investments	(669)	4	(665)	2,851	(285)	2,566
Tax rate adjustment	–	–	–	–	(72)	(72)
Share of the other comprehensive (expense)/income of associates and joint ventures accounted for using the equity method	(25)	–	(25)	140	(24)	116
Items that may be reclassified to the income statement:
Consolidated:
Currency translation on foreign currency net investments	(510)	–	(510)	1,172	–	1,172
Reclassification of cumulative currency translation reserve on disposal
of subsidiary	–	–	–	(17)	–	(17)
Fair value loss arising on hedging instruments during the year	(4)	1	(3)	(102)	25	(77)
Cumulative fair value (gain)/loss on hedging instruments reclassified
to the income statement	(19)	2	(17)	5	(1)	4
Share of the other comprehensive income/(expense) of associates and joint ventures accounted for using the equity method	12	(1)	11	(9)	1	(8)
	(1,215)	6	(1,209)	4,040	(356)	3,684

169

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Notes to the Consolidated financial statements continued

7. Tax expense continued

Tax recognised in other comprehensive income continued

		2023			2022
	Other	Retained		Other	Retained
	reserves	earnings	Total	reserves	earnings	Total
	£m	£m	£m	£m	£m	£m
Current tax
Consolidated:
Remeasurements on post-employment benefit schemes
and other investments	–	76	76	–	57	57
	–	76	76	–	57	57
Deferred tax
Consolidated:
Remeasurements on post-employment benefit schemes and other investments	–	(72)	(72)	–	(342)	(342)
Tax rate adjustment	–	–	–	–	(72)	(72)
Fair value loss arising on hedging instruments during the year	1	–	1	25	–	25
Cumulative fair value gain/(loss) on hedging instruments reclassified to the income statement	2	–	2	(1)	–	(1)
Share of the other comprehensive income of associates and joint ventures
accounted for using the equity method	(1)	–	(1)	1	(24)	(23)
	2	(72)	(70)	25	(438)	(413)
Tax on other comprehensive (expense)/income	2	4	6	25	(381)	(356)

8. Earnings per share

The weighted average number of ordinary shares used in calculating earnings per share is the number of ordinary shares outstanding

at the start of the year, less the weighted average number of shares repurchased, plus the weighted average number of shares issued

within the year (including those issued from treasury), and those shares held in trust that are no longer contingently returnable (i.e. all

performance conditions attached to them are met, excluding the passage of time). The number of ordinary shares outstanding at the

start of the year is calculated by taking the total number of ordinary shares in issue, less treasury shares and shares held in trust which

are contingently returnable (i.e. where the performance conditions attached to those shares have not been met, excluding the passage

of time). The weighted average number of ordinary shares purchased, issued or released is calculated by reference to the day on which

each transaction occurred.

The weighted average number of ordinary shares used in calculating diluted earnings per share is the weighted average number of

ordinary shares outstanding, plus the number of ordinary shares which are considered potentially dilutive ordinary shares in respect

of share incentive schemes, should the vesting conditions have been met as at the year end.

		2023			2022
		Basic	Diluted		Basic	Diluted
		pence	pence		pence	pence
	£m	per share	per share	£m	per share	per share
Profit for the year attributable to equity shareholders	1,857	61.3	60.4	1,591	51.1	50.5

	2023	2022
	Millions	Millions
Ordinary shares in issue as at 1 January	3,297	3,404
Less:
Treasury shares as at 1 January	(220)	(237)
Shares held in trust which were contingently returnable as at 1 January	(22)	(23)
Number of ordinary shares outstanding as at 1 January	3,055	3,144
Net weighted average number of ordinary shares repurchased in year	(24)	(32)
Weighted average number of ordinary shares used in calculating
basic earnings per share	3,031	3,112
Incremental ordinary shares in respect of employee share schemes	41	41
Weighted average number of ordinary shares used in calculating
diluted earnings per share	3,072	3,153

170

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Consolidated financial statements

9. Intangible assets

Intangible assets are carried at cost or valuation, less accumulated amortisation and impairment losses.

Cost or valuation

Goodwill

Under the acquisition method for business combinations, goodwill is the acquisition-date fair value of the consideration transferred, less the

net of the acquisition-date fair values of the identifiable assets acquired and liabilities assumed. Goodwill on acquisition of subsidiaries is

included in intangible assets. Goodwill on acquisition of joint ventures and associates is included in the carrying value of equity accounted

investments. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Software

Software includes:

– Computer software licences acquired for use within the Group are capitalised as an intangible asset on the basis of the costs incurred

to acquire and bring to use the specific software;

– Software development costs that are directly associated with the production of identifiable and unique software products controlled

by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets.

Group-funded expenditure associated with enhancing or maintaining computer software programmes for sale is recognised as an

expense as incurred; and

– Software as a service cloud computing arrangements are not deemed to be controlled by the Group, and costs associated with the

implementation and ongoing receipt of these services are expensed as the costs are incurred.

Development costs

Development costs funded by the Group on activities applied to a plan or design for the production of new or substantially improved

products are capitalised as an internally generated intangible asset if certain conditions are met. The costs capitalised include materials,

direct labour and related overheads.

Programme and customer-related

Intangible assets recognised by the Group include those relating to ongoing programmes within businesses acquired, mainly in respect

of customer relationships and order backlog. These assets are initially recognised at their fair value at the acquisition date.

Other

Other intangible assets includes patents, trademarks and licences.

Amortisation

Goodwill is not amortised, but is tested annually for impairment, and carried at cost less accumulated impairment losses. Amortisation

on intangible assets, excluding goodwill, is charged to the income statement on a straight-line basis over their estimated useful lives.

For programme-related intangibles, amortisation is set on a programme-by-programme basis over the life of the individual programme.

Amortisation for customer-related intangibles is also set on an individual basis.

The estimated useful lives are as follows:

Software	up to 5 years
Development costs	up to 10 years
Programme and customer-related	up to 15 years
Other	up to 20 years

The Group has no indefinite-life intangible assets other than goodwill.

Impairment of intangible assets, property, plant and equipment, right-of-use assets, investment property and equity

accounted investments

The carrying amounts of the Group’s intangible assets (excluding goodwill), property, plant and equipment, right-of-use assets, investment

property and equity accounted investments are reviewed at each balance sheet date to determine whether there is any indication of

impairment, as required by IAS 36 Impairment of Assets. If any such indication exists, the asset’s recoverable amount is estimated. For

goodwill and intangible assets that are not yet available for use, impairment testing is performed annually. In estimating the asset’s

recoverable amount, the Group takes into consideration the impact of the Group’s sustainability ambitions.

Goodwill is tested annually for impairment. For the purposes of impairment testing, goodwill is allocated to Cash-Generating Units (CGUs),

or a group of CGUs on a consistent basis. The impairment calculations require the use of estimates of the future profitability and cash-

generating ability of the CGU to determine its value in use based on the Group’s five-year IBP and the pre-tax discount rate used in

discounting these projected cash flows.

An impairment loss is recognised whenever the carrying amount of an asset or its CGU exceeds its recoverable amount, which is the

greater of its value in use and its fair value less cost of disposal. In assessing value in use, the estimated future cash flows are discounted

to their present value using an appropriate pre-tax discount rate. For an asset that does not generate largely independent cash flows,

the recoverable amount is determined for the CGU to which the asset belongs.

Impairment losses are recognised in the income statement. An impairment loss in respect of goodwill is not reversed. An impairment loss

in respect of other intangible assets, property, plant and equipment, investment property and equity accounted investments is reversed

if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised

or if there has been a change in the estimate used to determine the recoverable amount. An impairment loss is reversed only to the

extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation

or amortisation, if no impairment loss had been recognised.

171

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Notes to the Consolidated financial statements continued

9. Intangible assets continued

				Development	Programme and
		Goodwill	Software	costs	customer-related	Other	Total
	Note	£m	£m	£m	£m	£m	£m
Cost or valuation
At 1 January 2022		15,624	893	116	551	110	17,294
Additions:
Acquired separately		–	76	–	–	–	76
Internally developed		–	6	11	–	–	17
Business acquisitions	32	91	–	–	66	5	162
Disposals		–	(34)	–	–	–	(34)
Business disposals		(191)	–	–	–	–	(191)
Transfer from property, plant and equipment		–	5	–	–	–	5
Foreign exchange adjustments		1,069	27	14	71	15	1,196
At 31 December 2022		16,593	973	141	688	130	18,525
Additions:
Acquired separately		–	111	–	–	1	112
Internally developed		–	11	8	–	–	19
Business acquisitions	32	3	–	–	–	8	11
Disposals		–	(49)	–	(3)	(2)	(54)
Foreign exchange adjustments		(545)	(25)	(8)	(39)	(4)	(621)
At 31 December 2023		16,051	1,021	141	646	133	17,992
Amortisation and impairment
At 1 January 2022		4,714	569	79	170	46	5,578
Amortisation		–	106	2	95	15	218
Impairment charge		–	1	–	–	–	1
Disposals		–	(34)	–	–	–	(34)
Business disposals	33	(168)	–	–	–	–	(168)
Foreign exchange adjustments		228	21	10	21	6	286
At 31 December 2022		4,774	663	91	286	67	5,881
Amortisation		–	103	4	97	14	218
Impairment charge		–	5	–	–	–	5
Disposals		–	(49)	–	(3)	(2)	(54)
Foreign exchange adjustments		(109)	(20)	(7)	(18)	(3)	(157)
At 31 December 2023		4,665	702	88	362	76	5,893
Net book value
At 31 December 2023		11,386	319	53	284	57	12,099
At 31 December 2022		11,819	310	50	402	63	12,644
At 1 January 2022		10,910	324	37	381	64	11,716

1. Includes intangible assets with £nil net book value no longer used by the Group.

172

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Consolidated financial statements

9. Intangible assets continued

Impairment testing

The recoverable amount of the Group’s goodwill is based on value in use, estimated using risk-adjusted future cash flow projections from

the five-year Integrated Business Plan (IBP) and a terminal value based on the projections for the final year of that plan, with a long-term

growth rate of 2% applied for each significant group of Cash-Generating Units (CGUs). The IBP process includes the use of historical experience,

available government spending data and the Group’s order backlog, as well as the impact of evolving issues such as global economic uncertainty

and climate change. Pre-tax discount rates, derived from the Group’s post-tax weighted average cost of capital and adjusted for factors specific

to the market in which the CGU operates, have been used in discounting these projected risk-adjusted cash flows.

Significant CGUs

A summary of the significant CGUs is presented below.

			Allocated goodwill		Pre-tax discount rate
		2023	2022	2023	2022
Cash-Generating Unit	Key assumptions	£bn	£bn	%	%
Electronic Systems	Continued demand from the US Government for electronic	5.0	5.2	9	9
	warfare systems (where the business has a leadership
	position), other technology-based solutions and growth
	in the commercial avionics market
Platforms & Services	Continued demand in the Group’s principal markets for	3.6	3.8	9	9
	existing and successor military tracked vehicles, naval guns,
	missile launchers, artillery systems, munitions, upgrade
	programmes and support, and in the US for complex
	infrastructure, maritime and aviation services
Maritime	Continued demand, primarily from the UK and Australian	1.5	1.5	10	10
	Governments, for existing and successor programmes
	for submarines, complex warships and munitions. This
	includes upgrade and sustainment programmes in these
	areas as well as in the field of air, electronic systems
	and wide-area surveillance

The headroom, calculated as the difference between net assets including allocated goodwill as at 31 December 2023 and the value in use

calculations, for the CGUs listed above is shown below. The table also shows the headroom assuming a 1% reduction in the terminal value

growth rate assumption, a 2% increase in the discount rate and a 1% reduction in the operating margin used in the value in use calculations,

considered to be reasonable worst-case scenarios in the current economic climate.

				Headroom assuming
				a 1% reduction in the		Headroom assuming		Headroom assuming
	Headroom as at			terminal value growth		a 2% increase in the		a 1% reduction in
	31 December			rate assumption	discount rate			operating margin
	2023	2022	2023	2022	2023	2022	2023	2022
Cash-Generating Unit	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Electronic Systems	6.0	5.4	4.3	3.8	2.5	2.0	5.2	4.5
Platforms & Services	2.5	2.1	1.6	1.3	0.6	0.3	1.9	1.5
Maritime	5.7	4.2	4.8	3.5	2.6	1.7	4.8	3.5

Other CGUs

The remaining goodwill balance of £1.3bn (2022 £1.3bn) is allocated across multiple CGUs. No individual CGU exceeds 10% of the Group’s

total goodwill balance. The majority of the projected cash flows within these CGUs is primarily underpinned by expected levels of government

spending on defence, aerospace and security, and the Group’s ability to capture a broadly consistent market share.

Capital commitments

At 31 December 2023, capital expenditure of £44m (2022 £41m) in respect of intangible assets was contracted for but not provided for in

the accounts.

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Notes to the Consolidated financial statements continued

10. Property, plant and equipment

Cost

Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of self-constructed

assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. The cost of demonstration assets

is written off as incurred. The reimbursement of the cost of an item of property, plant and equipment by way of a government grant is

presented as deferred income and recognised in the income statement on a basis consistent with the depreciation of the asset over its

estimated useful life.

Assets held for leasing out under operating leases are included in property, plant and equipment at cost less accumulated depreciation and

impairment losses.

Depreciation

Depreciation is provided, normally on a straight-line basis, to write off the cost of items of property, plant and equipment over their

estimated useful lives to any estimated residual value, using the following rates:

Buildings	up to 50 years, or the lease term if shorter
Plant and machinery:
Computing equipment and motor vehicles	4 to 5 years
Other equipment	10 to 20 years, or the project life if shorter

No depreciation is provided on freehold land and assets in the course of construction.

The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each balance sheet date,

taking into consideration the impact on the assets’ useful economic lives as a result of the Group’s sustainability ambitions.

Impairment

The carrying amounts of the Group’s property, plant and equipment are reviewed at each balance sheet date to determine whether there

is any indication of impairment in accordance with the policy shown in note 9.

174

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Consolidated financial statements

10. Property, plant and equipment continued

		Land and	Plant and
		buildings	machinery	Total
	Note	£m	£m	£m
Cost
At 1 January 2022		2,754	3,756	6,510
Additions		302	289	591
Business acquisitions	32	–	1	1
Transfer to intangible assets		–	(5)	(5)
Reclassification between categories		16	(16)	–
Disposals		(45)	(131)	(176)
Foreign exchange adjustments		143	227	370
At 31 December 2022		3,170	4,121	7,291
Additions		413	411	824
Reclassification between categories		(38)	38	–
Disposals		(33)	(104)	(137)
Foreign exchange adjustments		(82)	(127)	(209)
At 31 December 2023		3,430	4,339	7,769
Depreciation and impairment
At 1 January 2022		1,191	2,467	3,658
Depreciation charge for the year		109	218	327
Impairment charge		–	2	2
Disposals		(40)	(125)	(165)
Foreign exchange adjustments		79	155	234
At 31 December 2022		1,339	2,717	4,056
Depreciation charge for the year		112	232	344
Disposals		(30)	(100)	(130)
Foreign exchange adjustments		(47)	(89)	(136)
At 31 December 2023		1,374	2,760	4,134
Net book value
At 31 December 2023		2,056	1,579	3,635
At 31 December 2022 1		1,831	1,404	3,235
At 1 January 2022		1,563	1,289	2,852

1. Includes £1,145m (2022 £991m) of assets at Barrow-in-Furness, UK funded by the UK government.

Assets in the course of construction

Included in the above analysis, the following balances relate to those assets which are still in the course of construction:

	Land and	Plant and
	buildings	machinery	Total
	£m	£m	£m
At 31 December 2023	750	394	1,144
At 31 December 2022	547	292	839

Capital commitments

At 31 December 2023, capital expenditure of £442m (2022 £403m) in respect of property, plant and equipment was contracted for but not

provided for in the Consolidated financial statements.

Assets pledged as security

Within the Land and buildings balance, there are assets with a carrying amount of £62m (2022 £nil) which the Group cannot pledge as security

for borrowings, or sell to another entity.

175

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Notes to the Consolidated financial statements continued

11. Leases

The Group as lessee

All leases in which the Group is lessee are recognised as a right-of-use asset and a corresponding lease liability at the date at which the

leased asset is available for use by the Group. Each lease payment is allocated between repayment of the lease liability and finance cost.

The finance cost is charged to the income statement over the lease term to produce a constant periodic rate of interest on the lease liability.

The right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis.

The lease liability is initially measured as the present value of future lease payments, discounted using the interest rate implicit in the lease.

Where this rate is not determinable, the Group’s incremental borrowing rate is used, which is the interest rate the Group would have to pay

to borrow the amount necessary to obtain an asset of similar value, in a similar economic environment with similar terms and conditions.

The right-of-use asset is initially measured at cost, comprising the initial value of the lease liability, any lease payments made (net of any

incentives received from the lessor) before the commencement of the lease, any initial direct costs and any restoration costs.

The carrying amounts of the Group’s right-of-use assets are reviewed at each balance sheet date to determine whether there is any

indication of impairment in accordance with the policy shown in note 9.

Payments in respect of short-term leases, low-value leases and leases of intangible assets are charged to the income statement on a

straight-line basis over the lease term.

The Group leases land, buildings, vehicles and equipment under non-cancellable lease arrangements. The leases have varying terms, including

escalation clauses, renewal rights and purchase options. None of these terms represents unusual arrangements or creates material onerous or

beneficial rights or obligations.

Right-of-use assets

			2023			2022
		Land and	Plant and		Land and	Plant and
		buildings	machinery	Total	buildings	machinery	Total
	Note	£m	£m	£m	£m	£m	£m
Net book value at 1 January		1,400	25	1,425	1,075	16	1,091
Additions during the year		115	19	134	397	20	417
Business acquisitions	32	–	–	–	1	–	1
Lease modifications during the year		20	(1)	19	50	1	51
Depreciation charge for the year		(202)	(12)	(214)	(205)	(12)	(217)
Business disposals	33	–	–	–	(3)	–	(3)
Foreign exchange adjustments		(53)	–	(53)	85	–	85
Net book value at 31 December		1,280	31	1,311	1,400	25	1,425

176

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Consolidated financial statements

11. Leases continued

Lease liabilities

A maturity analysis of the future undiscounted lease payments in respect of the Group’s lease liabilities is presented in the table below:

	2023	2022
	£m	£m
Payments due:
Within one year	197	290
Between one and five years	537	632
Later than five years	1,229	1,227
Total undiscounted gross payments	1,963	2,149
Deduct: Impact of discounting	(543)	(533)
Lease liabilities	1,420	1,616

The Group is also committed to future undiscounted lease payments of £68m in respect of leases which had not yet commenced at

31 December 2023 (2022 £5m).

The total cash outflow for leases in the year ended 31 December 2023, including short-term leases and low-value leases, amounted to £376m

(2022 £314m).

Amounts recognised in the Consolidated income statement

	2023	2022
	£m	£m
Included in operating costs:
Depreciation on right-of-use assets	(214)	(217)
Short-term lease expense	(25)	(25)
Low-value lease expense	(5)	(5)
	(244)	(247)
Included in net finance costs:
Interest income on finance lease receivables	1	1
Interest expense on lease liabilities	(53)	(48)
	(52)	(47)

177

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Notes to the Consolidated financial statements continued

12. Equity accounted investments

Equity accounted investments comprise joint ventures and associates. A joint venture is a joint arrangement whereby the parties that have

joint control have rights to the net assets of the arrangement. An associate is an entity over which the Group has significant influence but

not control or joint control.

The Group recognises its share of the profit or loss and other comprehensive income of equity accounted investments as a separate line in

the Consolidated income statement and Consolidated statement of comprehensive income, respectively.

The carrying value of an equity accounted investment comprises the Group’s share of net assets and purchased goodwill, and is assessed

for impairment as a single asset. The carrying amounts of the Group’s equity accounted investments are reviewed at each balance sheet

date to determine whether there is any indication of impairment, in accordance with the policy shown in note 9.

Group summary

The Group has two individually material joint ventures which are Eurofighter Jagdflugzeug and MBDA, the carrying values of which are

included on the next page.

The Group also has a number of individually immaterial joint ventures and associates, the carrying values of the most significant at

31 December 2023 are as follows: Rheinmetall BAE Systems Land (RBSL) (£84m); Air Astana (£84m); FADEC International (£47m); Panavia

Aircraft (£20m); and FNSS (£16m). The following table shows a reconciliation of the opening to closing carrying values for both the Group’s

principal and other joint ventures and associates.

	Principal equity
	accounted	Other joint	Other
	investments	ventures	associates	Total
	£m	£m	£m	£m
At 1 January 2022	354	115	85	554
Group’s share of profit for the year	126	46	8	180
Group’s share of remeasurements on post-employment benefit schemes	140	–	–	140
Tax on items that will not be reclassified to the income statement	(24)	–	–	(24)
Foreign exchange adjustments	(10)	–	(1)	(11)
Amounts (debited)/credited to hedging reserve	(2)	4	–	2
Tax on items that may be reclassified to the income statement	1	–	–	1
Group’s share of total comprehensive income for the year	231	50	7	288
Dividends received from equity accounted investments	(83)	(11)	–	(94)
Foreign exchange adjustments	26	13	–	39
At 31 December 2022	528	167	92	787
Group’s share of profit for the year	165	39	4	208
Group’s share of remeasurements on post-employment benefit schemes	(24)	(1)	–	(25)
Foreign exchange adjustments	3	3	–	6
Amounts credited to hedging reserve	2	4	–	6
Tax on items that may be reclassified to the income statement	(1)	–	–	(1)
Group’s share of total comprehensive income for the year	145	45	4	194
Acquisition of equity accounted investments	–	5	–	5
Dividends received from equity accounted investments	(110)	(24)	–	(134)
Foreign exchange adjustments	(12)	(8)	–	(20)
At 31 December 2023	551	185	96	832

178

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Consolidated financial statements

12. Equity accounted investments continued

Principal equity accounted investments

			Principally
Joint venture	Principal activities	Shareholding	operates in
Eurofighter Jagdflugzeug	Management and control of the European Typhoon programme	33%	Germany
MBDA	Development and manufacture of guided weapons	37.5%	Europe

The following tables summarise the financial information of the Group’s principal equity accounted investments included in their own financial

statements, as adjusted for fair value adjustments at acquisition and differences in accounting policies, and reconcile this to the Group’s interest

in those equity accounted investments.

	2023		2022
	Eurofighter		Eurofighter
	Jagdflugzeug	MBDA	Jagdflugzeug	MBDA
	£m	£m	£m	£m
Revenue (100%)	4,169	3,871	3,693	3,590
Underlying EBIT 1 excluding depreciation and amortisation	23	568	19	574
Depreciation and amortisation	(4)	(138)	(4)	(152)
Finance income	3	145	2	25
Finance costs	(3)	(13)	(2)	(13)
Tax expense	(9)	(130)	(6)	(105)
Profit for the year (100%)	10	432	9	329
Remeasurements on post-employment benefit schemes, net of tax	–	(65)	–	310
Amounts credited/(debited) to hedging reserve, net of tax	–	4	–	(4)
Foreign exchange adjustments	–	8	(5)	(24)
Total comprehensive income for the year (100%)	10	379	4	611
Group’s share of total comprehensive income for the year	3	142	1	230
Non-current assets	29	2,717	30	2,464
Cash and cash equivalents	43	4,109	42	2,650
Current assets excluding cash and cash equivalents	9,089	4,626	8,591	4,697
Current assets	9,132	8,735	8,633	7,347
Non-current financial liabilities excluding trade and other payables, and provisions	–	(15)	–	(10)
Other non-current liabilities	(45)	(85)	(47)	(20)
Non-current liabilities	(45)	(100)	(47)	(30)
Current financial liabilities excluding trade and other payables, and provisions	(9)	–	(10)	–
Other current liabilities	(9,077)	(9,942)	(8,581)	(8,416)
Current liabilities	(9,086)	(9,942)	(8,591)	(8,416)
Net assets (100%)	30	1,410	25	1,365

1. Underlying EBIT is an alternative performance measure defined in the Alternative performance measures section on page 227.

		2023			2022
	Eurofighter			Eurofighter
	Jagdflugzeug	MBDA	Total	Jagdflugzeug	MBDA	Total
	£m	£m	£m	£m	£m	£m
Group’s share of net assets	10	529	539	8	512	520
Goodwill adjustment	–	12	12	–	8	8
Carrying value	10	541	551	8	520	528

		2023			2022
	Eurofighter			Eurofighter
	Jagdflugzeug	MBDA	Total	Jagdflugzeug	MBDA	Total
	£m	£m	£m	£m	£m	£m
Dividends received	2	108	110	3	80	83

Contingent liabilities

The Group is not aware of any material contingent liabilities in respect of its equity accounted investments.

179

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Notes to the Consolidated financial statements continued

13. Other investments

Other investments are carried at fair value through other comprehensive income.

	2023	2022
	£m	£m
Other investments at fair value through other comprehensive income	84	99

14. Trade, contract and other receivables

Trade and contract receivables are measured at amortised cost under IFRS 9 Financial Instruments as they are held within a business model to

collect contractual cash flows and these cash flows consist solely of payments of principal and interest on the principal amount outstanding.

Contract receivables represent amounts for which the Group has an unconditional right to consideration in respect of unbilled revenue

recognised at the balance sheet date and comprise costs incurred plus attributable margin.

Trade receivables, contract receivables, amounts owed by equity accounted investments and finance lease receivables include a provision

for expected credit losses. The Group measures the provision at an amount equal to lifetime expected credit losses, estimated by reference

to past experience and relevant forward-looking factors.

The Group writes off a receivable when there is objective evidence that the debtor is in significant financial difficulty and there is no realistic

prospect of recovery, for example, when a debtor enters bankruptcy or financial reorganisation.

US deferred compensation plan assets are measured at fair value in accordance with IAS 19 Employee Benefits.

		2023	2022
	Note	£m	£m
Non-current
Contract receivables		18	20
Prepayments		215	201
Accrued income		–	1
US deferred compensation plan assets		340	328
Finance lease receivables		15	24
Other receivables		45	44
		633	618
Current
Contract receivables		3,377	3,473
Trade receivables		1,196	1,506
Amounts owed by equity accounted investments	30	77	75
Prepayments		933	509
Accrued income		19	62
US deferred compensation plan assets		42	39
Finance lease receivables		9	10
Other receivables		532	492
		6,185	6,166

1. Includes £231m (2022 £329m) in relation to VAT receivable in the Kingdom of Saudi Arabia.

Trade receivables are stated net of a provision for expected credit losses. Disclosures relating to the ageing of trade receivables and movements

in the provision for expected credit losses are provided in note 15.

180

BAE Systems plc Annual Report 2023

Consolidated financial statements

15. Other financial assets and liabilities and financial risk management

Derivative financial instruments and hedging activities

The international nature of the Group’s business means it is exposed to volatility in currency exchange rates. In order to protect itself

against currency fluctuations, the Group’s policy is to hedge all material firm transactional exposures.

The Group uses interest rate derivative instruments to manage the Group’s exposure to interest rate fluctuations on its borrowings

and deposits by varying the proportion of fixed rate debt relative to floating rate debt over the forward time horizon.

The Group uses foreign exchange derivative instruments to manage the Group’s exposure to currency fluctuations on its borrowings

and deposits with the Group’s subsidiaries and equity accounted investments.

In accordance with its Treasury Policy, the Group does not hold derivative financial instruments for trading purposes.

The Group aims to achieve hedge accounting treatment for all derivatives that hedge material foreign currency exposures.

Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, such instruments are stated at fair

value at the balance sheet date. The fair values are estimated by discounting expected future cash flows based on reputable third-party

forecast data, and then adjusting for credit risk, including the Group’s own credit risk, and market risk.

Fair value through profit or loss

Gains and losses on derivative financial instruments that are not designated as cash flow hedges are recognised within net finance costs

in the income statement for the year.

Cash flow hedges

Where a derivative financial instrument is designated as a hedge of the exposure to variability in cash flows relating to a highly-probable

forecast transaction (income or expense) or recognised asset or liability, the effective portion of any change in the fair value of the

instrument is recognised in other comprehensive income and presented in the hedging reserve in equity. Amounts recognised in equity

are removed from the hedging reserve and included in the cost of the underlying transaction or reclassified to the income statement

when the underlying transaction affects profit or loss. These amounts are presented within the same line item in the income statement

as the underlying transaction, typically revenue or operating costs. The ineffective portion of any change in the fair value of the instrument

is recognised in the income statement within net finance costs immediately. The Group treats the foreign currency basis element of the

designated foreign exchange derivative hedging instruments as a cost of hedging and as such it is excluded from the hedge designation.

Any hedges entered into on behalf of equity accounted investments (note 30) are classified as cash flow hedges.

		2023	2022
	Assets	Liabilities	Assets	Liabilities
	£m	£m	£m	£m
Non-current
Cash flow hedges – foreign exchange contracts	127	(170)	175	(237)
Debt-related derivative financial instruments	100	(57)	147	(35)
	227	(227)	322	(272)
Current
Cash flow hedges – foreign exchange contracts	162	(184)	229	(249)
Debt-related derivative financial instruments	–	(21)	–	–
Other foreign exchange/interest rate contracts	43	(90)	23	(79)
	205	(295)	252	(328)

Debt-related derivative financial instruments

The debt-related derivative financial instruments represent the fair value of cross-currency, interest rate and foreign exchange derivatives

relating to the US$800m 3.8% bond, repayable 2024, the US$500m 7.5% bond, repayable 2027, the US$1,300m 3.4% bond, repayable

2030, and the US$400m 5.8% bond, repayable 2041 (see note 21).

181

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Additional informationGovernance Financial statementsStrategic report

Notes to the Consolidated financial statements continued

15. Other financial assets and liabilities and financial risk management conti nued

Interest rate risk

The Group’s objective is to manage its 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.

The Group’s interest rate management policy is that a minimum of 50% (2022 50%) and a maximum of 90% (2022 90%) of borrowings is

maintained at fixed interest rates. At 31 December 2023, the Group had 86% (2022 85%) of fixed-rate debt and 14% (2022 15%) of floating

rate debt based on a gross debt of £5.1bn (2022 £5.0bn), including debt-related derivative financial assets.

Based on contracted maturities and/or repricing dates, the following amounts are exposed to interest rate risk over the future as shown below:

		2023			2022
	Within	Between one	Later than	Within	Between one	Later than
	one year	and two years	two years	one year	and two years	two years
	£m	£m	£m	£m	£m	£m
Cash and cash equivalents	4,067	–	–	3,107	–	–
Loans and overdrafts	703	–	–	745	745	–

The floating rate debt has been predominantly achieved by entering into interest rate swaps which swap the fixed-rate US dollar interest payable

on debt into either floating rate sterling or US dollars. At the end of 2023, the Group had a total of $0.9bn (2022 $0.9bn) of this type of swap

outstanding with a weighted average duration of 0.8 years (2022 1.8 years). In respect of the fixed-rate debt, the weighted average period in

respect of which interest is fixed was 12.4 years (2022 12.9 years). Given the level of short-term interest rates during the year, the average cost

of the floating rate debt was 7.7% (2022 4.2%) on US dollars. The cost of the fixed-rate debt was 3.7% (2022 3.7%).

Additionally, the Group has entered into $1.0bn (£0.8bn) of interest rate derivatives to partially manage the Group’s exposure to fixed interest

rate risk on the anticipated raising of capital in 2024.

IBOR reform

The Group has interest rate swaps that reference USD LIBOR, with a combined notional value of $0.9bn, that mature in October 2024. During

the year, the Group adhered to the International Swaps and Derivatives Association (ISDA) 2020 IBOR Fallbacks Protocol, which will be used to

calculate the USD floating rates applicable for these interest rate swaps between the period post cessation of USD LIBOR and maturity of the

swaps. The Group has no other derivatives that reference IBOR benchmarks.

Sensitivity analysis

A change of 100 basis points in short-term rates applied to the average fixed/floating mix and level of borrowings would vary the interest cost

to the Group by approximately £7m (2022 £7m).

In respect of cash deposits, given the fluctuation in the Group’s working capital requirements, cash is generally invested for short-term periods

based at floating-interest rates. A change of 100 basis points in the average interest rates during the year applied to the average cash deposits

would vary the interest receivable by approximately £29m (2022 £19m). Should interest rates fluctuate by a different rate to those disclosed, the

impact can be linearly interpolated.

182

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Consolidated financial statements

15. Other financial assets and liabilities and financial risk management conti nued

Liquidity risk

Contractual cash outflows on financial liabilities

The contracted cash outflows on loans and overdrafts, derivative financial instruments and other financial instruments at the reporting date

are shown below, classified by maturity. The cash outflows are shown on a gross basis, are not discounted, are translated at the spot rate

and include estimated interest payments where applicable. Contracted cash outflows reflect the gross cash outflow on derivative financial

instruments and exclude the broadly offsetting cash inflows for the receive leg of derivatives that are settled separately to the pay leg.

				2023					2022
				Contracted cash outflow					Contracted cash outflow
			Between	Later				Between	Later
		Within	one and	than			Within	one and	than
	Carrying	one	five	five		Carrying	one	five	five
	amount	year	years	years	Total	amount	year	years	years	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Cash outflows without directly
offsetting inflows
Accruals 1	(1,758)	(1,739)	(19)	–	(1,758)	(2,025)	(1,997)	(28)	–	(2,025)
Trade and other payables	(2,681)	(2,660)	(21)	–	(2,681)	(2,154)	(2,126)	(28)	–	(2,154)
Lease liabilities	(1,420)	(197)	(537)	(1,229)	(1,963)	(1,616)	(290)	(632)	(1,227)	(2,149)
Loans and overdrafts	(5,111)	(825)	(1,585)	(4,794)	(7,204)	(5,242)	(199)	(2,377)	(4,893)	(7,469)
	(10,970)					(11,037)
Cash outflows with largely
offsetting inflows
Cash flow hedges – financial assets	289	(6,003)	(4,623)	(135)	(10,761)	404	(7,434)	(4,444)	(443)	(12,321)
Cash flow hedges – financial liabilities	(354)	(6,775)	(6,127)	(477)	(13,379)	(486)	(8,258)	(5,758)	(741)	(14,757)
Other foreign exchange/interest
rate contracts – financial assets	43	(2,674)	–	–	(2,674)	23	(2,364)	–	–	(2,364)
Other foreign exchange/interest
rate contracts – financial liabilities	(90)	(1,468)	–	–	(1,468)	(79)	(1,693)	–	–	(1,693)
Debt-related derivatives – financial assets	100	(23)	(370)	(36)	(429)	147	(58)	(534)	(1,124)	(1,716)
Debt-related derivatives – financial liabilities	(78)	(92)	(141)	(1,053)	(1,286)	(35)	(47)	(47)	–	(94)
	(90)					(26)
	(11,060)					(11,063)

1. Accruals presented in the table excludes £910m (2022 £719m) of accruals which are non-financial liabilities.

2. Trade and other payables excludes other taxes and social security costs, deferred income and US deferred compensation plan liabilities (see note 23) on the basis that these

are non-financial liabilities.

3. Cash outflows in relation to derivatives presented in this table do not include the cash inflows which would be received when closing out the trades. These cash inflows

are expected to largely offset all outflows presented within this table.

Borrowing facilities

The Group’s objective is to maintain adequate undrawn committed borrowing facilities.

At 31 December 2023, the Group had a committed Revolving Credit Facility (RCF) of £2bn (2022 £2bn). The RCF was undrawn throughout the

year. The RCF also acts as a backstop to Commercial Paper issued by the Group. In 2023, the Group entered into a new five-year RCF, with two

one-year extension options, taking the expected maturity of the facility to 2030. At 31 December 2023, the Group had no Commercial Paper

in issue (2022 £nil).

At 31 December 2023, the Group also had a committed undrawn bridge loan facility of US$4.0bn (£3.1bn) to support the Group’s financing

requirements for the acquisition of Ball Aerospace which completed on 16 February 2024. Prior to completion, the full bridging facility was

drawn down. See note 34 on page 213.

183

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Additional informationGovernance Financial statementsStrategic report

Notes to the Consolidated financial statements continued

15. Other financial assets and liabilities and financial risk management conti nued

Currency risk

The Group’s objective is to reduce its exposure to transactional volatility in earnings and cash flows from movements in foreign currency

exchange rates, mainly the US dollar, euro, Saudi riyal and Australian dollar.

The Group is exposed to movements in foreign currency exchange rates in respect of foreign currency-denominated transactions. All material

firm transactional exposures are hedged using foreign exchange forward contracts and the Group aims, where possible, to apply cash flow

hedge accounting to these transactions.

The currency and notional amount of the designated hedging instruments match the currency and principal amounts of the forecast

transactions being hedged, therefore the hedging instruments and hedged items have values which will generally move in opposite directions

because of the same hedged risk. As the critical terms of the hedging instruments match those of the hedged items, an economic relationship

can be demonstrated on an ongoing basis.

The hedge ratio is 1:1 on the basis that the notional amount of the designated hedging instruments matches the principal amount of the

forecast foreign currency sales/purchases designated as the hedged items. The Group does not designate groups of items with offsetting risk

positions as hedged items.

The Group considers the potential sources of hedge ineffectiveness to be:

– valuation adjustments for credit risk made to derivative hedging instruments at each hedge effectiveness measurement date;

– changes to the timing and amount of forecast transactions; and

– non-occurrence of the designated hedged items.

Ineffectiveness due to foreign currency basis was highly immaterial.

The Group enters into derivative contracts with varying maturities up to 2032. The following table presents the sterling nominal amounts of the

foreign currency contracts used to hedge foreign currency risk, split by maturity profile, along with the exchange rate:

				2023			2022
			Currency purchased	Currency sold			Currency purchased		Currency sold
			Notional		Notional		Notional		Notional
		Weighted	value of	Weighted	value of	Weighted	value of	Weighted	value of
		average	currency	average	currency	average	currency	average	currency
		hedged	purchased	hedged	sold	hedged	purchased	hedged	sold
(Purchase)/sale contracts	Maturity date	rate	£m	rate	£m	rate	£m	rate	£m
Sterling/US dollar	Within one year	1.26	(2,762)	1.27	2,657	1.23	(2,790)	1.24	3,060
	Between one and five years	1.26	(1,608)	1.27	1,898	1.28	(1,423)	1.30	2,171
	Later than five years	1.33	(13)	1.40	5	1.40	(31)	1.29	19
Sterling/euro	Within one year	1.12	(2,725)	1.12	2,525	1.12	(3,689)	1.12	3,299
	Between one and five years	1.10	(2,913)	1.09	2,702	1.09	(2,576)	1.09	2,583
	Later than five years	1.07	(136)	1.07	133	1.08	(383)	1.07	388
Other	Within one year	n/a	(2,208)	n/a	2,209	n/a	(2,873)	n/a	2,869
	Between one and five years	n/a	(1,795)	n/a	1,781	n/a	(1,437)	n/a	1,455
	Later than five years	n/a	(333)	n/a	326	n/a	(379)	n/a	378
Cash flow hedges			(14,493)		14,236		(15,581)		16,222

The effect of cash flow hedges on the Group’s financial position and performance for the year is as follows:

		2023				2022
	Change in the	Change in			Change in the	Change in
	value of	the value			value of	the value
	hedging	of hedged			hedging	of hedged
	instruments	items since	Notional	Carrying	instruments	items since	Notional	Carrying
	since 1 January	1 January	amount	amount	since 1 January	1 January	amount	amount
(Purchase)/sale contracts	£m	£m	£m	£m	£m	£m	£m	£m
Sterling/US dollar	44	(44)	177	(29)	(106)	106	1,006	(102)
Sterling/euro	(5)	5	(414)	(2)	9	(9)	(378)	17
Other	(43)	43	(20)	(34)	(5)	5	13	3
Cash flow hedges	(4)	4	(257)	(65)	(102)	102	641	(82)

184

BAE Systems plc Annual Report 2023

Consolidated financial statements

15. Other financial assets and liabilities and financial risk management conti nued

Currency risk continued

Sensitivity analysis

The Group is exposed to movements in foreign currency exchange rates in respect of the translation of net assets and income statements

of foreign subsidiaries and equity accounted investments. 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.

The estimated impact on foreign exchange gains and losses in net finance costs of a ten cent movement in the closing sterling to US dollar

exchange rate on the retranslation of US dollar-denominated bonds held by BAE Systems plc is approximately £229m (2022 £258m).

The Group enters into cash flow hedges in order to manage all material firm transactional exposures. The estimated impact on fair value gains

and losses in other reserves of a ten cent movement in the closing sterling to US dollar exchange rates on the transactional cash flow hedges

is approximately £16m (2022 £94m). The estimated impact of a ten cent movement in the closing sterling to euro exchange rate on the

transactional cash flow hedges is approximately £35m (2022 £35m).

Credit risk

For trade receivables, contract receivables, amounts due from equity accounted investments and finance lease receivables, the Group measures

a provision for expected credit losses at an amount equal to lifetime expected credit losses, estimated by reference to past experience and

relevant forward-looking factors.

The Group’s assessment is that credit risk in relation to defence-related sales to government customers or subcontractors to governments

is extremely low as the probability of default is insignificant; therefore the provision for expected credit losses is immaterial in respect of

receivables from these customers. For all non-government commercial customers, the Group assesses expected credit losses, including risk

arising from global economic uncertainty; however, this is not considered material to the financial statements. The Group considers that

default has occurred when a receivable is past 180 days overdue, because historical experience indicates that these receivables are generally

not recoverable. The Group recognises a provision of 100% against all receivables over 180 days past due unless there is evidence that

individual receivables in this category are recoverable.

The carrying amount of the Group’s financial assets represents the maximum exposure to credit risk.

Movements on the provision for expected credit losses are as follows:

	2023	2022
	£m	£m
At 1 January	20	15
Net remeasurement of loss allowance	3	7
Amounts written off	(3)	(2)
At 31 December	20	20

For contract receivables, amounts due from equity accounted investments and finance lease receivables the expected credit loss provision is

immaterial as the probability of default is considered insignificant.

The Group writes off a receivable when there is evidence that the debtor is in significant financial difficulty and there is no realistic prospect of

recovery, for example, when a debtor enters bankruptcy or financial reorganisation. None of the trade receivables that were written off during

the year are still subject to enforcement activity. The ageing of trade receivables is detailed below:

		2023			2022
	Gross	Provision	Net	Gross	Provision	Net
	£m	£m	£m	£m	£m	£m
Not past due	822	–	822	969	–	969
Up to 180 days overdue	336	(1)	335	499	(1)	498
Past 180 days overdue	58	(19)	39	58	(19)	39
	1,216	(20)	1,196	1,526	(20)	1,506

Cash management

Cash flow forecasting is performed by the businesses on a monthly basis. The Group monitors a rolling forecast of its liquidity requirements

to ensure that there is sufficient cash to meet operational needs and maintain adequate headroom.

Surplus cash held by the businesses over and above balances required for working capital management is loaned to the Group’s centralised

treasury department. Surplus cash is invested in instant-access current accounts, short-term deposits and money market funds, choosing

instruments with appropriate maturities or sufficient liquidity to provide adequate headroom as determined by cash flow forecasts.

The Group’s objective is to monitor and control counterparty credit risk and credit limit utilisation. The Group adopts a conservative approach

to the investment of its surplus cash which is deposited for short periods with financial institutions with investment-grade (BBB- and above)

credit ratings. The cash and cash equivalents balance at 31 December 2023 of £4,067m (2022 £3,107m) was invested with 42 (2022 44)

financial institutions. A credit limit is allocated to each institution taking account of its market capitalisation, credit rating and credit default

swap price. The cash and cash equivalents of the Group are invested in non-speculative financial instruments which are usually highly liquid,

such as short-term deposits. Therefore, the Group believes it has reduced its exposure to counterparty credit risk through this process.

185

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Notes to the Consolidated financial statements continued

15. Other financial assets and liabilities and financial risk management conti nued

Credit risk continued

The cash and cash equivalents balance is subject to review for impairment under IFRS 9, and due to the high credit ratings of the counterparties

set out below, no impairment has been recognised within the year:

Counterparty credit rating at 31 December	2023	2022
AAA to AA-	60%	67%
A+ to A-	39%	32%
BBB+ to BBB-	1%	1%

Offsetting financial assets and liabilities

Financial assets and liabilities are offset, and the net amount reported in the balance sheet, when there is a legally enforceable right to offset

the recognised amounts. The following table sets out the Group’s financial assets and financial liabilities which are subject to a master netting

agreement. The master netting agreements regulate settlement amounts in the event a party defaults on their obligations.

		2023			2022
	Balance	Amounts	Net	Balance	Amounts	Net
	sheet	not offset	balances	sheet	not offset	balances
	£m	£m	£m	£m	£m	£m
Assets
Other financial assets	432	(382)	50	574	(455)	119
Liabilities
Other financial liabilities	(522)	382	(140)	(600)	455	(145)

16. Deferred tax

A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable

that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and

reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to

income taxes levied by the same tax authority on the same taxable entity, or on different taxable entities, but they intend to settle current

tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

Deferred tax assets/(liabilities)

					Net balance at
		Deferred tax assets		Deferred tax liabilities	31 December
	2023	2022	2023	2022	2023	2022
	£m	£m	£m	£m	£m	£m
Property, plant and equipment	17	48	(118)	(126)	(101)	(78)
Intangible assets	41	15	(2)	(2)	39	13
Capitalised research and development	458	149	–	–	458	149
Provisions and accruals	229	233	–	–	229	233
Goodwill	–	–	(352)	(352)	(352)	(352)
Pension/post-employment schemes:
Deficits	80	97	–	–	80	97
UK additional pension contributions	–	60	–	–	–	60
US deferred compensation plans	106	102	–	–	106	102
Share-based payments	94	64	–	–	94	64
Financial instruments	21	17	(1)	(1)	20	16
Other items, including tax losses carried forward	28	45	(2)	(16)	26	29
Deferred tax assets/(liabilities)	1,074	830	(475)	(497)	599	333
Set off of tax	(465)	(492)	465	492	–	–
Net deferred tax assets/(liabilities)	609	338	(10)	(5)	599	333

186

BAE Systems plc Annual Report 2023

Consolidated financial statements

16. Deferred tax continued

Movement in temporary differences during the year

	At	Foreign				At
	1 January	exchange	Acquisitions	Recognised	Recognised	31 December
	2023	adjustments	and disposals	in income	in equity 2023
	£m	£m	£m	£m	£m	£m
Property, plant and equipment	(78)	7	–	(30)	–	(101)
Intangible assets	13	–	–	26	–	39
Capitalised research and development	149	(17)	–	326	–	458
Provisions and accruals	233	(13)	–	9	–	229
Goodwill	(352)	21	–	(21)	–	(352)
Pension/post-employment schemes:
Deficits	97	(3)	–	(2)	(12)	80
UK additional pension contributions	60	–	–	–	(60)	–
US deferred compensation plans	102	(6)	–	10	–	106
Share-based payments	64	–	–	13	17	94
Financial instruments	16	–	–	1	3	20
Other items, including tax losses carried forward	29	(5)	–	2	–	26
	333	(16)	–	334	(52)	599

	At	Foreign				At
	1 January	exchange	Acquisitions	Recognised	Recognised	31 December
	2022	adjustments	and disposals	in income	in equity 2022
	£m	£m	£m	£m	£m	£m
Property, plant and equipment	(59)	(12)	–	(7)	–	(78)
Intangible assets	15	2	(13)	9	–	13
Capitalised research and development	–	4	–	145	–	149
Provisions and accruals	203	25	–	5	–	233
Goodwill	(302)	(39)	–	(11)	–	(352)
Pension/post-employment schemes:
Deficits	430	3	–	20	(356)	97
UK additional pension contributions	118	–	–	–	(58)	60
US deferred compensation plans	110	13	–	(21)	–	102
Share-based payments	28	–	–	12	24	64
Financial instruments	(9)	1	–	3	21	16
Other items, including tax losses carried forward	11	3	–	15	–	29
	545	–	(13)	170	(369)	333

Unrecognised deferred tax assets and liabilities

Deferred tax assets have not been recognised in respect of the following items:

	2023		2022
		Unrecognised		Unrecognised
	Gross	deferred	Gross	deferred
	amount	tax asset	amount	tax asset
	£m	£m	£m	£m
Deductible temporary differences, including tax credits	2	2	9	9
Tax losses carried forward	438	89	464	93
	440	91	473	102

These assets have not been recognised as the incidence of future profits in the relevant countries and legal entities cannot be accurately

predicted at this time.

The Group has not recognised any deferred tax liability on temporary differences totalling £211m (2022 £189m) relating to potentially taxable

unremitted earnings of overseas subsidiaries and equity accounted investments because the Group is in a position to control the timing of the

reversal of the temporary differences and none are expected to reverse in the foreseeable future.

Both the recognised and unrecognised UK deferred tax balances at 31 December 2023 have been calculated at 25% (2022 blended rate of

24.2%). This reflects the increase in the UK corporation tax rate from 19% to 25% with effect from 1 April 2023. An adjustment has been

made to reflect the fact that UK deferred tax balances are expected to unwind at 25%.

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Notes to the Consolidated financial statements continued

17. Inventories

Inventories are stated at the lower of cost, including all relevant overhead expenditure, and net realisable value. Inventory cost is valued

using the most appropriate method based on the business use of inventory. In the majority of cases this is moving average unit cost, with

some businesses using standard cost or first in first out (FIFO) as methods more indicative of their use of inventory.

	2023	2022
	£m	£m
Raw materials and consumables	646	535
Work-in-progress	437	372
Finished goods and goods for resale	73	69
	1,156	976

The Group recognised £4m (2022 £26m) as a write down of inventories to net realisable value.

18. Current tax

Current tax for the current and prior years is recognised as a liability to the extent that it has not yet been settled, and as an asset to the

extent that the amounts already paid exceed the amount due or the benefit of a tax loss can be carried back to recover current tax of a

prior year. Current tax assets and liabilities are measured at the amount expected to be paid to or recovered from tax authorities, using

the rates that have been enacted or substantively enacted by the balance sheet date.

	2023	2022
	£m	£m
Tax provisions	(370)	(145)
Research and development expenditure credits receivable	156	131
Other tax receivables	89	44
	(125)	30
Represented by:
Current tax assets	160	133
Current tax liabilities	(285)	(103)
	(125)	30

Tax provisions of £370m (2022 £145m) are in respect of known tax issues, of which £299m (2022 £87m) relates to the US, £71m (2022 £56m)

relates to the UK and £nil (2022 £2m) relates to other territories. The majority of the current tax provisions relate to the timing of tax reliefs.

Corresponding deferred tax assets are therefore recognised in relation to the same tax judgements, including in relation to most of the increase

in the year.

19. Cash and cash equivalents

Cash and cash equivalents includes cash in hand, call and term deposits, investments in money market funds and other short-term liquid

investments with original maturities of three months or less and which are subject to an insignificant risk of change in value. For the

purpose of the cash flow statement, cash and cash equivalents also includes bank overdrafts that are repayable on demand and which

form an integral part of the Group’s cash management.

	2023	2022
	£m	£m
Cash	502	484
Money market funds	1,375	1,149
Short-term deposits	2,190	1,474
	4,067	3,107

Cash and cash equivalents includes £59m (2022 £55m) which is subject to regulatory restrictions and is therefore not available for general

use by other entities within the Group.

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20. Geographical analysis of assets

Analysis of non-current assets by geographical location

Asset location

Note

		2023	2022
		£m	£m
UK		4,877	4,563
Rest of Europe		2,065	1,965
US		10,167	10,719
Kingdom of Saudi Arabia		533	586
Australia		499	518
Rest of Asia and Pacific		8	5
		18,149	18,356
Other investments	13	84	99
Other receivables	14	418	416
Post-employment benefit surpluses	24	804	1,297
Other financial assets	15	227	322
Deferred tax assets	16	609	338
Non-current assets		20,291	20,828

21. Loans and overdrafts

Loans and overdrafts are recognised initially at fair value, less attributable transaction costs. Subsequent to initial recognition, loans and overdrafts

are stated at amortised cost. Any difference between the amount initially recognised and the redemption value is recognised in the income

statement over the period of the borrowings.

	2023	2022
	£m	£m
Non-current
US$800m 3.8% bond, repayable 2024	–	664
US$750m 3.85% bond, repayable 2025	587	621
US$500m 7.5% bond, repayable 2027	392	415
US$1,300m 3.4% bond, repayable 2030	1,013	1,073
US$1,000m 1.9% bond, repayable 2031	778	824
US$400m 5.8% bond, repayable 2041	311	330
US$550m 4.75% bond, repayable 2044	423	447
US$1,000m 3% bond, repayable 2050	770	815
US$200m 5.5%, private placement, repayable 2050	158	–
	4,432	5,189
Current
US$800m 3.8% bond, repayable 2024	627	–
Accrued interest	52	53
	679	53

The proceeds received under the US$200m private placement are being used in the construction of a modern shiplift at our Jacksonville, Florida

ship repair facility.

US$500m of the US$800m 3.8% bond, repayable 2024, has been converted to a floating rate bond by utilising interest rate swaps that

mature in October 2024 and had an effective rate during 2023 of 5.7%.

The US$500m 7.5% bond, repayable 2027, was converted at issue to a sterling fixed rate bond by utilising cross-currency swaps and had

an effective rate during 2023 of 7.7%.

US$1,237m of the US$1,300m 3.4% bond, repayable 2030, was converted at issue to a sterling fixed rate bond by utilising cross-currency

swaps and had an effective rate during 2023 of 3.5%.

The US$400m 5.8% bond, repayable 2041, has been converted to a floating rate bond by utilising interest rate swaps that mature in October

2024 and had an effective rate during 2023 of 8.8%.

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Notes to the Consolidated financial statements continued

22. Contract liabilities

Contract liabilities represent the obligation to transfer goods or services to a customer for which consideration has been received, or

consideration is due, from the customer.

	2023	2022
	£m	£m
Non-current
Contract liabilities	1,955	945
Current
Contract liabilities	3,865	3,882
	5,820	4,827

Revenue recognised in the year includes £3,573m (2022 £2,393m) that was included in the opening contract liabilities balance.

Non-current and current contract liabilities as at 1 January 2022 were £519m and £2,874m, respectively.

The increase in contract liabilities since 2022 is primarily due to customer advances received during the year.

23. Trade and other payables

Trade and other payables are stated at amortised cost.

US deferred compensation plan liabilities represent the present value of expected future payments required to settle the obligation

to employees in accordance with IAS 19 Employee Benefits.

		2023	2022
	Note	£m	£m
Non-current
Accruals		68	50
Amounts owed to equity accounted investments	30	10	8
Deferred income		1,144	1,006
US deferred compensation plan liabilities		361	357
Other payables		11	20
		1,594	1,441
Current
Trade payables		866	839
Amounts owed to equity accounted investments	30	1,534	1,061
Other taxes and social security costs		73	76
Accruals		2,600	2,679
Deferred income		61	109
US deferred compensation plan liabilities		42	39
Other payables		260	187
		5,436	4,990

1. Includes £1,192m (2022 £1,041m) of funding received from the UK Government for property, plant and equipment at Barrow-in-Furness, UK.

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24. Post-employment benefits

Pension schemes

Defined contribution

Obligations for contributions are recognised as an expense in the income statement as incurred.

Defined benefit

The cost of providing benefits is determined periodically by independent actuaries and charged to the income statement in the year

in which those benefits are earned by the employees. Remeasurements, including actuarial gains and losses, are recognised in the

Consolidated statement of comprehensive income in the year in which they occur. Past service costs resulting from a plan amendment

or curtailment are recognised immediately in the income statement.

The post-employment benefit surpluses and obligations recognised in the Group’s balance sheet represent the fair value of scheme

assets, less the present value of the defined benefit obligations calculated using a number of actuarial assumptions as set out on page 195.

The bid values of scheme assets are not intended to be realised in the short term and may be subject to significant change before they

are realised. The present values of scheme liabilities are derived from cash flow projections over long periods and are, therefore, inherently

uncertain.

IAS 19 Employee Benefits limits the measurement of a defined benefit surplus to the lower of the surplus in the defined benefit scheme

and the asset ceiling. The asset ceiling is the present value of any economic benefits available in the form of refunds from the scheme or

reductions in future contributions to the scheme. IFRIC 14 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and

their Interaction, issued in 2007, provides an interpretation of the requirements of IAS 19, clarifying that a refund is available if the entity

has an unconditional right to a refund in certain circumstances. The Group has applied IFRIC 14 and has determined that there is no limit

on the recognition of the surpluses in its defined benefit pension schemes as at 31 December 2023. In the UK the surpluses have been

recognised on the basis that the future economic benefits are unconditionally available to the Group, which is assumed to be via a refund.

These have been recognised after deducting a 35% withholding tax which would be levied prior to the future refunding of any surplus

and have been presented on a net basis as this is not deemed to be an income tax.

MBDA participates in the Group’s defined benefit schemes and, as these are multi-employer schemes, the Group has allocated a share

of the IAS 19 pension surpluses and deficits to MBDA based on the relative payroll contributions of active members or actual obligations

where known. Whilst this methodology is intended to reflect a reasonable estimate of the share of the surplus or deficit, it may not

accurately reflect the obligations of the participating employers.

In the event that an employer who participates in the Group’s pension schemes fails or cannot be compelled to fulfil its obligations as

a participating employer, the remaining participating employers are obliged to collectively take on its obligations. The Group considers

the likelihood of this event arising as remote.

The Group’s share of the IAS 19 pension surplus or deficit allocated to equity accounted investments is included in the balance sheet

within equity accounted investments.

Background

Pension schemes

BAE Systems plc operates pension schemes for the Group’s qualifying employees in the UK, US and other countries. The UK and US operate a

number of funded defined benefit schemes, and the assets are held in separate trustee-administered funds. The largest funded defined benefit

scheme is the BAE Systems Pension Scheme – BAE Systems Section (Main Scheme) which represents 93% (2022 93%) of the UK IAS 19 defined

benefit obligation at 31 December 2023. The schemes in other countries are primarily defined contribution schemes.

At 31 December 2023, the weighted average durations of the UK and US defined benefit pension obligations were 13 years (2022 13 years)

and 11 years (2022 12 years), respectively.

The split of the defined benefit pension liability on a funding basis between active, deferred and pensioner members for the Main Scheme

and US schemes in aggregate is set out below:

	Active	Deferred	Pensioner
	%	%	%
Main Scheme 1	28	21	51
US schemes	24	16	60

1. Source: 31 March 2021 actuarial valuation reports.

2. Source: Annual updates of the US schemes as at 1 January 2023.

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Notes to the Consolidated financial statements continued

24. Post-employment benefits continued

Regulatory framework

The funded UK schemes are registered and subject to the statutory scheme-specific funding requirements outlined in UK legislation, including

the payment of levies to the Pension Protection Fund as set out in the Pension Act 2004. These schemes were established under trust and the

responsibility for their governance lies jointly with the Trustees and the Group.

The funded US schemes are tax-qualified pension schemes regulated by the Pension Protection Act 2006 and insured by the Pension Benefit

Guaranty Corporation (PBGC) up to certain limits. These schemes were established under, and are governed by, the US Employee Retirement

Income Security Act 1974 and the BAE Systems Administrative Committee is a named fiduciary with the authority to manage their operation.

The schemes’ assets are held in the BAE Systems Master Pension Investment Trust and the trustee is The Northern Trust Company. The US

schemes received a favourable determination letter from the Internal Revenue Service (IRS) dated 6 July 2017, stating that the US schemes

and related Master Trust are designed in accordance with applicable sections of the IRS Code and, therefore, are exempt from taxation.

Once qualified, the US schemes are required to operate in conformity with the Code to maintain qualification.

Benefits

The UK defined benefit schemes provide benefits to members in the form of a set level of pension payable for life based on members’ final

salaries. The benefits attract inflation-related increases both in deferment and payment. All UK defined benefit schemes are closed to new

entrants, with benefits for new employees being provided through a defined contribution scheme. The Normal Retirement Age for the majority

of active members of the Main Scheme is 65. Specific benefits applicable to members differ between schemes. Further details on the benefits

provided by each scheme are provided on the BAE Systems Pensions website: baesystems.com/en-pensions/home

The US defined benefit schemes cover eligible employees of BAE Systems, Inc. and certain adopting affiliates providing benefits based on each

employee’s final salary and service. The US defined benefit schemes ceased to be final salary schemes in January 2013. Since then an annual

accrual of $1,000 is credited to participants’ accumulated plan benefits. Vested benefits are payable upon retirement, death, disability, and in

certain circumstances upon termination of employment. The Normal Retirement Age for the US pension schemes is 65.

Other post-employment benefits

The Group operates a number of non-pension retirement benefit schemes, under which certain employees are eligible to receive benefits

after retirement or on leaving the Group, the majority of which relate to the provision of medical benefits to retired employees of the Group’s

subsidiaries in the US.

Funding

Introduction

Disclosures in respect of pension funding are provided below. Disclosures in respect of pension accounting under IAS 19 are provided

on pages 195 to 202.

The majority of the UK and US defined benefit pension schemes are funded by the Group’s subsidiaries and equity accounted investments.

The individual pension schemes’ funding requirements are based on actuarial measurement frameworks set out in their funding policies.

For funding valuation purposes, pension scheme assets are included at market value at the valuation date, whilst the liabilities are measured

on an actuarial funding basis using the projected unit credit method and discounted to their present value based on prudent assumptions set

by the Trustees following consultation with scheme actuaries.

The funding valuations are performed by professionally qualified independent actuaries and include assumptions which differ from the actuarial

assumptions used for IAS 19 accounting purposes shown on page 195. The purpose of the funding valuations is to design funding plans which

ensure that the schemes have sufficient funds available to meet future benefit payments.

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24. Post-employment benefits continued

Funding contin ued

UK valuations

Funding valuations of the Group’s UK defined benefit pension schemes are performed at least every three years. Following the accelerated

payment in 2021 of the remaining sponsor deficit reduction contributions under the previously agreed deficit recovery plan, the Group and

Trustees agreed to carry out an early triennial funding valuation for the Main Scheme as at 31 March 2021. This valuation was concluded

and signed off on 30 June 2022.

The results of the most recent triennial valuation for the Main Scheme are shown below. This valuation was agreed with the Trustees and

certified by the Scheme Actuary after consultation with The Pensions Regulator in the UK.

	Main
	Scheme as at
	31 March 2021
	£bn
Market value of assets	22.9
Present value of liabilities	(22.9)
Funding surplus	–
Percentage of accrued benefits covered by the assets at the valuation date	100%

The other UK schemes were all in surplus at their most recent triennial valuations.

The valuations were determined using the following mortality assumptions:

Life expectancy of a male currently aged 65 (years)	86 – 89
Life expectancy of a female currently aged 65 (years)	88 – 90
Life expectancy of a male at age 65, currently aged 45 (years)	88 – 91
Life expectancy of a female at age 65, currently aged 45 (years)	90 – 93

As part of the process of the Main Scheme’s 2021 valuation, the Trustees and the Group agreed to update the methodology to use a cash flow

matching strategy, such that assets are invested with the aim of the expected income directly matching the expected benefit payments of the

Main Scheme. The cash flow matching strategy aims to manage risk through a defined amount of risk buffer assets, which equate to the agreed

prudence margin in the valuation. The risk buffer assets are measured over time to ensure the Main Scheme is sufficiently funded. The asset

portfolio is currently invested in a selection of bonds designed to match the pension payments for current pensioners, as well as a mix of

growth-seeking assets aimed to generate returns for the pension payments for future pensioners. Over time, assets from the return-seeking

portfolio will be realised to purchase additional, lower-risk assets to match the increasing current pensioner payments.

The valuations for the other schemes use a different method in that discount rates were directly based on prudent levels of expected returns for

the assets held by the schemes, reflecting the planned investment strategies and maturity profiles of each scheme. The discount rates are curves

which provide a different rate for each year into the future. Under IAS 19, the discount rate for accounting purposes is based on third-party AA

corporate bond yields.

The inflation assumptions for each of the valuations were derived based on the difference between the yields, on index-linked and fixed-interest

long-term government bonds. The inflation assumption is a curve which provides a different rate for each year into the future.

There have been no changes to the contributions or benefits, as set out in the rules of the schemes, for pension scheme members as a result

of the new funding valuations.

The results of future triennial valuations and associated funding requirements will be impacted by a number of factors, including the future

performance of investment markets and anticipated members’ longevity.

US valuations

The Group’s US pension schemes are valued annually, with the latest valuations performed as at 1 January 2023. The actuarial present value

of accumulated plan benefits is determined by an independent actuary and uses actuarial assumptions to adjust the accumulated plan benefits

earned by participants to reflect the time value of money and the probability of payment between the valuation date and the expected date

of payment.

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Notes to the Consolidated financial statements continued

24. Post-employment benefits continued

Funding contin ued

Contributions

Under the terms of the trust deeds of the UK schemes, the Group is required to have a funding plan determined at the conclusion of the

triennial funding valuations.

Equity accounted investments make regular contributions to the schemes in which they participate in line with the schedule of contributions

and are allocated a share of funding contributions.

In 2023, total employer contributions to the Group’s pension schemes were £274m (2022 £267m), including amounts funded by equity accounted

investments of £30m (2022 £23m), and included approximately £68m (2022 £45m) of payments associated with the share buyback programme

in respect of the Main Scheme.

Contributions in 2024 to the Group’s pension schemes are expected to be at a similar level to 2023.

Risk management

The defined benefit pension schemes expose the Group to actuarial risks, including market (investment) risk, interest rate risk, inflation risk

and longevity risk.

Risk	Mitigation
Market (investment) risk	The investment portfolios are highly diversified, investing in a wide range of assets, in order to reduce
Asset returns may not move	the exposure of the total portfolio to a materially adverse impact from a single security or type of
in line with the liabilities and	security. To reduce volatility, certain assets are held in a matching portfolio, which largely consists
may be subject to volatility.	of index-linked bonds, gilts and swaps, designed to mirror movements in corresponding liabilities.
	Some 36% (2022 42%) of the Group’s pension scheme assets are held in equities and pooled
	investment vehicles due to the higher expected level of return over the long term.
	The UK Main Scheme reduced its allocation to equities significantly over the course of 2023, and
	closed out its equity option strategy to reflect its limited resultant exposure to equity markets.
	Environmental (including exposure to climate related risks), Social and Governance (ESG) factors are
	incorporated into the investment analysis and decision-making process carried out by the Trustees of
	the UK schemes. There is alignment between the UK Main Scheme and Company’s climate change
	objectives with consistent long-term net zero ambitions.
Interest rate risk	As part of the funding valuation finalised during 2022, the main UK Scheme has adopted a cash flow
Liabilities are sensitive to	matching strategy, whereby contractual income from assets is designed to directly match benefits paid
movements in interest rates,	to members each year. A portfolio of assets with contractual income has been structured to match
with lower interest rates leading to an	benefits already in payment, representing around half of the liabilities. This inherently hedges the
increase in the valuation of liabilities.	associated interest rate risk. As members retire and become pensioners, additional matching assets will
	be purchased to keep pace. Interest rate risk associated with the remaining purchase of matching assets
	is mitigated via a hedging strategy involving mainly physical assets and derivatives. The overall level of
	interest rate hedging on the funding basis has increased compared to 2022.
Inflation risk	The main UK Scheme’s cash flow matching strategy includes aligning asset income to the inflation-
Liabilities are sensitive to	linked members’ benefit payments. Inflation risk is mitigated by the presence of caps on most inflation-
movements in inflation, with	linked benefits and via a hedging strategy, executed with several banks to reduce counterparty risk.
higher inflation leading to an increase	The overall level of inflation hedging on the funding basis has increased compared 2022.
in the valuation of liabilities.	The Group’s US scheme benefits are not indexed with inflation.
	In	201	4, the Main Scheme implemented a pension increase exchange to allow retired members to
	elect for a higher current pension in exchange for foregoing certain rights to future pension increases.
Longevity risk			Longevity adjustment factors are used in the majority of the UK pension schemes in order to adjust
Liabilities are sensitive to	the pension benefits payable so as to share the cost of people living longer with employees.
life expectancy, with increases	In	201	3, with the agreement of the Company, the Trustees of the 2000 Plan, Royal Ordnance Pension
in life expectancies leading			Scheme and Shipbuilding Industries Pension Scheme (SIPS) entered into arrangements with Legal &
to an increase in the valuation	General to insure against longevity risk for the current pensioner population, covering a total of £4.4bn
of liabilities.	of pension scheme liabilities. These arrangements reduce the funding volatility relating to increasing life		expectancy. This longevity risk cover with Legal & General remains in place following the 2019 merger
	of the 2000 Plan and SIPS into the Main Scheme.

Virgin Media case

The Company is aware of the ongoing ‘Virgin Media v NTL Pension Trustees Ltd and others’ case and that there is a potential for the outcome

of the case to have an impact on the UK schemes. The case affects defined benefit schemes that provided contracted-out benefits before

6 April 2016 based on meeting the reference scheme test. Where scheme rules were amended, potentially impacting benefits accrued from

6 April 1997 to 6 April 2016, schemes needed the actuary to confirm that the reference scheme test was still being met by providing written

confirmation under Section 37 of the Pension Schemes Act 1993. In the Virgin Media case the judge ruled that alterations to the scheme rules

were void and ineffective because of the absence of written actuarial confirmation required under Section 37 of the Pension Schemes Act

1993. The case has been taken to The Court of Appeal, with the hearing set for June 2024. The potential impact on the UK schemes is not

yet known but continues to be assessed.

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24. Post-employment benefits continued

IAS 19 accounting

The disclosures below relate to post-retirement benefit schemes in the UK, US and other countries which are accounted for as defined benefit

schemes in accordance with IAS 19.

Principal actuarial assumptions

The assumptions used are estimates chosen from a range of possible actuarial assumptions which, due to the long-term nature of the obligation

covered, may not necessarily occur in practice.

		UK			US
	2023	2022	2021	2023	2022	2021
Financial assumptions
Discount rate – past service (%)	4.5	4.8	1.9	4.8	5.0	2.8
Discount rate – future service (%)	4.6	4.8	1.9	4.8	5.0	2.8
Retail Prices Index (RPI) inflation (%)	2.8	3.0	3.1	n/a	n/a	n/a
Rate of increase in salaries (%)	2.8	3.0	3.1	n/a	n/a	n/a
Rate of increase in deferred pensions (CPI/RPI) (%)	2.1/2.8	2.3/3.0	2.4/3.1	n/a	n/a	n/a
Rate of increase in pensions in payment (%)	1.6 – 3.6	1.7 – 3.6	1.7 – 3.7	n/a	n/a	n/a
Demographic assumptions
Life expectancy of a male currently aged 65 (years)	85 – 89	86 – 89	86 – 89	88	87	87
Life expectancy of a female currently aged 65 (years)	88 – 89	88 – 90	88 – 90	89	89	89
Life expectancy of a male currently aged 45 (years)	86 – 89	87 – 90	86 – 90	87	87	87
Life expectancy of a female currently aged 45 (years)	89 – 90	89 – 91	89 – 91	89	89	89

Discount rate

The discount rate assumptions are derived through discounting the projected benefit payments using a third-party AA corporate bond yield

curve to produce a single equivalent discount rate for the UK and US territories. This inherently captures the maturity profile of the expected

benefit payments. For the UK territory, the discount rate used for future service differs from that used for past service as it only uses the cash

flows relating to active members, which have a different duration. Further information on the duration of the schemes is detailed on page 191.

Retail Prices Index (RPI) and Consumer Prices Index (CPI) inflation

In the UK, the inflation assumptions are derived by reference to the difference between the yields on index-linked and fixed-interest long-term

government bonds. Index-linked government bond prices contain a premium that investors are willing to pay to mitigate the risk that RPI

inflation is higher than expected. To account for this, the RPI assumption includes an inflation risk premium deduction.

The inflation risk premium deduction has been set at 0.55% per annum (2022 0.55%) and the CPI assumption has been set at 0.7% per annum

(2022 0.7%) lower than RPI. The resulting RPI assumption is 2.8% per annum and the CPI assumption is 2.1% per annum. The 0.7% per annum

RPI-CPI differential is a weighted average of a 1% per annum differential pre-2030 and 0.1% per annum differential post-2030; this reflects the

anticipated change to the RPI index from 2030. In the US, inflation assumptions are not relevant as the Group’s US pension schemes are not

indexed with inflation.

Rate of increase in salaries

The rate of increase in salaries for the UK schemes is assumed to be RPI inflation of 2.8% (2022 RPI inflation of 3.0%), plus a promotional scale.

From 1 January 2013, employees in the US schemes no longer accrue salary-related benefits.

Rate of increase in deferred pensions

The rate of increase in deferred pensions for the UK schemes is based on CPI inflation of 2.1% (2022 CPI inflation of 2.3%), with the exception

of the legacy 2000 Plan, which is based on RPI inflation of 2.8% (2022 RPI inflation of 3.0%). For all UK schemes, the rate of increase in deferred

pensions is subject to inflation caps.

Rate of increase in pensions in payment

The rate of increase in pensions in payment differs between UK schemes. Different tranches of the schemes’ benefits increase at rates based

on either RPI or CPI inflation, and some are subject to an inflation cap. With the exception of two smaller schemes, the rate of increase in

pensions in payment is based on RPI inflation.

Life expectancy

For its UK pension schemes, the Group has used the Self-Administered Pension Schemes S3 mortality tables based on year of birth (as published

by the Institute and Faculties of Actuaries) for both pensioner and non-pensioner members, in conjunction with the results of an investigation

into the actual mortality experience of scheme members and information on the demographic profile of the scheme’s membership.

In addition, to allow for future improvements in longevity, the Continuous Mortality Investigation 2022 tables (published by the Institute of

Actuaries) have been used (in 2022, the Continuous Mortality Investigation 2021 tables were used), with an assumed long-term rate of mortality

improvements of 1.0% per annum (2022 1.0%), an initial rate adjustment parameter (‘A’) of 0.2% (2022 0.25%), a smoothing parameter (‘Sk’)

of 7 (2022 7) and the following weighting (‘W’) parameters: W2022 35% (2022 n/a); W2021 0% (2022 7.5%); and W2020 0% (2022 7.5%).

For the majority of the US schemes, the mortality tables used at 31 December 2023 are a blend of the fully generational PRI-2012 White Collar

table and the PRI-2012 Blue Collar table, both projected using Scale MP-2021.

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Notes to the Consolidated financial statements continued

24. Post-employment benefits continued

IAS 19 accounting continued

US healthcare schemes

The latest valuations of the principal schemes, covering retiree medical and life insurance schemes in certain US subsidiaries, were performed

by independent actuaries as at 1 January 2023. These valuations were rolled forward to reflect the information at 31 December 2023. The

method of accounting for these is similar to that used for defined benefit pension schemes.

Long-term healthcare cost is assumed to increase at 5.0% per annum (2022 4.7%). This is based on an assumed increase in 2023 of 7.75%

for pre-retirement and 6.25% for post-retirement, with both rates then reducing to 4.5% by 2033 and remaining at 4.5% per annum each

year thereafter.

Summary of movements in post-employment benefit obligations

		US and
	UK	other	Total
	£m	£m	£m
Total net IAS 19 surplus/(deficit) at 1 January 2023 (net of withholding tax)	1,236	(483)	753
Add back: withholding tax on surpluses	722	–	722
Total net IAS 19 surplus/(deficit) at 1 January 2023	1,958	(483)	1,475
Actual return on assets excluding amounts included in net finance costs	(608)	124	(484)
Increase in liabilities due to changes in financial assumptions	(376)	(52)	(428)
Decrease/(increase) in liabilities due to changes in demographic assumptions	38	(1)	37
Experience losses	(111)	(22)	(133)
Contributions in excess of/(less than) service cost	151	(12)	139
Settlements	–	60	60
Net interest income/(expense)	106	(20)	86
Foreign exchange adjustments	–	19	19
Movement in other schemes	–	(33)	(33)
Total net IAS 19 surplus/(deficit) at 31 December 2023	1,158	(420)	738
Withholding tax on surpluses	(441)	–	(441)
Total net IAS 19 surplus/(deficit) at 31 December 2023 (net of withholding tax)	717	(420)	297
Allocated to equity accounted investments	(68)	–	(68)
Group’s share of net IAS 19 surplus/(deficit) excluding Group’s share of amounts allocated to equity accounted investments at 31 December 2023	649	(420)	229

Settlement gain

In May 2023, $1.2bn (£1.0bn) of the US defined benefit obligation liabilities were settled via a transfer to an insurance company. The premium

of $1.1bn (£0.9bn) was approximately 95% of the IAS 19 liability carrying value, creating a one-off accounting gain. Since the half-year 2023

results, the asset valuations for the settlement have been finalised, resulting in an additional gain of £9m. The total gain is now $75m (£60m).

This gain has been recognised in the Consolidated income statement, and as an adjusting item.

Surplus recognition

A number of schemes are in an accounting surplus position. The surpluses have been recognised on the basis that the future economic

benefits are unconditionally available to the Group, which is assumed to be via a refund. On 22 November 2023, the UK government

announced that the authorised surplus payments charge would be reduced from 35% to 25% from 6 April 2024. The legislation had not

been legally enacted as at the date of issue of these financial statements. The surplus has been recognised net of withholding tax of 35%

at 31 December 2023 (2022: 35%) based on the enacted legislation at that date. Should the legislation have been enacted at year-end, this

would have resulted in an £0.1bn increase in the pension surplus. This tax would be levied prior to the future refunding of any surplus and

therefore the surplus has been presented on a net basis as this is not deemed to be an income tax of the Group.

196

BAE Systems plc Annual Report 2023

Consolidated financial statements

24. Post-employment benefits continued

IAS 19 accounting continued

Amounts recognised on the balance sheet

The table below shows a reconciliation between the gross assets and liabilities of the Group’s UK, US and other post-employment benefit

schemes and the amounts recognised on the Group’s balance sheet after allocation to equity accounted investments.

			2023
				Kingdom
	UK defined	US and		of Saudi
	benefit	other	US	Arabia end
	pension	pension	healthcare	of service
	schemes	schemes	schemes	benefit	Total
	£m	£m	£m	£m	£m
Present value of unfunded obligations	(105)	(98)	–	(168)	(371)
Present value of funded obligations	(19,913)	(2,838)	(125)	–	(22,876)
Fair value of scheme assets	21,176	2,629	180	–	23,985
Total net IAS 19 surplus/(deficit)	1,158	(307)	55	(168)	738
Withholding tax on surpluses	(441)	–	–	–	(441)
Allocated to equity accounted investments	(68)	–	–	–	(68)
Group’s share of net IAS 19 surplus/(deficit)	649	(307)	55	(168)	229
Represented by:
Post-employment benefit surpluses	747	2	55	–	804
Post-employment benefit obligations	(98)	(309)	–	(168)	(575)
	649	(307)	55	(168)	229
Group’s share of net IAS 19 surplus of equity accounted investments	22	–	–	–	22

The US unfunded pension obligations have associated assets held in deferred compensation schemes with a fair value of £53m (2022 £57m),

which are shown in Other Investments. The funds held in these trusts can be used solely for the satisfaction of the unfunded obligations.

			2022
				Kingdom
	UK defined	US and		of Saudi
	benefit	other	US	Arabia end
	pension	pension	healthcare	of service
	schemes	schemes	schemes	benefit	Total
	£m	£m	£m	£m	£m
Present value of unfunded obligations	(104)	(105)	–	(142)	(351)
Present value of funded obligations	(19,462)	(3,927)	(128)	–	(23,517)
Fair value of scheme assets	21,524	3,629	190	–	25,343
Total net IAS 19 surplus/(deficit)	1,958	(403)	62	(142)	1,475
Withholding tax on surpluses	(722)	–	–	–	(722)
Allocated to equity accounted investments	(107)	–	–	–	(107)
Group’s share of net IAS 19 surplus/(deficit)	1,129	(403)	62	(142)	646
Represented by:
Post-employment benefit surpluses	1,224	11	62	–	1,297
Post-employment benefit obligations	(95)	(414)	–	(142)	(651)
	1,129	(403)	62	(142)	646
Group’s share of net IAS 19 surplus of equity accounted investments	38	–	–	–	38

Total cumulative actuarial losses recognised in equity since the transition to IFRS are £1.8bn (2022 £1.1bn).

197

BAE Systems plc Annual Report 2023

Additional informationGovernance Financial statementsStrategic report

Notes to the Consolidated financial statements continued

24. Post-employment benefits continued

IAS 19 accounting continued

Changes in the fair value of scheme assets before allocation to equity accounted investments

				Kingdom
	UK defined	US and		of Saudi
	benefit	other	US	Arabia end
	pension	pension	healthcare	of service
	schemes	schemes	schemes	benefit	Total
	£m	£m	£m	£m	£m
Value of scheme assets at 1 January 2022	26,947	4,415	218	–	31,580
Interest income	490	132	6	–	628
Actual return on assets excluding amounts included in interest income	(5,094)	(1,199)	(48)	–	(6,341)
Actual return on assets	(4,604)	(1,067)	(42)	–	(5,713)
Contributions by employer	257	10	–	14	281
Contributions by employer in respect of employee salary sacrifice arrangements	72	–	–	–	72
Total contributions by employer	329	10	–	14	353
Members’ contributions	5	–	–	–	5
Administrative expenses	(18)	(7)	(1)	–	(26)
Foreign exchange translation	–	521	26	–	547
Benefits paid	(1,135)	(243)	(11)	(14)	(1,403)
Value of scheme assets at 31 December 2022	21,524	3,629	190	–	25,343
Interest income	1,010	170	9	–	1,189
Actual return on assets excluding amounts included in interest income	(608)	124	3	–	(481)
Actual return on assets	402	294	12	–	708
Contributions by employer	265	9	–	13	287
Contributions by employer in respect of employee salary sacrifice arrangements	72	–	–	–	72
Total contributions by employer	337	9	–	13	359
Members’ contributions	5	–	–	–	5
Settlements	–	(894)	–	–	(894)
Administrative expenses	(24)	(15)	(1)	–	(40)
Foreign exchange translation	–	(185)	(11)	–	(196)
Benefits paid	(1,068)	(209)	(10)	(13)	(1,300)
Value of scheme assets at 31 December 2023	21,176	2,629	180	–	23,985

198

BAE Systems plc Annual Report 2023

Consolidated financial statements

24. Post-employment benefits continued

IAS 19 accounting continued

Assets of defined benefit pension schemes

					2023
		UK			US and other			Total
	Quoted	Unquoted	Total	Quoted	Unquoted	Total	Quoted	Unquoted	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Equities:
UK	1	–	1	–	–	–	1	–	1
Overseas	226	–	226	–	–	–	226	–	226
Pooled investment vehicles	–	7,706	7,706	655	–	655	655	7,706	8,361
Fixed-interest securities:
UK gilts	2,376	–	2,376	–	–	–	2,376	–	2,376
UK corporates	2,884	1,752	4,636	–	–	–	2,884	1,752	4,636
Overseas government	35	–	35	595	–	595	630	–	630
Overseas corporates	1,721	–	1,721	1,276	–	1,276	2,997	–	2,997
Index-linked securities:
UK gilts	2,193	–	2,193	–	–	–	2,193	–	2,193
UK corporates	1,084	–	1,084	–	–	–	1,084	–	1,084
Overseas government	–	–	–	–	–	–	–	–	–
Overseas corporates	41	–	41	–	–	–	41	–	41
Property	–	1,441	1,441	–	29	29	–	1,470	1,470
Derivatives	–	(1,285)	(1,285)	–	5	5	–	(1,280)	(1,280)
Cash:
Sterling	577	174	751	–	–	–	577	174	751
Foreign currency	244	–	244	69	–	69	313	–	313
Other	–	6	6	–	–	–	–	6	6
Total	11,382	9,794	21,176	2,595	34	2,629	13,977	9,828	23,805

					2022
		UK			US and other			Total
	Quoted	Unquoted	Total	Quoted	Unquoted	Total	Quoted	Unquoted	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Equities:
UK	209	–	209	–	–	–	209	–	209
Overseas	624	–	624	–	–	–	624	–	624
Pooled investment vehicles	3	8,892	8,895	793	–	793	796	8,892	9,688
Fixed-interest securities:
UK gilts	2,397	–	2,397	–	–	–	2,397	–	2,397
UK corporates	1,832	2,416	4,248	–	–	–	1,832	2,416	4,248
Overseas government	29	–	29	599	–	599	628	–	628
Overseas corporates	1,248	56	1,304	2,105	–	2,105	3,353	56	3,409
Index-linked securities:
UK gilts	2,050	–	2,050	–	–	–	2,050	–	2,050
UK corporates	–	952	952	–	–	–	–	952	952
Overseas corporates	9	–	9	–	–	–	9	–	9
Property	–	1,731	1,731	–	37	37	–	1,768	1,768
Derivatives	–	(1,595)	(1,595)	–	–	–	–	(1,595)	(1,595)
Cash:
Sterling	566	84	650	–	–	–	566	84	650
Foreign currency	12	(1)	11	95	–	95	107	(1)	106
Other	–	10	10	–	–	–	–	10	10
Total	8,979	12,545	21,524	3,592	37	3,629	12,571	12,582	25,153

1. Includes £nil (2022 £3m) of the Company’s own ordinary shares.

2. Primarily invested in private markets and exchange traded funds. The amounts classified as unquoted primarily comprise investments in private markets, with the majority

held in infrastructure, alternatives and direct funds, valued in accordance with International Private Equity and Venture Capital Valuation Guidelines.

3. Valued on the basis of open market value at the end of the year determined in accordance with the Royal Institution of Chartered Surveyors’ Appraisal and Valuation

Standards and the Practice Note contained therein. Includes £233m (2022 £223m) of property occupied by Group companies.

4. Includes forward foreign exchange contracts, futures, and interest rate, inflation and longevity swaps. In addition, the total derivative figures shown are net of £449m

(2022 £520m) of repurchase agreements. The valuations are based on valuation techniques using underlying market data and discounted cash flows.

199

BAE Systems plc Annual Report 2023

Additional informationGovernance Financial statementsStrategic report

Notes to the Consolidated financial statements continued

24. Post-employment benefits continued

IAS 19 accounting continued

Longevity swap

The Group holds longevity insurance contracts for some of its UK defined benefit pension schemes. These provide long-term protection

and income to the underlying pension scheme in the event that insured members live longer than expected.

The value of the longevity insurance contracts held by the Group are calculated by an actuary. They are measured by discounting the difference

between the projected fixed and floating cash flows payable under the contracts, excluding the value of future projected fees. The significant

assumptions used for this valuation are the discount rate and mortality assumptions; fair values for these assumptions are advised by an actuary

based on external data and characteristics of the insured member population.

At 31 December 2023, the longevity swap valuation leads to a negative adjustment to the assets which reflects that experience to date

on the contracts has been higher than expected deaths.

Changes in the present value of the defined benefit obligations before allocation to equity accounted investments

	UK defined	US and		Kingdom of
	benefit	other	US	Saudi Arabia
	pension	pension	healthcare	end of service
	schemes	schemes	schemes	benefit	Total
	£m	£m	£m	£m	£m
Defined benefit obligations at 1 January 2022	(28,920)	(4,643)	(150)	(153)	(33,866)
Current service cost	(231)	(12)	(1)	(27)	(271)
Contributions by employer in respect of employee salary sacrifice arrangements	(72)	–	–	–	(72)
Total current service cost	(303)	(12)	(1)	(27)	(343)
Members’ contributions	(5)	–	–	–	(5)
Past service cost – plan amendments	14	2	(1)	–	15
Actuarial gain due to changes in financial assumptions	10,745	1,067	32	47	11, 891
Actuarial loss due to changes in demographic assumptions	(39)	–	–	–	(39)
Experience (losses)/gains	(1,672)	(6)	3	(4)	(1,679)
Interest expense	(521)	(138)	(4)	(5)	(668)
Foreign exchange translation	–	(545)	(18)	(14)	(577)
Benefits paid	1,135	243	11	14	1,403
Defined benefit obligations at 31 December 2022	(19,566)	(4,032)	(128)	(142)	(23,868)
Current service cost	(90)	(6)	(2)	(20)	(118)
Contributions by employer in respect of employee salary sacrifice arrangements	(72)	–	–	–	(72)
Total current service cost	(162)	(6)	(2)	(20)	(190)
Members’ contributions	(5)	–	–	–	(5)
Past service cost – plan amendments	–	–	(2)	–	(2)
Settlements	–	954	–	–	954
Actuarial loss due to changes in financial assumptions	(376)	(52)	(4)	(13)	(445)
Actuarial gain/(loss) due to changes in demographic assumptions	38	(1)	–	–	37
Experience losses	(111)	(22)	(1)	(5)	(139)
Interest expense	(904)	(190)	(6)	(8)	(1,108)
Foreign exchange translation	–	204	8	7	219
Benefits paid	1,068	209	10	13	1,300
Defined benefit obligations at 31 December 2023	(20,018)	(2,936)	(125)	(168)	(23,247)

200

BAE Systems plc Annual Report 2023

Consolidated financial statements

24. Post-employment benefits continued

IAS 19 accounting continued

Amounts recognised in the income statement after allocation to equity accounted investments

		2023
	UK defined	US and
	benefit	other
	pension	pension	Other
	schemes	schemes	schemes	Total
	£m	£m	£m	£m
Included in operating costs:
Current service cost	(85)	(6)	(22)	(113)
Past service cost – plan amendments	–	–	(2)	(2)
Administrative expenses	(22)	(15)	(1)	(38)
	(107)	(21)	(25)	(153)
Included in other income:
Pensions settlement gain	–	60	–	60
Included in net finance costs:
Net interest income/(expense) on post-employment benefit obligations	66	(20)	(5)	41
Group defined benefit schemes included in share of results of equity accounted
investments:
Group’s share of equity accounted investments’ operating costs	(5)	–	–	(5)
Group’s share of equity accounted investments’ net finance income	3	–	–	3

		2022
	UK defined	US and
	benefit	other
	pension	pension	Other
	schemes	schemes	schemes	Total
	£m	£m	£m	£m
Included in operating costs:
Current service cost	(210)	(12)	(28)	(250)
Past service cost – plan amendments	13	2	(1)	14
Administrative expenses	(16)	(7)	(1)	(24)
	(213)	(17)	(30)	(260)
Included in net finance costs:
Net interest expense on post-employment benefit obligations	(28)	(6)	(3)	(37)
Group defined benefit schemes included in share of results of equity accounted
investments:
Group’s share of equity accounted investments’ operating costs	(10)	–	–	(10)
Group’s share of equity accounted investments’ net finance costs	(1)	–	–	(1)

Defined contribution schemes

The Group incurred a charge of £309m (2022 £299m) in relation to defined contribution schemes for employees.

201

BAE Systems plc Annual Report 2023

Additional informationGovernance Financial statementsStrategic report

Notes to the Consolidated financial statements continued

24. Post-employment benefits continued

IAS 19 accounting continued

Sensitivity analysis

The sensitivity information has been derived using scenario analysis from the actuarial assumptions as at 31 December 2023 and keeping

all other assumptions as set out on page 195.

The pension schemes hold a number of unquoted pooled investment vehicles, which are investments in private markets. These are valued

based on latest available valuation reports, and as noted on page 158, these valuations are subject to estimation uncertainty as their valuation

techniques incorporate a number of assumptions, including those associated with the impact of climate change. Should these funds’ actual

valuations at 31 December 2023 be on average 2% different to those assumed, this would result in a £0.2bn (2022 £0.2bn) change in the

valuation of the assets.

Financial assumptions

The estimated impact of changes in the discount rate and inflation assumptions on the defined benefit pension obligation, together with the

estimated impact on scheme assets, is shown in the table below. The estimated impact on scheme assets takes into account the Group’s risk

management activities in respect of interest rate and inflation risk. The sensitivity analysis on the defined benefit obligation is measured on

an IAS 19 accounting basis.

	Decrease/(increase)	(Decrease)/increase
	in pension obligation	in scheme assets
	£bn	£bn
Discount rate:
0.5 percentage point increase/decrease	1.3/(1.5)	(1.3)/1.5
1.0 percentage point increase/decrease	2.5/(3.1)	(2.5)/3.2
2.0 percentage point increase/decrease	4.6/(6.9)	(4.5)/7.1
3.0 percentage point increase/decrease	6.3/(11.8)	(6.1)/12.0

	(Increase)/decrease	Increase/(decrease)
	in pension obligation	in scheme assets
	£bn	£bn
Inflation:
0.1 percentage point increase/decrease	(0.1)/0.1	0.2/(0.2)
0.5 percentage point increase/decrease	(0.7)/0.7	0.8/(0.8)
1.0 percentage point increase/decrease	(1.4)/1.3	1.8/(1.5)

Demographic assumptions

Changes in the life expectancy assumption, including the benefit of longevity swap arrangements (see longevity risk on page 194), would have

the following effect on the total net IAS 19 surplus:

	(Decrease)/increase
	in net surplus
	£bn
Life expectancy:
One-year increase/decrease	(0.8)/0.8

1. Before allocation to equity accounted investments and deduction of withholding tax.

202

BAE Systems plc Annual Report 2023

Consolidated financial statements

25. Provisions

A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, it

is probable that an outflow of economic benefits will be required to settle the obligation and the amount has been reliably estimated.

If the effect is material, provisions are determined by discounting the expected future cash flows at an appropriate pre-tax risk-free

discount rate.

Warranties and after-sales services

Where warranties and after-sales services are provided in the normal course of business, provisions for associated costs are made based

on an assessment of future claims with reference to past experience. A provision for warranties is recognised when the underlying

products and services are sold. The provision is based on historical warranty data and a weighting of possible outcomes against their

associated probabilities.

Reorganisations

A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring

has either commenced or has been announced to those affected. The costs associated with the reorganisation programmes are supported

by detailed plans and based on previous experience as well as other known factors. Future operating costs are not provided for.

Legal, contractual and environmental

The Group holds provisions for expected legal, contractual and environmental costs that it expects to incur over an extended period.

Management exercises judgement to determine the amount of these provisions. Provision is made for known issues based on past

experience of similar items and other known factors. Each provision is considered separately and the amount provided reflects the

best estimate of the most likely amount, being the single most likely amount in a range of possible outcomes.

	Warranties		Legal,
	and		contractual
	after-sales		and
	services	Reorganisations	environmental	Other	Total
	£m	£m	£m	£m	£m
Non-current	57	9	244	28	338
Current	52	25	129	43	249
At 1 January 2023	109	34	373	71	587
Created	43	8	106	43	200
Utilised	(27)	(15)	(77)	(10)	(129)
Transfer from other balance sheet categories	2	–	–	–	2
Released	(18)	(8)	(37)	(19)	(82)
Net present value adjustments	–	–	7	1	8
Foreign exchange adjustments	(4)	(1)	(10)	(3)	(18)
At 31 December 2023	105	18	362	83	568
Represented by:
Non-current	55	7	236	34	332
Current	50	11	126	49	236
	105	18	362	83	568

Warranties and after-sales services

Warranty and after-sales services provisions are generally utilised within three years post-delivery. Whilst actual events could result in potentially

significant differences to the value, but not the timing, of the outflows in relation to the provisions, management has reflected current

knowledge in assessing the provision levels.

Reorganisations

Reorganisation provisions are generally utilised within one to three years. There is limited volatility around the timing and amount of the ultimate

outflows related to these provisions.

Legal, contractual and environmental

Reflecting the inherent uncertainty within many legal proceedings, the amount of the outflows could differ significantly from the amount provided.

While the timing of the outflows is also uncertain, the Group expects these provisions to be utilised over a period of approximately 25 years.

Other

There are no individually significant provisions included within other provisions.

203

BAE Systems plc Annual Report 2023

Additional informationGovernance Financial statementsStrategic report

Notes to the Consolidated financial statements continued

26. Share capital and other reserves

Share capital

		Equity		Non-equity	Total
		Ordinary shares of 2.5p each		Special Share of £1
	Number of	Nominal	Number of	Nominal	Nominal
	shares	value	shares	value	value
	m	£m		£	£m
Issued and fully paid
At 1 January 2022	3,404	85	1	1	85
Shares cancelled	(107)	(3)	–	–	(3)
At 31 December 2022	3,297	82	1	1	82
Shares cancelled	(58)	(1)	–	–	(1)
At 31 December 2023	3,239	81	1	1	81

Special Share

One Special Share of £1 in the Company is held on behalf of the Secretary of State for Business and Trade (the Special Shareholder). Certain

provisions of the Company’s Articles of Association cannot be amended without the consent of the Special Shareholder. These provisions

include the requirement that no foreign person, or foreign persons acting in concert, can have more than a 15% voting interest in the Company,

the requirement that the majority of the directors are British, and the requirement that the Chief Executive or any executive Chair are British.

The effect of these requirements can also be amended by regulations made by the directors and approved by the Special Shareholder.

The Special Shareholder may require the Company at any time to redeem the Special Share at par or to convert the Special Share into one

ordinary voting share. The Special Shareholder is entitled to attend a general meeting, but has no right to vote or any other rights at such

meeting, other than to speak in relation to any business in respect of the Special Share.

Treasury shares

As at 31 December 2023, 204,041,705 (2022 220,086,959) ordinary shares of 2.5p each with an aggregate nominal value of £5,101,043

(2022 £5,502,174) were held in treasury. During 2023, 16,045,254 (2022 16,720,072) treasury shares were used to satisfy awards and options

under the Share Incentive Plan, International Share Incentive Plan, Performance Share Plan, the Performance Shares and Restricted Shares

elements of the Long-Term Incentive Plan, the Executive Share Option Plan, the Group Free Shares Plan and the International Profit Sharing

Scheme.

BAE Systems Employee Share Option Plan (ESOP) Trust

The Group has an ESOP discretionary trust to administer the share plans and to acquire Company shares, using funds loaned by the Group, to meet

commitments to Group employees. Dividend waivers were in operation for shares within the ESOP Trust, other than those owned beneficially

by the participants, for the dividends paid in the year.

At 31 December 2023, the ESOP Trust held 8,665,966 (2022 7,268,002) ordinary shares of 2.5p each, with a market value of £96m

(2022 £62m). The shares held by the ESOP Trust are recorded at cost and deducted from retained earnings until such time as the shares vest

unconditionally to employees.

A dividend waiver was also in operation for the dividends paid in the year over shares within the Company’s share incentive plan trusts other

than those shares owned beneficially by the participants.

Own shares held

Own shares held, including treasury shares and shares held by BAE Systems ESOP Trust, are recognised as a deduction from retained earnings.

204

BAE Systems plc Annual Report 2023

Consolidated financial statements

26. Share capital and other reserves continued

Equity dividends

Equity dividends on ordinary share capital are recognised as a liability on the date that the shareholder’s right to receive payment is

established.

	2023	2022
	£m	£m
Final 16.6p dividend per ordinary share paid in the year (2022 15.2p)	508	480
Interim 11.5p dividend per ordinary share paid in the year (2022 10.4p)	349	322
	857	802

After the balance sheet date, the directors proposed a final dividend of 1 8.5p per ordinary share. The dividend proposed amounts to approximately

£599m, although the final payment is likely to be lower as a result of the impact of share repurchases. The dividend, which is subject to

shareholder approval, will be paid on 3 June 2024 to shareholders registered on 19 April 2024. The ex-dividend date is 18 April 2024. The

payment of this dividend will not have any tax expense consequences for the Group.

Shareholders who do not at present participate in the Company’s Dividend Reinvestment Plan and wish to receive the final dividend in shares

rather than cash should complete a mandate form for the Dividend Reinvestment Plan and return it to the registrars no later than 10 May 2024.

Other reserves

				Capital
	Merger	Statutory	Revaluation	redemption	Hedging	Translation
	reserve	reserve	reserve	reserve	reserve	reserve	Total
	£m	£m	£m	£m	£m	£m	£m
At 1 January 2022	4,589	202	10	5	51	1,030	5,887
Subsidiaries:
Currency translation on foreign currency net investments	–	–	–	–	–	1,151	1,151
Reclassification of cumulative currency translation reserve
on disposal of subsidiary	–	–	–	–	–	(17)	(17)
Net amounts debited to hedging reserve	–	–	–	–	(65)	–	(65)
Equity accounted investments (net of tax)	–	–	–	–	3	(11)	(8)
Purchase of own shares	–	–	–	3	–	–	3
At 31 December 2022	4,589	202	10	8	(11)	2,153	6,951
Subsidiaries:
Currency translation on foreign currency net investments	–	–	–	–	–	(502)	(502)
Net amounts debited to hedging reserve	–	–	–	–	(58)	–	(58)
Equity accounted investments (net of tax)	–	–	–	–	5	6	11
Purchase of own shares	–	–	–	1	–	–	1
At 31 December 2023	4,589	202	10	9	(64)	1,657	6,403

205

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Additional informationGovernance Financial statementsStrategic report

Notes to the Consolidated financial statements continued

26. Share capital and other reserves continued

Other reserves con tinued

Merger reserve

The merger reserve arose on the acquisition of the Marconi Electronic Systems (MES) business by British Aerospace in 1999 to form BAE Systems,

and represents the amount by which the fair value of the shares issued by British Aerospace as consideration exceeded their nominal value.

Statutory reserve

Under Section 4 of the British Aerospace Act 1980, this reserve may only be applied in paying up unissued shares of the Company to be allotted

to members of the Company as fully paid bonus shares.

Revaluation reserve

The revaluation reserve relates to the revaluation at fair value of the net assets of the BVT joint venture previously held as an equity accounted

investment on the acquisition of the remaining 45% interest in 2009.

Capital redemption reserve

The capital redemption reserve represents the cumulative nominal value of the Company’s ordinary shares repurchased and subsequently cancelled.

Hedging reserve

The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related

to hedged transactions that have not yet occurred.

Translation reserve

The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations.

Capital

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

At 31 December 2023, the Group’s capital was £10,787m (2022 £11,411m), which comprised total equity of £10,723m (2022 £11,400m),

excluding amounts accumulated in equity relating to cash flow hedges of £(64)m (2022 £(11)m). Net debt (excluding lease liabilities) was

£1,022m (2022 £2,023m).

The capital structure of the Group reflects the judgement of the directors of an appropriate balance of funding required. The Group’s policy

is to maintain an investment grade credit rating and ensure operating flexibility, whilst:

– meeting its pension obligations;

– investing in research and technology and pursuing other organic investment opportunities;

– paying dividends in line with the Group’s policy of long-term sustainable cover of around two times underlying earnings (see page 228);

– making accelerated returns of capital to shareholders when the balance sheet allows and 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.

Purchase of own shares

On 29 July 2021, the Company announced the details of a share buyback programme to repurchase up to £500m of its own shares over

the following 12 months (the 2021 share buyback programme). The 2021 share buyback programme was completed on 2 February 2022.

During 2022, 24,253,065 shares were repurchased under the 2021 share buyback programme for a total price, including transaction costs,

of £132m.

In July 2022, the directors approved a new share buyback programme (the 2022 share buyback programme) of up to £1.5bn over the next three

years under the same terms as the 2021 buyback programme. During 2022, 82,997,065 shares were repurchased under the 2022 share buyback

programme for a total price, including transaction costs, of £664m. In total during 2022, 107,250,130 shares were repurchased under the 2021

and 2022 share buyback programmes for a total price, including transaction costs, of £796m.

During 2023, the total number of shares repurchased under the 2022 share buyback programme was 58,689,756 for a total price, including

transaction costs, of £558m.

All ordinary shares acquired have been subsequently cancelled, with the nominal value of ordinary shares cancelled deducted from share capital

against the capital redemption reserve.

As part of the 2021 and 2022 buyback programmes, it was agreed that should a better alternative use for the Company’s cash reserves be

identified, the share buyback programmes would be ceased, and the money instead used for the alternative purpose. Therefore, when the

Company issued a mandate to the brokers to purchase shares on their behalf, the mandates were structured such that they could be revoked

at any point. As such, no financial liability has been recognised for shares not yet purchased under the 2022 programme.

In August 2023, the directors approved a further share buyback programme (the 2023 share buyback programme) of up to £1.5bn, which

is expected to commence after completion of the 2022 share buyback programme and conclude within three years of its commencement.

206

BAE Systems plc Annual Report 2023

Consolidated financial statements

27. Movement in assets and liabilities arising from financing activities

				Non-cash movements
	As at		Foreign			Net		As at
	1 January		exchange	Fair value		finance	Other	31 December
	2023	Cash flow	movements	Leases	adjustments	costs	movements	2023
	£m	£m	£m	£m	£m	£m	£m	£m
Assets
Other financial assets	170	(200)	–	–	166	7	–	143
	170	(200)	–	–	166	7	–	143
Liabilities
Loans	(5,242)	35	299	–	–	(203)	–	(5,111)
Lease liabilities	(1,616)	346	60	(157)	–	(53)	–	(1,420)
Other financial liabilities	(114)	406	–	–	(441)	(19)	–	(168)
	(6,972)	787	359	(157)	(441)	(275)	–	(6,699)
		587
Other interest paid		95
Purchase of own shares		561
Equity dividends paid		857
Dividends paid to non-controlling interests		88
Net cash flow from financing activities		2,188

				Non-cash movements
	As at		Foreign			Net		As at
	1 January		exchange	Fair value		finance	Other	31 December
	2022	Cash flow	movements	Leases	adjustments	costs	movements	2022
	£m	£m	£m	£m	£m	£m	£m	£m
Assets
Other financial assets	122	(550)	–	–	581	17	–	170
	122	(550)	–	–	581	17	–	170
Liabilities
Loans	(5,061)	615	(584)	–	–	(212)	–	(5,242)
Lease liabilities	(1,295)	284	(95)	(464)	–	(48)	2	(1,616)
Other financial liabilities	(163)	205	–	–	(155)	(1)	–	(114)
	(6,519)	1,104	(679)	(464)	(155)	(261)	2	(6,972)
		554
Other interest paid		23
Purchase of own shares		788
Equity dividends paid		802
Dividends paid to non-controlling interests		166
Net cash flow from financing activities		2,333

1. Cash flow movements represent both payments or receipts of principal and payments of interest, which are presented separately in the Consolidated cash flow statement.

2. Other movements includes movements arising on the acquisition or disposal of businesses.

3. Excluding cash flow hedges, for which the cash flow is reported in line with the underlying transaction. See note 15 for an analysis of other financial assets and liabilities.

207

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Notes to the Consolidated financial statements continued

28. Fair value measurement

Fair value of financial instruments

Certain of the Group’s financial instruments are held at fair value.

The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction

between market participants at the balance sheet date.

The fair values of financial instruments held at fair value have been determined based on available market information at the balance sheet date,

and the valuation methodologies listed below:

– the fair values of forward foreign exchange contracts are calculated by discounting the contracted forward values and translating at the

appropriate balance sheet rates;

– the fair values of both interest rate and cross-currency swaps are calculated by discounting expected future principal and interest cash flows

and translating at the appropriate balance sheet rates; and

– the fair values of money market funds are calculated by multiplying the net asset value per share by the investment held at the balance

sheet date.

The derivative fair values are based on reputable third party forecast data, and then adjusted for credit risk, including the Group’s own credit

risk, and market risk.

Due to the variability of the valuation factors, the fair values presented at 31 December may not be indicative of the amounts the Group will

realise in the future.

Fair value hierarchy

The fair value measurement hierarchy is as follows:

– Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities;

– Level 2 – Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices)

or indirectly (i.e. derived from prices); and

– Level 3 – Inputs for the asset or liability that are not based on observable market data (i.e. unobservable inputs).

Carrying amounts and fair values of certain financial instruments

		2023		2022
		Carrying	Fair	Carrying	Fair
		amount	value	amount	value
	Note	£m	£m	£m	£m
Financial instruments measured at fair value:
Non-current
Other investments at fair value through other comprehensive income	13	84	84	99	99
Other financial assets	15	227	227	322	322
Other financial liabilities	15	(227)	(227)	(272)	(272)
Current
Other financial assets	15	205	205	252	252
Money market funds	19	1,375	1,375	1,149	1,149
Other financial liabilities	15	(295)	(295)	(328)	(328)
Financial instruments not measured at fair value:
Non-current
Loans	21	(4,432)	(4,045)	(5,189)	(4,588)
Current
Loans	21	(679)	(672)	(53)	(53)

All of the financial assets and liabilities measured at fair value are classified as level 2 using the fair value hierarchy, except for money market

funds, which are classified as level 1, and other investments, which are at a combination of level 1 and level 3. The total value of investments

classified as level 3 is immaterial. There were no transfers between levels during the year. Alternative valuation techniques would not materially

change the valuations presented.

Financial assets and liabilities in the Group’s Consolidated balance sheet are either held at fair value or at amortised cost. With the exception of

loans, the carrying value of financial instruments measured at amortised cost approximates their fair value. For the bonds included within loans

the fair value of loans presented in the table above is derived from market prices as of 31 December, classified as level 1 using the fair value

hierarchy. The fair value of the private placement included within loans has been valued based on the interest yield on an equivalent observable

bond, applied to the private placement cash flows, and has been classified as level 3 using the fair value hierarchy.

208

BAE Systems plc Annual Report 2023

Consolidated financial statements

29. Share-based payments

The Group has granted equity-settled share options and Long-Term Incentive Plan arrangements which are measured at fair value at the

date of grant using an option pricing model. The fair value is expensed on a straight-line basis over the vesting period, based on the Group’s

estimate of the number of shares that will actually vest.

Details of the terms and conditions of each share-based payment plan are given in the Annual remuneration report on pages 107 to 134.

Expense in year

	2023	2022
	£m	£m
Executive Share Option Plan	8	10
Performance Share Plan	43	35
Restricted Share Plan	12	10
	63	55

The Group also incurred a charge of £47m (2022 £46m) in respect of the equity-settled all-employee Free Shares and Matching Partnership Shares

elements of the Share Incentive Plan.

Executive Share Option Plan

	2023		2022
		Weighted		Weighted
		average		average
	Number of	exercise	Number of	exercise
	shares	price	shares	price
	’000	£	’000	£
Outstanding at 1 January	34,814	5.58	47,280	5.16
Granted during the year	–	–	8,141	7.39
Exercised during the year	(9,380)	5.01	(18,020)	5.30
Expired during the year	(1,012)	6.10	(2,587)	5.50
Outstanding at 31 December	24,422	5.78	34,814	5.58
Exercisable at 31 December	8,284	5.21	8,271	5.38

	2023	2022
Range of exercise price of outstanding options (£)	4.12 – 7.83	3.89 – 7.83
Weighted average remaining contracted life (years)	7	7
Weighted average fair value of options granted (£)	–	1.87

Performance Share Plan and Restricted Share Plan

		Performance Share Plan		Restricted Share Plan
	2023	2022	2023	2022
	Number of	Number of	Number of	Number of
	shares	shares	shares	shares
	’000	’000	’000	’000
Outstanding at 1 January	27,343	27,915	5,805	5,413
Granted during the year	10,897	6,799	1,705	2,205
Exercised during the year	(4,293)	(3,719)	(1,688)	(1,383)
Expired during the year	(942)	(3,652)	(241)	(430)
Outstanding at 31 December	33,005	27,343	5,581	5,805
Exercisable at 31 December	1,508	387	108	38

	2023	2022	2023	2022
Weighted average remaining contracted life (years)	5	5	5	5
Weighted average fair value of awards granted (£)	9.73	7.32	9.78	7.49

The exercise price for the Performance Share Plan and Restricted Share Plan is £nil (2022 £nil).

209

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Notes to the Consolidated financial statements continued

29. Share-based payments continued

Details of options/awards granted in the year

The fair value of equity-settled options/awards granted in the year has been measured using the weighted average inputs below and the

following valuation models:

Executive Share Option Plan – Binomial

Performance Share Plan – Monte Carlo

Restricted Share Plan – Dividend valuation

	2023	2022
Range of share price at date of grant (£)	9.75 – 10.14	7.35 – 7.83
Expected option/award life (years)	3 – 7	3 – 10
Volatility (%)	31	29
Risk-free interest rate (%)	3 – 4	1 – 3

Volatility was calculated with reference to the Group’s weekly share price volatility, after allowing for dividends, for the greater of 30 weeks or

for the period until vest date.

The average share price in the year was £9.77 (2022 £7.53).

30. Related party transactions

The Group has a related party relationship with its directors and key management personnel (see below), equity accounted investments (note 12)

and pension schemes (note 24).

Transactions with related parties occur 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		Purchases from			Amounts owed by		Amounts owed to	Management
	related parties		related parties		related parties			related parties	recharges 1
	2023	2022	2023	2022	2023	2022	2023	2022	2023	2022
Related party	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Eurofighter Jagdflugzeug GmbH	1,377	1,219	303	442	32	67	116	91	–	–
FADEC International LLC	118	73	–	–	26	–	–	–	–	–
MBDA SAS	15	19	258	76	2	6	1,390	949	8	8
Panavia Aircraft GmbH	33	22	38	49	1	1	1	2	–	–
BAE Systems Pension Schemes	–	–	24	20	–	–	202	193	–	–
Other	143	11	35	28	18	3	37	27	–	–
	1,686	1,344	658	615	79	77	1,746	1,262	8	8

1. Also relates to disclosures under IAS 24 Related Party Disclosures, for the parent company, BAE Systems plc. At 31 December 2023, £1,509m (2022 £1,021m) was owed

by BAE Systems plc and £237m (2022 £241m) by other Group subsidiaries.

The Group also manages certain treasury functions on behalf of some of their equity accounted investments. This includes entering into

foreign exchange derivatives on their behalf. As at 31 December 2023, we entered into forward contracts to purchase €297m, purchase

$47m and purchase £12m worth of other currencies (2022 purchase €313m, sell $21m and purchase £14m worth of other currencies) on

their behalf. No service fee is charged for these arrangements.

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 115 to 134. Total emoluments for directors and key management personnel charged to the Consolidated

income statement were:

	2023	2022
	£’000	£’000
Short-term employee benefits	22,146	22,238
Post-employment benefits	1,534	677
Share-based payments	15,655	12,023
	39,335	34,938

210

BAE Systems plc Annual Report 2023

Consolidated financial statements

31. Contingent liabilities

Contingent liabilities are potential future cash outflows which are either not probable or cannot be measured reliably.

The Group has entered into a number of guarantee and performance bond arrangements in the normal course of business. Various Group

undertakings are parties to legal actions and claims which arise in the normal course of business. Provision is made for any amounts that

the directors consider may become payable (see note 25).

The Group believes that any significant liability in respect of its guarantees and performance bond arrangements, and legal actions and

claims not already provided for, is remote.

32. Acquisition of businesses

Businesses acquired during 2023

Eurostep acquisition

On 31 October, the Group acquired 100% of the share capital of Eurostep, a secure data sharing company headquartered in Sweden,

for consideration of £9m. The company will form part of the Cyber & Intelligence segment, within the Digital Intelligence business.

The results and financial position of the acquired businesses have been consolidated from the date of acquisition.

Businesses acquired during 2022

On 11 November 2021, the Group announced its intention to acquire 100% of the share capital of BIS Invest S.a.r.l. and its subsidiaries,

together the Bohemia Interactive Simulations Group (BISim Group) for a consideration of $200m (£151m). On 4 March 2022, this deal passed

all required pre-closing activities, and the acquisition was completed. Using the latest game-based technology, the experienced BISim team of

engineers develops high-fidelity, cost-effective training and simulation software products and components to meet the growing demand for

defence applications. BISim forms part of the Cyber & Intelligence segment.

The results and financial position of the acquired business have been consolidated from the date of acquisition. The purchase price allocation

exercise was finalised in the year, with no changes, and is summarised below.

Acquisition consideration and fair value of net assets acquired

	£m
Intangible assets	71
Property, plant and equipment	1
Right-of-use assets	1
Receivables	10
Deferred tax assets	1
Lease liabilities	(1)
Payables	(8)
Deferred tax liabilities	(14)
Provisions	(6)
Cash and cash equivalents	5
Net identifiable assets acquired	60
Goodwill	91
Net assets acquired	151
Satisfied by:
Cash consideration	151
Total consideration	151

211

BAE Systems plc Annual Report 2023

Additional informationGovernance Financial statementsStrategic report

Notes to the Consolidated financial statements continued

32. Acquisition of businesses continued

The net outflow of cash in respect of the acquisition is as follows:

	£m
Cash consideration	151
Cash and cash equivalents acquired	(5)
Net cash outflow in respect of the acquisition of the business	146

The goodwill recognised is primarily attributable to expected synergies. No goodwill is expected to be deductible for tax purposes. Goodwill has

been allocated to the Intelligence & Security business. No impairment losses have been recognised in respect of goodwill in the year ended

31 December 2022.

The acquisition contributed £38m to the Group’s revenue and £8m to the Group’s underlying EBIT

between the date of acquisition and

31 December 2022. If it had been completed on 1 January 2022, the Group’s revenue from the acquisition would have been £42m, and the

Group’s underlying EBIT

would have been £8m for the year ended 31 December 2022.

Contractual cash flows on trade, other and contract receivables are recognised net of expected credit losses. No contingent liabilities have been

recognised or require disclosure in respect of this acquisition.

1. Underlying EBIT is an alternative performance measure defined in the Alternative performance measures section on page 227. It is presented here as our internal measure

of segmental performance, to provide additional information on performance to the user.

33. Business disposals

Business disposals during 2023

There were no business disposals in 2023. The Group incurred cash outflows of £8m in the current year relating to the 2022 disposal of the

financial crime detection business from Digital Intelligence, which had been fully provided for in 2022.

Business disposals during 2022

On 9 July 2022, the Group entered into an agreement for the sale of BAE Systems’ financial crime detection business from the Digital Intelligence

business in our Cyber & Intelligence segment. The sale to SymphonyAI completed on 28 October 2022. Disposal costs of £25m were incurred in

relation to the sale, relating to costs incurred in the sale and operational separation of the business.

The gain recognised on disposal was as follows:

	£m
Cash received or receivable:
Cash	131
Total disposal consideration	131
Carrying amount of net assets sold (see below)	(29)
Disposal costs	(25)
Cumulative currency translation gain	17
Gain on sale before tax	94
Net cash inflow arising on disposal:
Cash consideration received	131
Less: cash and cash equivalents disposed	(17)
Less: disposal costs	(13)
	101

Assets and liabilities presented as at the date of disposal were as follows:

	£m
Intangible assets including goodwill	23
Right-of-use assets	3
Trade, other and contract receivables	26
Cash and cash equivalents	17
Total assets	69
Lease liabilities	(3)
Contract liabilities	(9)
Trade and other payables	(27)
Provisions	(1)
Total liabilities	(40)
Net assets disposed	29

212

BAE Systems plc Annual Report 2023

Consolidated financial statements

34. Events after the reporting period

Ball Aerospace acquisition

On 17 August 2023, the Group announced its intention to acquire 100% of the share capital of the Ball Aerospace division for consideration

of $5.5bn (£4.4bn), of which $0.75bn is expected to be recoverable under a tax benefit associated with the acquisition. The acquisition

completed on 16 February 2024. Upon completion, the Group drew down $4.0bn (£3.2bn) under a bridge finance facility, and paid $1.5bn

(£1.2bn) in cash from the Group’s existing cash resources, in initial settlement of the transaction.

Ball Aerospace is a leading provider of spacecraft, mission payloads, optical systems, and antenna systems. Headquartered in Colorado, with

more than 5,200 employees, it has existing customer relationships among the Intelligence Community, US Department of Defense, and civilian

space agencies. It is well positioned across several markets; military and civil space, C4ISR, and missile and munitions. The space market exposure

extends across positions in defence, intelligence, and scientific missions. The Tactical Solutions business is well positioned to capture expected

increases in demand for missiles and munitions.

Given the limited time since the acquisition date and the size and complexity of the transaction, the Group is working through the accounting

under IFRS 3 Business Combinations and is unable to reasonably estimate and determine the fair value of net assets acquired and resulting

goodwill at the date of this report. The Group will work through the fair value exercise under IFRS 3 and provisional disclosures will be reported

in the Group’s 2024 half-year results.

Air Astana IPO

On 12 January 2024, Air Astana announced its intention to proceed with a joint initial public offering (IPO) on the London Stock Exchange,

the Astana International Exchange in Kazakhstan, and the Kazakhstan Stock Exchange. On 9 February 2024, the IPO was launched. As a result

of the IPO, it is expected that the total shareholding held by BAE Systems in Air Astana will be between 15% and 17%, with proceeds from the

sale of shares of between $227m (£180m) and $207m (£164m). The Group will continue to equity account for the remaining investment.

At 31 December 2023, the Group held a 49% shareholding in Air Astana, with a carrying value of £84m. At that time, management did not

consider that the IPO was highly probable as the listing was not being actively marketed, the Air Astana Board of Directors had not approved

the IPO, and it was not reasonably certain that the intended offering value would be achieved. Consequently, the investment was not held for

sale as at 31 December 2023 and the subsequent completion of the IPO is considered to be a non-adjusting post balance sheet event.

Malloy Aeronautics acquisition

On 31 January 2024 the Group acquired 100% of the share capital of Malloy Aeronautics for £60m cash consideration, plus adjustments for

working capital and contingent consideration, for which the fair value is still being assessed. Malloy Aeronautics designs and supplies all-electric

uncrewed aerial systems to both civil and military customers. Their range of uncrewed, heavy lift quadcopters are capable of lifting payloads

from 68kg to 300kg over short-range missions. Malloy Aeronautics will form part of FalconWorks

, the research and development business

within the Air segment.

213

BAE Systems plc Annual Report 2023

Additional informationGovernance Financial statementsStrategic report

Notes to the Consolidated financial statements continued

35. Information about related undertakings

In accordance with Section 409 of the Companies Act 2006, a full list of subsidiaries, joint ventures, associated undertakings, and significant

holdings in undertakings other than subsidiary undertakings of the Group at 31 December 2023 is disclosed below. All subsidiary undertakings

are subsidiary undertakings of their immediate parent undertaking(s) pursuant to section 1162 (2) (a) of the Companies Act 2006 unless

otherwise indicated. Unless otherwise stated, the aggregate percentage of capital held by the Group is 100%, the Group’s shareholding

represents ordinary shares of equal value and voting rights held indirectly by BAE Systems plc, the year end is 31 December, the country of

incorporation is the United Kingdom and the address of the registered office is Victory Point, Lyon Way, Frimley, Camberley, Surrey GU16 7EX,

England. For companies incorporated outside of the United Kingdom, the country of incorporation is shown in the address. No subsidiary

undertakings have been excluded from the consolidation.

Subsidiary undertakings – wholly-owned

4219 Lafayette, LLC

4219 Lafayette Center Drive, Chantilly VA 20151, United States

Aircraft Research Association Limited

Manton Lane, Bedford MK41 7PF, United Kingdom

Alvis Limited

Alvis Pension Scheme Trustees Limited

Alvis Vickers Limited

Armstrong Whitworth Aircraft Limited

ASC Shipbuilding Pty Limited

Bldg 01, Level 2, 640 Mersey Road North, Osborne SA 5017,

Australia

Australian Marine Engineering Corporation (Finance)

Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

Avro International Aerospace Limited

BAE Systems (Al Diriyah C4i) Limited

BAE Systems (Canada) Inc.

220 Laurier Avenue West, Suite 1200, Ottawa ON K1P 5Z9,

Canada

BAE Systems (Combat and Radar Systems) Limited

Charter Place, 23/27 Seaton Place, St. Helier, Jersey JE1 1JY

BAE Systems (Corporate Air Travel) Limited

BAE Systems (Defence Systems) Limited

BAE Systems (Dynamics) Limited

BAE Systems (Farnborough 3) Limited

BAE Systems (Finance) Limited

BAE Systems (Funding Four) Unlimited Company

Riverside One, Sir John Rogerson’s Quay, Dublin D02 X576,

Ireland

BAE Systems (Funding Three) Limited

BAE Systems (Funding Two) Limited

BAE Systems (Gripen Overseas) Limited

BAE Systems (Holdings) Limited

BAE Systems (International) Limited

BAE Systems (Kazakhstan) Limited

BAE Systems (Kuwait) Limited

BAE Systems (Land and Sea Systems) Limited

BAE Systems (Malaysia) Sdn Bhd

Level 25 Menara Hong Leong, No. 6 Jalan Damanlela,

Bukit Damansara, 50490 Kuala Lumpur, Malaysia

BAE Systems (MEH) Limited

BAE Systems (Military Air) Overseas Limited

BAE Systems (Nominees) Limited

BAE Systems (Oman) Limited

BAE Systems (Operations) Limited

BAE Systems (Operations) Singapore Pte Limited

One Marina Boulevard #28-00, Singapore 018989, Singapore

BAE Systems (Overseas Holdings) Limited

BAE Systems (Poland) Sp. z o.o.

ul. Abp. A. Baraniaka 88, 61-131 Poznan, Poland

BAE Systems (Projects) Limited

BAE Systems (Property Investments) Limited

BAE Systems 2000 Pension Plan Trustees Limited

BAE Systems AB

Box 5676, SE-114 86 Stockholm, Sweden

BAE Systems Air Japan KK

1-1 Katamachi, Shinjuku-ku, Tokyo, Japan

BAE Systems Applied Intelligence (Asia Pacific)

Pte Limited

United Square, 101 Thomson Road, #25-03/04, 307591,

Singapore

BAE Systems Applied Intelligence (Connect) A/S

c/o Kromann Reumert, Sundkrogsgade 5, Copenhagen East,

2100, Denmark

BAE Systems Applied Intelligence (GCS) Limited

c/o Interpath Limited, 10 Fleet Place, London EC4M 7RB,

United Kingdom

BAE Systems Applied Intelligence (Integration) Limited

c/o Interpath Limited, 10 Fleet Place, London EC4M 7RB,

United Kingdom

BAE Systems Applied Intelligence (International)

Limited

Priestley Road, Surrey Research Park, Guildford, Surrey

GU2 7RQ, United Kingdom

BAE Systems Applied Intelligence (Japan) KK

12/F Ark Mori Building, 1-12-32 Akasaka, Minato-ku, Tokyo,

107-6024, Japan

BAE Systems Applied Intelligence (Spain) S.A.

Paseo de la Castellana, 141, Cuzco IV, 28046 Madrid, Spain

BAE Systems Applied Intelligence (UK) Limited

BAE Systems Applied Intelligence A/S

c/o Kromann Reumert, Sundkrogsgade 5, Copenhagen East,

2100, Denmark

BAE Systems Applied Intelligence GCS Inc.

800 Towers Crescent Drive, 13th Floor #1382, Vienna VA

22182, United States

BAE Systems Applied Intelligence Integrated

Computer Solutions (Kuwait) (S.P.C.)

Al Hamra Tower, Office Number 3503, 35th Floor,

East Maqwa, Kuwait City, Kuwait

BAE Systems Applied Intelligence Limited

Surrey Research Park, Guildford, Surrey GU2 7RQ,

United Kingdom

BAE Systems Applied Intelligence LLC

8000 Towers Crescent Blvd, 13th Floor, Vienna VA 22182,

United States

BAE Systems Applied Intelligence Malaysia Sdn Bhd

Level 25, Menara Hong Leong, No. 6 Jalan Damanlela, Bukit

Damansara, 50490 Kuala Lumpur, Malaysia

BAE Systems Australia (Electronic Systems) Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

BAE Systems Australia (NSW) Holdings Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

BAE Systems Australia (NSW) Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

BAE Systems Australia Datagate Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

BAE Systems Australia Defence Holdings Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

BAE Systems Australia Defence Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

BAE Systems Australia Holdings Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

BAE Systems Australia Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

BAE Systems Australia Logistics Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

BAE Systems Australia Sea Sentinel Project Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

BAE Systems Avionics Singapore Pte Limited

One Marina Boulevard, #28-00, Singapore 018989, Singapore

BAE Systems Bofors AB

SE-691 80 Karlskoga, Sweden

BAE Systems Bofors Holdings Sdn Bhd

Level 21, Suite 21.01, The Gardens South Tower, Mid Valley

City, Lingkaran Syed Putra, 59200 Kuala Lumpur, Malaysia

BAE Systems C-ITS AB

Repslagaregatan 25, Linkoping SE-58222, Sweden

BAE Systems Communications Solutions LLC

Knowledge Oasis, Building 4, Second Floor, 0402-Z427,

Knowledge Oasis Muscat, PO Box 16, Postal Code 135,

Muscat, Oman

BAE Systems Controls Inc.

2941 Fairview Park Drive, Suite 100, Falls Church, VA, 22042,

United States

BAE Systems Creole Inc.

2941 Fairview Park Drive, Suite 100, Falls Church, VA, 22042,

United States

BAE Systems Datagate Holdings Limited

c/o Interpath Limited, 10 Fleet Place, London EC4M 7RB,

United Kingdom

BAE Systems Deployed Systems Limited

BAE Systems Digital Intelligence Pty Limited

Level 26, 459 Collins Street, Melbourne VIC 3000, Australia

BAE Systems do Brasil Ltda

SCN Quadra 5 Bloco A, Ed. Brasilia Shopping, Torre Norte,

Sala 426, Brasilia, DF CEP:70715-900, Brazil

BAE Systems Electronic Systems (Overseas) Limited

BAE Systems Electronics Limited

BAE Systems Enterprises Limited

BAE Systems Executive Pension Scheme Trustees

Limited

BAE Systems Finance Inc.

2941 Fairview Park Drive, Suite 100, Falls Church, VA, 22042,

United States

BAE Systems Flight Training (Australia) Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

BAE Systems Funds Management

3,14

BAE Systems GCS International Limited

BAE Systems Global Combat Systems Munitions

Limited

BAE Systems Global LLC

2941 Fairview Park Drive, Suite 100, Falls Church VA 22042,

United States

BAE Systems Hägglunds AB

Bjornavagen 2, Ornskoldsvik SE-89182, Sweden

BAE Systems Hawaii Shipyards Inc.

3049 Ualena Street, Suite 915, Honolulu, HI, 96819,

United States

214

BAE Systems plc Annual Report 2023

Consolidated financial statements

35. Information about related undertakings continued

Subsidiary undertakings – wholly-owned continued

BAE Systems Holding GmbH

Hauptstrasse 48, 82433 Bad Kohlgrub, Germany

BAE Systems Holdings (South Africa) (Pty) Limited

Central Office Park No. 5, 257 Jean Avenue, Centurion,

Gauteng, 0157, South Africa

BAE Systems Holdings B.V.

c/o IQ-EQ, Hoogoorddreef 15, 1101 BA Amsterdam,

Netherlands

BAE Systems Holdings Inc.

2941 Fairview Park Drive, Suite 100, Falls Church, VA, 22042,

United States

BAE Systems Holdings International LLC

2941 Fairview Park Drive, Suite 100, Falls Church, VA, 22042,

United States

BAE Systems Imaging Solutions Inc.

1841 Zanker Road, Suite 50, San Jose, CA, 95112,

United States

BAE Systems India (Homeland Security)

Private Limited

#201, 2nd Floor, World Mark 2, Asset No. 8, Aerocity, NH-8,

New Delhi – 110037, India

BAE Systems India (Services) Private Limited

#201, 2nd Floor, World Mark 2, Asset No. 8, Aerocity, NH-8,

New Delhi – 110037, India

BAE Systems India (Technology) Private Limited

#201, 2nd Floor, World Mark 2, Asset No. 8, Aerocity, NH-8,

New Delhi – 110037, India

BAE Systems India (Ventures) Private Limited

#201, 2nd Floor, World Mark 2, Asset No. 8, Aerocity, NH-8,

New Delhi – 110037, India

BAE Systems Information and Electronic Systems

Integration Inc.

65 Spit Brook Road, Nashua, NH, 03061, United States

BAE Systems Insurance (Isle of Man) Limited

Tower House, Loch Promenade, Douglas, IM1 2LZ, Isle of Man

BAE Systems Integrated System Technologies

(KSA) Limited

BAE Systems Integrated System Technologies

(Overseas) Limited

BAE Systems Integrated System Technologies Limited

BAE Systems International Inc.

65 Spit Brook Road, Nashua, NH, 03061, United States

BAE Systems Jacksonville Ship Repair LLC

8500 Hecksher Drive, Jacksonville FL 32226, United States

BAE Systems Japan GK

Ark Mori Building, 1-12-32 Akasaka, Minato-Ku, Tokyo, Japan

BAE Systems Land & Armaments Holdings LLC

2941 Fairview Park Drive, Suite 100, Falls Church VA 22042,

United States

BAE Systems Land & Armaments Inc.

2941 Fairview Park Drive, Suite 100, Falls Church, VA, 22042,

United States

BAE Systems Land & Armaments L.P.

2941 Fairview Park Drive, Suite 100, Falls Church, VA, 22042,

United States

BAE Systems Land Systems (Finance) Limited

BAE Systems Land Systems (Investments) Limited

BAE Systems Land Systems ATF Limited

BAE Systems Land Systems FMTV International Inc.

2941 Fairview Park Drive, Suite 100, Falls Church, VA, 22042,

United States

BAE Systems Land Systems Pinzgauer (Holdings)

Limited

BAE Systems Land Systems Pinzgauer Limited

BAE Systems MAI Turkey Hava Sistemleri A.S¸ .

Üniversiteler Mahallesi, Beytepe Lodumlu Köy Yolu Cad.

No: 5/348 Çankaya, Ankara, Turkey

BAE Systems Marine (Holdings) Limited

BAE Systems Marine (YSL) Limited

BAE Systems Marine Limited

BAE Systems Netherlands B.V.

c/o IQ-EQ, Hoogoorddreef 15, 1101 BA Amsterdam,

Netherlands

BAE Systems Norfolk Ship Repair Inc.

750 West Berkley Avenue, VA 23523, Norfolk, United States

BAE Systems Oman LLC

PO Box 74, Postal Code 111, Seeb, Oman

BAE Systems Ordnance Systems Inc.

4509 West Stone Drive, Kingsport, TN 37660-9982,

United States

BAE Systems Overseas Inc.

65 Spit Brook Road, Nashua, NH, 03061, United States

BAE Systems Pension Funds CIF Trustees Limited

BAE Systems Pension Funds Investment

Management Limited

3,16

BAE Systems Pension Funds Trustees Limited

BAE Systems Project Services Limited

BAE Systems Projects (Canada) Limited

BAE Systems Properties Limited

BAE Systems Quest Limited

3,8

c/o Interpath Limited, 10 Fleet Place, London EC4M 7RB,

United Kingdom

BAE Systems Regional Aircraft Colombia SAS

c/o Brigard & Urrutia, Calle 70 A No. 4-41, Bogotá, Colombia

BAE Systems Resolution Inc.

2941 Fairview Park Drive, Suite 100, Falls Church, VA, 22042,

United States

BAE Systems S&S Operations Inc.

2941 Fairview Park Drive, Suite 100, Falls Church, VA, 22042,

United States

BAE Systems San Diego Ship Repair Inc.

2205 East Belt Street, Foot of Sampson Street, CA 92113,

San Diego, United States

BAE Systems Saudi America Limited

Riyadh Kingdom Centre 28th Floor (REGUS),

PO Box 23088, Riyadh 11321, Central Province,

Riyadh, Kingdom of Saudi Arabia

BAE Systems Saudi Arabia (Maintenance

and Equipment Services) Limited

PO Box 1732, Riyadh 11441, Kingdom of Saudi Arabia

BAE Systems Saudi Arabia (Vehicles and

Equipment Holdings) Limited

BAE Systems Saudi Arabia (Vehicles and

Equipment Nominees) Limited

BAE Systems Saudi Limited

PO Box 1732, Riyadh 11441, Kingdom of Saudi Arabia

BAE Systems Serviços de Aviônicos Ltda.

Rua Ambrósio Molina, No. 1090. Bloco F, Eugênio de Melo,

São José dos Campos, São Paulo 12.247-000, Brazil

BAE Systems Share Plans Trustee Limited

3,8

c/o Interpath Limited, 10 Fleet Place, London EC4M 7RB,

United Kingdom

BAE Systems Services Limited

BAE Systems Shared Services Inc.

11215 Rushmore Drive, Charlotte, NC, 28277, United States

BAE Systems Ship Repair Inc.

750 West Berkley Ave., Norfolk, VA, 23523, United States

BAE Systems Southeast Shipyards AMHC Inc.

8500 Heckscher Drive, Jacksonville, FL, 32226, United States

BAE Systems Surface Ships (Holdings) Limited

BAE Systems Surface Ships (Overseas) Limited

BAE Systems Surface Ships (Projects) Limited

BAE Systems Surface Ships Integrated Support Limited

BAE Systems Surface Ships Intermediate

Holdings Limited

BAE Systems Surface Ships International Limited

BAE Systems Surface Ships Limited

BAE Systems Surface Ships Maritime Limited

BAE Systems Surface Ships Portsmouth Limited

BAE Systems Surface Ships Projects (Malaysia) Sdn Bhd

Level 29 Menara Binjai, No 2 Jalan Binjai, Off Jalan Ampang,

50450 Kuala Lumpur, Malaysia

BAE Systems Surface Ships Property Services Limited

c/o Interpath Limited, 10 Fleet Place, London EC4M 7RB,

United Kingdom

BAE Systems Surface Ships Support Limited

BAE Systems SWS Defence AB

SE-691 80 Karlskoga, Sweden

BAE Systems Tactical Vehicle Systems LP

2941 Fairview Park Drive, Suite 100, Falls Church VA 22042,

United States

BAE Systems Technology LLC

Office No. 458, Building No. 47, 90th North Street, Section 1,

New Cairo, 5th Settlement, Cairo, Egypt

BAE Systems Technology Solutions & Services Inc.

520 Gaither Road, Rockville, MD, 20850, United States

BAE Systems Training Services Limited

c/o Interpath Limited, 10 Fleet Place, London EC4M 7RB,

United Kingdom

BAE Systems TVS Holdings LLC

2941 Fairview Park Drive, Suite 100, Falls Church VA 22042,

United States

BAE Systems Ukraine LLC

23-A Building, Yaroslaviv Val Street, Kyiv City, 01054, Ukraine

BAE Systems Zephyr Corporation

United Agent Group, Inc. 3411 Silverside Rd. Tatnall,

Bldg. #104, Wilmington, DE, 19810, United States

BAE Systems Zephyr Fifth Corporation

United Agent Group, Inc. 3411 Silverside Rd. Tatnall,

Bldg. #104, Wilmington, DE, 19810, United States

BAE Systems Zephyr Fourth Corporation

United Agent Group, Inc. 3411 Silverside Rd. Tatnall,

Bldg. #104, Wilmington, DE, 19810, United States

BAE Systems Zephyr Second Corporation

United Agent Group, Inc. 3411 Silverside Rd. Tatnall,

Bldg. #104, Wilmington, DE, 19810, United States

BAE Systems Zephyr Third Corporation

United Agent Group, Inc. 3411 Silverside Rd. Tatnall,

Bldg. #104, Wilmington, DE, 19810, United States

BAE Systems, Inc.

2941 Fairview Park Drive, Suite 100, Falls Church, VA, 22042,

United States

BIS Invest S.à.r.l.

2, Place de Strasbourg, L-2562, Luxembourg, Grand Duchy

of Luxembourg

Bohemia Interactive Australia Pty Ltd

Unit 2, Building A, 2 Technology Place, Williamtown

NSW 2318, Australia

Bohemia Interactive Simulations GK

Karolinská, 654/2, Karin, 186 00 Prague 8, Czech Republic

(incorporated in Japan)

215

BAE Systems plc Annual Report 2023

Additional informationGovernance Financial statementsStrategic report

Notes to the Consolidated financial statements continued

35. Information about related undertakings continued

Subsidiary undertakings – wholly-owned continued

Bohemia Interactive Simulations GmbH

Vistra Corporate Services, Westendstraße 28, 60325,

Frankfurt am Main, Germany

Bohemia Interactive Simulations, Inc.

3050 Technology Pkwy, Suite 110, Orlando, FL, 32746,

United States

Bohemia Interactive Simulations K.S.

Karolinská, 654/2, Karin, 186 00 Prague 8, Czech Republic

Bohemia Interactive Simulations Korea Ltd

Karolinská, 654/2, Karin, 186 00 Prague 8, Czech Republic

(incorporated in the Republic of Korea)

Bohemia Interactive Simulations sp z.o.o.

Ul. Ostrobramska 101, 04-041, Warsaw, Poland

Bohemia Interactive Simulations (UK) Limited

31 Hercules Way, Farnborough Aerospace Centre,

Farnborough, Hampshire GU14 6UU, United Kingdom

Bohemia Invest One Ltd

Bohemia Invest Two Ltd

Brabazon Limited

c/o Interpath Limited, 10 Fleet Place, London EC4M 7RB,

United Kingdom

British Aerospace (Far East) Limited

Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong

British Aerospace (Malaysia) Sdn Bhd

Unit 30-01, Level 30, Tower A, Vertical Business Suite,

Avenue 3, Bangsar South, No.8, Jalan Kerinchi,

59200 Kuala Lumpur, Malaysia

British Aircraft Corporation (Pension Fund Trustees)

Limited

British Aircraft Corporation Limited

CPS International, Inc.

Benedetti & Benedetti, Comosa Building, 21st Floor, PO Box

850120, Panama 5, Panama

Creole (Nigeria) Limited

9th Floor, St. Nicholas House, 26 Catholic Mission Street,

Lagos, Nigeria

Detica Group Limited

Detica Mexico S. de R.L. de C.V.

Torre Esmeralda II, Blvd Manuel Avila Camacho No. 36 Piso 18,

Lomas de Chapultepec, 11000 D.F., Mexico

Detica Services, Inc.

5th Floor, Suite 1920, 256 Franklin Street, Boston, MA 02110,

United States

Dividend Training Limited

ETI Engineering, Inc.

1676 International Drive, 10th Floor, Suite 1000,

McLean VA 22102, United States

Eurostep AB

Gustavslundsvägen 137, SE-167 51 Bromma, Sweden

Eurostep Limited

Unit 16 Ffordd Richard Davies, St. Asaph Business Park,

St. Asaph, Denbighshire LL17 0LJ, Wales

Eurostep Oy

Metsänneidonkuja 12 02130 Espoo Finland

Eurostep S.à.r.l.

8 rue Germain Soufflot 78180 Montigny-le-Bretonneux, France

EVU Czech, S.R.O.

Pernerova 691/42, Karlin, 186 00 Prague 8, Czech Republic

Gloster Aircraft Limited

H-B Utveckling, H-B Development AB

Nybrogatan 7, SE-114 34 Stockholm, Sweden

Hadrian Holdings, Inc.

521 Fifth Avenue, New York NY 101075, United States

Hadrian Trustees Limited

Hägglunds Vehicle GmbH

Ernst-Grote Strasse 13, 30916 Isernhagen, Germany

Hawker Siddeley Aviation Limited

Hawker Siddeley Dynamics Limited

HSA/HSD Pension Fund Trustees Limited

Hunter Aerospace Corporation Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

In-Space Missions Limited

8 Oriel Court, Omega Park, Alton GU34 2YT, England

International Military Sales Limited

Jetstream Aircraft Limited

Prestwick International Airport, Prestwick, Ayrshire KA9 2RW,

United Kingdom

MES Holdco Limited

Charter Place, 23/27 Seaton Place, St. Helier, Jersey JE1 1JY

MES Interco

Meslink Limited

Newcombe Properties Limited

Pitch Technologies AB

Repslagaregatan 25, SE-582 22 Linköping, Sweden

Pitch Technologies Limited

Sweden House, 5 Upper Montagu Street, London W1H 2AG,

United Kingdom

Prismatic Limited

2 Omega Park, Alton GU34 2QE, England

PT. BAE Systems Services

Wisma 46, Kota BNI, 34th Floor, Suite 34.01.A,

Jl. Jenderal Sudirman Kavling 71, Jakarta 10220, Indonesia

Pulse Power and Measurement Inc.

1717 Pennsylvania Avenue, NW Suite, 1025 Washington DC

20006, United States

Pulse Power and Measurement Limited

65 Shrivenham Hundred Business Park, Watchfield, Swindon,

Wiltshire SN6 8TY, United Kingdom

Representaciones SSTS, CA

Ave Francisco de Miranda, Centro Lido El Rosal Oficina 71B,

Caracas, Venezuela

Riptide Autonomous Solutions Canada Company

600-1741 Lower Water Street, Halifax, N/A, NS, B3J 3P6,

Canada

Royal Ordnance (Crown Service) Pension Scheme

Trustees Limited

Royal Ordnance Senior Staff Pension Scheme

Trustees Limited

Scottish Aviation Limited

Prestwick International Airport, Prestwick, Ayrshire KA9 2RW,

United Kingdom

Sepia, LLC

4219 Lafayette Center Drive, Chantilly VA 20151, United States

Shipbuilding (MSF) Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

Shipbuilding (VIC) Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

Simulation Technologies S.A.S.

8 rue de La Michodière, Paris, 75002, France

Stewart & Stevenson Operations (Nigeria) Limited

9th Floor, St. Nicholas House, 26 Catholic Mission Street,

Lagos, Nigeria

Stewart & Stevenson TVS UK Limited

Stratsec.net Sdn Bhd

Unit F-3-1, Blok F, Third Floor, CBD Perdana 3, Jalan Perdana,

Cyber 12, 63000 Cyberjaya, Selangor Darul Ehsan, Malaysia

Support Solutions General Services and Contracting

Company/Limited Liability company

1,17

House No. 145, Street No. 1, Qtr. 611, Al Andulous Area,

Al Mansour, Baghdad, Iraq

TDS International Holdings Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

TDS International Pty Limited

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

Techmodal Limited

Techmodal Ventures Limited

TerraSim, Inc.

600 Grant Street, Suite 1080, Pittsburgh PA, 15219,

United States

The Blackburn Aeroplane & Motor Co Limited

The Bristol Aviation Company Limited

The British & Colonial Aeroplane Co. Limited

The Supermarine Aviation Works Limited

3,4

Thomas Sopwith Aviation Company Limited

TMB International Logistics Limited

VSEL Birkenhead Limited

Westover Controls Incorporated

1098 Clark Street, Endicott NY 13760, United States

216

BAE Systems plc Annual Report 2023

Consolidated financial statements

35. Information about related undertakings continued

Subsidiary undertakings

– not wholly-owned

Advanced National Company for Aircraft Maintenance

Limited (51%)

PO Box 1732, Riyadh 11441, Kingdom of Saudi Arabia

BAE Systems Saudi Development and Training

Company Limited (50.98%)

PO Box 67775, Riyadh 11517, Kingdom of Saudi Arabia

BAE Systems SDT (UK) Limited (51%)

Flight Control System Management GmbH (66.6%)

PO Box 801109, 81663 Munich, Germany

Granada Enterprises Limited (51%)

PO Box 1732, Riyadh 11441, Kingdom of Saudi Arabia

Hadrian Properties, Inc. (95%)

521 Fifth Avenue, New York NY 101075, United States

International Systems Engineering Company Limited

(46.2%)

PO Box 54002, Riyadh 11514, Kingdom of Saudi Arabia

Overhaul and Maintenance Company Holding (51%)

PO Box 1732, Riyadh 11441, Kingdom of Saudi Arabia

Saudi Maintenance & Supply Chain Management

Company Limited (51%)

PO Box 1732, Riyadh 11441, Kingdom of Saudi Arabia

Saudi Technology & Logistics Services Limited (65%)

PO Box 1732, Riyadh 11441, Kingdom of Saudi Arabia

SMSCMC (UK) Limited (51%)

Equity accounted investments

Abercromby Property International (20.42%)

521 Fifth Avenue, New York NY 101075, United States

Air Astana (49%)

4A Zakarpatskaya Street, Turksib District, Almaty, 050039,

Republic of Kazakhstan

AMSH B.V. (50%)

Coolsingel 61, 7th Floor – right, 3012 AB Rotterdam,

Netherlands

BAE Systems Strategic Aerospace Services WLL (49%)

Building 58, Street 850, Area 23, Qatari Bin Al Fajaa,

Doha, Qatar

BAeHAL Software Limited (40%)

3,15

Airport Lane, HAL Estate, Bangalore 560010, India

BHIC Bofors Defense Asia Sdn Bhd (49%)

Level 21, Suite 21.01, The Gardens South Tower, Mid Valley

City, Lingkaran Syed Putra, 59200 Kuala Lumpur, Malaysia

Canadian Naval Support Limited (50%)

3099 Barrington Street, Halifax NS B3K 5M7, Canada

Corsair Pty Ltd (51%)

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

CTA International SAS (50%)

13 Route De La Miniere, 78034 Versailles Cedex, France

Data Link Solutions L.L.C. (50%)

1,19

350 Collins Road, Northeast Cedar Rapids IA 52498,

United States

Eurofighter Jagdflugzeug GmbH (33%)

Am Soldnermoos 17, 85399 Hallbergmoos, Germany

FADEC International LLC (50%)

1098 Clark Street, Endicott NY 13760, United States

FAST Holdings Limited (50%)

15,21

FAST Training Services Limited (50%)

FNSS Savunma Sistemleri A.S (49%)

Og˘ ulbey Mahallesi, Og˘ ulbey Kumeevleri, No. 441/A, 441/B,

Gölbas¸ ı, Ankara, Turkey

Innovaero Holdings Pty Ltd (51%)

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

Innovaero Operations Pty Ltd (51%)

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

Innovaero Pty Ltd (51%)

Level 2, 80 Flinders Street, Adelaide SA 5000, Australia

KBS Maritime Limited (50%)

Victory Building (Pp 72), Rm. 233, The Parade,

HM Naval Base, Portsmouth PO1 3LS, England

MBDA B.V. (37.5%)

Coolsingel 61, 7th Floor – right, 3012 AB Rotterdam,

Netherlands

MBDA Holdings S.A.S. (25%)

1 avenue Réaumur, 92350 Le Plessis-Robinson, France

MBDA S.A.S. (37.5%)

1 avenue Réaumur, 92350 Le Plessis-Robinson, France

Nobeli Business Support AB (34%)

SE-691 80 Karlskoga, Sweden

Panavia Aircraft GmbH (42.5%)

Am Soldnermoos 17, 85399 Hallbergmoos, Germany

Promoveo Solutions JV LLC (49%)

260 Peachtree Street NW, #2200, Atlanta GA 30303,

United States

Reaction Engines Limited (15.5%)

Building F5, Culham Campus, Abingdon OX14 3DB, England

Rheinmetall BAE Systems Land Limited (45%)

Hadley Castle Works, PO Box 106, Telford TF1 6QW, England

Saab Bofors Test Center AB (30%)

Box 418, SE-691 27 Karlskoga, Sweden

Sealand Support Services Limited (33.3%)

8,29

45 Gresham Street, London, EC2V 7BG, United Kingdom

Winner Developments Limited (33.3%)

Notes

1. Unincorporated entity for which the address

given is the principal place of business.

2. Company limited by guarantee.

3. Directly owned by BAE Systems plc.

4. Ownership held in class of A shares, B shares

and preference shares.

5. Ownership held in class of A shares and B shares.

6. Ownership held in ordinary shares and

preference shares.

7. Ownership held in common shares.

8. In members’ voluntary liquidation (MVL).

9. Ownership held in ordinary shares and

redeemable preference shares.

10. Ownership held in common stock.

11. Ownership held in authorized shares.

12. 40% directly owned by BAE Systems plc.

13. Ownership held in ordinary shares, ordinary A

and ordinary B shares.

14. Unlimited company.

15. Year end 31 March.

16. Year end 5 April.

17. In liquidation.

18. Ownership held in ordinary A shares.

19. Year end 30 September.

20. Ownership held in class of A, B, C, D, E, F

and G ordinary shares.

21. Ownership held in class of A shares.

22. 1% directly owned by BAE Systems plc.

23. 33.3% directly owned by BAE Systems plc.

24. Subsidiary due to unilateral controlling rights.

25. Ownership held in class of B shares.

26. Ownership held in common shares (50%)

and B Preferred shares (100%).

27. Not deemed a subsidiary due to rights of

other shareholder.

28. Ownership held in ordinary shares (50%)

and preference shares (75%).

29. Ownership held in ordinary shares (33.3%)

and A Cumulative Preference Shares (75%).

217

BAE Systems plc Annual Report 2023

Additional informationGovernance Financial statementsStrategic report

Company statement of changes in equity

for the year ended 31 December

Note

Issued share

capital

£m

premium

£m

Other

reserves

£m

Retained

earnings

£m

Total

equity

£m

At 1 January 2022 85 1,252 206 2,798 4,341

Profit for the year – – – 1,648 1,648

Total other comprehensive income for the year – – 9 207 216

Total comprehensive income for the year – – 9 1,855 1,864

Share-based payments 10 – – – 102 102

Purchase of own shares 9 (3) – 3 (793) (793)

Ordinary share dividends

– – – (802) (802)

At 31 December 2022 82 1,252 218 3,160 4,712

Profit for the year – – – 1,264 1,264

Total other comprehensive expense for the year – – (5) (89) (94)

Total comprehensive (expense)/income for the year – – (5) 1,175 1,170

Share-based payments 10 – – – 110 110

Purchase of own shares 9 (1) – 1 (558) (558)

Ordinary share dividends

– – – (857) (857)

Unclaimed asset programme proceeds – 1 – – 1

At 31 December 2023 81 1,253 214 3,030 4,578

1. The non-distributable portion of retained earnings is £1,037m (2022 £955m).

2. Details of ordinary share dividends are provided in note 26 to the Consolidated financial statements.

218

BAE Systems plc Annual Report 2023

Company financial statements

Company balance sheet

as at 31 December

Note

2023

£m

2022

£m

Non-current assets

Intangible assets 10 44

Property, plant and equipment 1 2

Right-of-use assets 16 18

Investments in subsidiary undertakings and participating interests 2 9,272 9,191

Amounts owed by subsidiary undertakings 3 4,781 4,501

Other receivables 3 9 5

Post-employment benefit surpluses 8 105 167

Other financial assets 4 377 522

14,571 14,450

Current assets

Trade and other receivables 3 126 80

Current tax 13 13

Other financial assets 4 356 448

Cash and cash equivalents 3,303 2,533

3,798 3,074

Total assets 18,369 17,524

Non-current liabilities

Loans 5 (2,872) (3,042)

Lease liabilities (16) (19)

Other payables 6 (2) (3)

Post-employment benefit obligations 8 (79) (75)

Other financial liabilities 4 (332) (403)

Provisions 7 (127) (126)

(3,428) (3,668)

Current liabilities

Loans 5 (24) (25)

Lease liabilities (4) (2)

Trade and other payables 6 (9,908) (8,596)

Other financial liabilities 4 (423) (504)

Provisions 7 (4) (17)

(10,363) (9,144)

Total liabilities (13,791) (12,812)

Net assets 4,578 4,712

Capital and reserves

Issued share capital 9 81 82

Share premium 1,253 1,252

Other reserves 9 214 218

Retained earnings

3,030 3,160

Total equity 4,578 4,712

1. The Company’s profit for the year was £1,264m (2022 £1,648m).

Approved by the Board of BAE Systems plc on 20 February 2024 and signed on its behalf by:

C N Woodburn B M Greve

Chief Executive Chief Financial Officer

Registered number: 01470151

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Notes to the Company financial statements

1. Preparation of the Company financial statements

Basis of preparation

The directors have a reasonable expectation that the Company has adequate resources to continue its operational existence for at least

12 months from the signing of the accounts, notwithstanding the net current liabilities of £6,565m. Therefore, the financial statements

ofBAESystems plc have been prepared on a going concern basis, as disclosed in the Strategic report on page 79, and in accordance

withFinancial Reporting Standard (FRS) 101, Reduced Disclosure Framework.

In preparing these financial statements, the Company applies therecognition, measurement and disclosure requirements of UK-adopted

International Financial Reporting Standards (IFRS), but makes amendments where necessary in order to comply withthe Companies Act 2006

and has set out below where advantage of the FRS 101 disclosure exemptions have been taken:

– the requirements of paragraphs 45(b) and 46 to 52 of IFRS 2 Share-based Payment;

– the requirements of paragraphs 62, B64(d), B64(e), B64(g), B64(h), B64(j) to B64(m), B64(n)(ii), B64(o)(ii), B64(p), B64(q)(ii), B66

andB67ofIFRS 3 Business Combinations;

– the requirements of paragraph 33(c) of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;

– the requirements of IFRS 7 Financial Instruments: Disclosures;

– the requirements of paragraphs 91 to 99 of IFRS 13 Fair Value Measurement;

– the requirements of the second sentence of paragraph 110 and paragraphs 113(a), 114, 115, 118, 119(a) to (c), 120 to 127 and 129

ofIFRS15Revenue from Contracts with Customers;

– the requirement in paragraph 38 of IAS 1 Presentation of Financial Statements, to present comparative information in respect of:

paragraph79(a)(iv) of IAS 1; paragraph 73(e) of IAS 16 Property, Plantand Equipment; paragraph 118(e) of IAS 38 Intangible Assets;

andparagraphs 76 and 79(d) of IAS 40 Investment Property;

– the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 38D, 40A, 40B, 40C, 40D, 111 and 134 to 136 of IAS 1 Presentation

ofFinancial Statements;

– the requirements of IAS 7 Statement of Cash Flows;

– the requirements of paragraphs 30 and 31 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors;

– the requirements of paragraphs 17 and 18A of IAS 24 Related Party Disclosures;

– the requirements in IAS 24 Related Party Disclosures, to disclose related party transactions entered into between two or more members

ofagroup, provided that any subsidiary which is a party to the transaction is wholly-owned by such a member;

– the requirements of paragraphs 130(f)(ii), 130(f)(iii), 134(d) to 134(f) and 135(c) to 135(e) of IAS 36 Impairment of Assets; and

– the requirements of paragraphs 88C and 88D of IAS 12 Income Taxes.

The Company intends to continue to prepare its financial statements in accordance with FRS 101.

In accordance with Section 408(3) of the Companies Act 2006, theCompany is exempt from the requirement to present its own

incomestatement. The amount of profit for the year of the Company is disclosed in the Company balance sheet.

The Company financial statements are presented in pounds sterling and, unless stated otherwise, rounded to the nearest million. The financial

statements have been prepared under the historical cost convention, as modified by the revaluation of relevant financial assets and financial

liabilities (including derivative instruments).

220

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Company financial statements

1. Preparation of the Company financial statements continued

Material accounting policies

The material accounting policies applied in the preparation of these individual financial statements are set out below. These policies have

beenapplied consistently to all the years presented, unless otherwise stated.

Investments in subsidiary undertakings and participating interests

Fixed asset investments in shares in subsidiary undertakings and participating interests are stated at cost less provision for impairment.

The Company recognises an increase in its investments in subsidiary undertakings in respect of the cost of share-based payment awards

issuedby the Company to employees of the Company’s operating subsidiaries, with a corresponding entry to equity.

Amounts owed by subsidiary undertakings

Amounts owed by subsidiary undertakings are stated at amortised costincluding a provision for expected credit losses. For the purposes

ofimpairment assessment, amounts to subsidiary undertakings are considered low credit risk and, therefore, the Company measures the

provision at an amount equal to 12-month expected credit losses.

Other significant accounting policies

Other significant accounting policies are consistent with the Consolidated financial statements.

Judgements and sources of estimation uncertainty

In the course of preparing the financial statements, no judgements have been made in the process of applying the Company’s accounting

policies, other than those involving estimates, that have had a significant effect on the amounts recognised in the Company financial statements.

Key sources of estimation uncertainty

Post-employment benefits

A number of actuarial assumptions are made in assessing the value of post-employment benefit obligations, including discount rate,

inflationrate and mortality assumptions. For each of the actuarial assumptions used there is a wide range of possible values and

managementestimates a point within that range that most appropriately reflects the Group’s circumstances.

If estimates relating to these actuarial assumptions are no longer valid or change due to changing economic and social conditions,

thenthepotential obligations due under these schemes could change significantly.

Discount and inflation rates could change significantly as a result ofaprolonged economic downturn, monetary policy decisions and

interventions or other macroeconomic issues. The impact of estimates made with regard to mortality projections may also change.

Similarly, the values of many assets are subject to estimates and assumptions, in particular those which are held in unquoted pooled

investmentvehicles. The associated fair value of these unquoted pooled investments is estimated with consideration of the most recently

available valuations provided by the investment or fund managers. These valuations inherently incorporate a number of assumptions

includingthe impact of climate change on the underlying investments. The overall level of estimation uncertainty in valuing these assets

couldtherefore give rise to a material change in valuation within the next 12 months.

Furthermore, estimates are required around the Group’s ability to access its defined benefit surpluses, and on what basis, which then

determines the associated rate of tax to apply. Depending on the outcome, judgement is then required to determine the presentation

ofanytaxpayable in recovering a surplus.

Note 24 of the Consolidated financial statements provides information on the key assumptions and analysis of their sensitivities.

Changes in accounting policies

Several standards, interpretations and amendments to existing standards became effective on 1 January 2023, as detailed on page 159

oftheConsolidated financial statements, none of which had a material impact on the Company.

The Company has reviewed its parent company guarantee contracts following the issue of IFRS 17 Insurance Contracts, which came into

effecton 1 January 2023. IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance

contractswithin the scope of the Standard. Management have determined that a number of the Company’s parent company guarantees fall

within the definition of IFRS 17 Insurance Contracts, and consider any insurance contract liability arising to be negligible. In determining this

position, management have taken into consideration a number of factors including the fact that no claims have historically been made against

the Company under these contracts, as well as factoring in scenarios which could result in a guarantee being called upon in the future,

includingunder circumstances of insolvency within the Group. The probability weighted cash flows based on these scenarios were negligible

and, as aresult, no liability has been recognised in respect of these contracts.

221

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Notes to the Company financial statements continued

2. Investments in subsidiary undertakings and participating interests

£m

Cost

At 1 January 2023 9,197

Additions 82

Disposal (1)

At 31 December 2023 9,278

Impairment provisions

At 1 January 2023 and 31 December 2023 6

Net carrying value

At 31 December 2023 9,272

At 31 December 2022 9,191

3. Trade and other receivables

2023

£m

2022

£m

Non-current

Amounts owed by subsidiary undertakings

4,781 4,501

Other receivables 9 5

4,790 4,506

Current

Prepayments 13 16

Accrued income 34 36

Other receivables 79 28

126 80

1. Amounts owed by subsidiary undertakings are repayable on demand. Whilst the majority of these receivables are interest free, certain balances bear interest priced

onanarm’s-length basis. Provision for expected credit losses is immaterial.

4. Other financial assets and liabilities

2023 2022

Assets

£m

Liabilities

£m

Assets

£m

Liabilities

£m

Non-current

Cash flow hedges – foreign exchange contracts 2 – 7 –

Other foreign exchange/interest rate contracts 275 (275) 368 (368)

Debt-related derivative financial instruments 100 (57) 147 (35)

377 (332) 522 (403)

Current

Cash flow hedges – foreign exchange contracts 1 – 2 (1)

Other foreign exchange/interest rate contracts 355 (402) 446 (503)

Debt-related derivative financial instruments – (21) – –

356 (423) 448 (504)

Included within other foreign exchange contracts are derivatives entered into on behalf of subsidiaries. These derivatives were passed down

tothe hedging subsidiary using an internal derivative with equal but opposite terms to the external derivatives, and valued using the same

methodology as the external derivatives. The majority of such derivatives were designated in cash flow hedges in the Consolidated financial

statements. Disclosures in respect of the maturity profile and fair value of other financial assets and liabilities are provided in notes 15 and 28

tothe Consolidated financial statements.

222

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Company financial statements

5. Loans and overdrafts

2023

£m

2022

£m

Non-current

US$1,300m 3.4% bond, repayable 2030 1,013 1,073

US$1,000m 1.9% bond, repayable 2031 778 824

US$400m 5.8% bond, repayable 2041 311 330

US$1,000m 3.0% bond, repayable 2050 770 815

2,872 3,042

Current

Accrued interest 24 25

24 25

6. Trade and other payables

2023

£m

2022

£m

Non-current

Other payables 2 3

Current

Amounts owed to subsidiary undertakings

8,263 7,379

Amounts owed to equity accounted investments 1,509 1,021

Accruals 98 105

Deferred income 10 42

Other payables 28 49

9,908 8,596

1. Amounts owed to subsidiary undertakings are repayable on demand. Whilst the majority of these payables are interest free, certain balances bear interest priced

onanarm’s-length basis.

7. Provisions

Contractual

and other

£m

Non-current 126

Current 17

At 1 January 2023 143

Created 1

Utilised (12)

Released (6)

Net present value adjustments 5

At 31 December 2023 131

Represented by:

Non-current 127

Current 4

131

The Company holds provisions for contractual costs that it expects to incur over an extended period. These costs are based on past experience

ofsimilar items and represent management’s best estimate of the likely outcome, but the timing and amount of the outflows could differ

significantly from management’s estimates. The Company expects these provisions to be utilised over a period of approximately 25 years.

223

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Notes to the Company financial statements continued

8. Post-employment benefits

The Company participates in all of the Group’s UK pension schemes. Regular contributions to the schemes are made in line with the schedule

ofcontributions and a share of deficit funding is allocated to participating employers. The deficit allocation methodology is based on the

historical allocation percentages applied for all retired and deferred scheme members, adjusted by the relative payroll contributions of active

members. Full disclosures relating to these schemes are given in note 24 to the Consolidated financial statements.

Amounts recognised on the balance sheet

The table below shows the Company’s share of the Group’s UK pension schemes after allocation to other participating employers.

2023

£m

2022

£m

Present value of unfunded obligations (79) (75)

Present value of funded obligations (1,748) (1,676)

Fair value of scheme assets 1,910 1,933

Total net IAS 19 surplus 83 182

Withholding tax on surpluses (57) (90)

Company’s share of net IAS 19 surplus 26 92

Represented by:

Post-employment benefit surpluses 105 167

Post-employment benefit obligations (79) (75)

26 92

Surplus recognition

A number of schemes are in an accounting surplus position. The surpluses have been recognised on the basis that the future economic benefits

are unconditionally available to the Company, which is assumed to be via a refund. On 22 November 2023, the UK government announced that

the authorised surplus payments charge would be reduced from 35% to 25% from 6 April 2024. The legislation had not been legally enacted

asat the date of issue of these financial statements. The surplus has been recognised net of withholding tax of 35% at 31 December 2023

(2022: 35%) based on the enacted legislation at that date. Should the legislation have been enacted at year-end, this would have resulted in

an£16m increase in the pension surplus. This tax would be levied prior to the future refunding of any surplus and therefore the surplus has

beenpresented on a net basis as this is not deemed to be an income tax.

9. Share capital and other reserves

Share capital and equity dividends

Disclosures in respect of the Company’s share capital and on equity dividends are provided in note 26 to the Consolidated financial statements.

Other reserves

Statutory

reserve

£m

Capital

redemption

reserve

£m

Hedging

reserve

£m

Total

£m

At 1 January 2022 202 5 (1) 206

Amounts credited to hedging reserve – – 9 9

Shares cancelled – 3 – 3

At 31 December 2022 202 8 8 218

Amounts debited to hedging reserve – – (5) (5)

Shares cancelled – 1 – 1

At 31 December 2023 202 9 3 214

Statutory reserve

Under Section 4 of the British Aerospace Act 1980, this reserve may only be applied in paying up unissued shares of the Company to be allotted

to members of the Company as fully paid bonus shares.

Capital redemption reserve

The capital redemption reserve represents the cumulative nominal value of the Company’s ordinary shares repurchased and subsequently cancelled.

Hedging reserve

The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related

tohedged transactions that have not yet occurred.

224

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Company financial statements

9. Share capital and other reserves continued

Purchase of own shares

On 29 July 2021, the Company announced the details of a share buyback programme to repurchase up to £500m of its own shares over

thefollowing 12 months (the 2021 share buyback programme). The 2021 share buyback programme was completed on 2 February 2022.

During 2022, 24,253,065 shares were repurchased under the 2021 share buyback programme for a total price, including transaction costs,

of£132m.

In July 2022, the directors approved a new share buyback programme (the 2022 share buyback programme) of up to £1.5bn over the next

threeyears under the same terms asthe 2021 buyback programme. During 2022, 82,997,065 shares were repurchased under the 2022 share

buyback programme for a total price, including transaction costs, of £664m. In total during 2022, 107,250,130 shares were repurchased under

the 2021 and 2022 share buyback programmes for a total price, including transaction costs, of £796m.

During 2023, the total number of shares repurchased under the 2022 share buyback programme was 58,689,756 for a total price, including

transaction costs, of £558m.

All ordinary shares acquired have been subsequently cancelled, with the nominal value of ordinary shares cancelled deducted from share capital

against the capital redemption reserve.

As part of the buyback programmes, it was agreed that should a better alternative use for the Company’s cash reserves be identified, the

sharebuyback programme would be ceased, and the money instead used for the alternative purpose. Therefore, when the Company issued

amandate to the brokers to purchase shares on their behalf, the mandates were structured such that they could be revoked at any point.

Assuch, no financial liability was recognised for shares not yet purchased under the programmes.

On 2 August 2023, the directors approved a further share buyback programme (the 2023 share buyback programme) of up to £1.5bn, which

isexpected to commence after completion of the 2022 share buyback programme and conclude within three years of its commencement.

10. Share-based payments

Options over shares of the Company have been granted to employees of the Company under various plans. Details of the terms and conditions

ofeach share-based payment plan are given in the Annual remuneration report on pages 115 to 134.

2023 2022

Range of

exercise price

of outstanding

options

Weighted

average

remaining

contracted life

Years

Range of

exercise price

of outstanding

options

Weighted

average

remaining

contracted life

Years

Executive Share Option Plan (ExSOP) 7.83 – 4.85 7 4.12 – 7.83 8

Performance Share Plan (PSP) – 5 – 5

Restricted Share Plan (RSP) – 5 – 5

The average share price in the year was £9.77 (2022 £7.53).

11. Employees

The average and year-end numbers of employees of the Company at 31 December 2023 were 1,349 (2022 1,938) and 1,480 (2022 2,119)

respectively. All of the Company’s employees work within head office functions.

Total staff costs, excluding charges for share-based payments, were as follows:

2023

£m

2022

£m

Wages and salaries 106 133

Social security costs 17 18

Pension costs – defined contribution plans 8 7

Pension costs – defined benefit plans 15 23

146 181

On 1 January 2023, 1,109 employees were transferred from BAE Systems plc to BAE Systems Services Limited, a wholly-owned subsidiary, as

part of the Group’s reorganisation of its internal shared services activities.

225

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Notes to the Company financial statements continued

12. Other information

Company audit fee

Fees payable to the Company’s auditor for the audit of the Company’s annual accounts totalled £3,043,000 (2022 £2,963,000). Fees payable

toDeloitteLLP and its associates for non-audit services to the Company are not required to be disclosed because the Consolidated financial

statements disclose such fees on a consolidated basis (see note 3 to the Consolidated financial statements).

Related party transactions

Disclosures in respect of related party transactions are provided in note 30 to the Consolidated financial statements.

Directors’ emoluments

Under Schedule 5 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 (Schedule 5), total directors’

emoluments, excluding Company pension contributions, were £11,064,996 (2022 £10,064,679); these amounts are calculated on a different

basis to emoluments in the Annual remuneration report which are calculated under Schedule 8 of the Large and Medium-Sized Companies and

Groups (Accounts and Reports) Regulations 2008 (Schedule 8). These emoluments were paid for their services on behalf ofthe BAE Systems

Group. Noemoluments related specifically to their work for the Company. Under Schedule 5, the aggregate gains made bythe directors from

the exercise of share options in 2023 as at the date of exercise was £1,732,675 (2022 £1,676,502) andthenet aggregate value ofassets received

bydirectors in 2023 from Long-Term Incentive Plans as calculated at the date of vesting was £6,364,979 (2022 £5,073,406); these amounts

arecalculated on a different basis from the valuation of share plan benefits under Schedule 8 in the Annual remuneration report. Retirement

benefits are accruing to one director in respect of defined benefit schemes and to three directors in respect of defined contribution schemes.

Subsidiary guarantees

Borrowings by subsidiary undertakings totalling £2,215m (2022 £2,147m), which are included in the Group’s borrowings, have been guaranteed

bytheCompany, with the guarantees measured initially at their fair values, and subsequently measured at the higher of the expected credit

lossdetermined under IFRS 9 Financial Instruments and the amount initially recognised less cumulative amortisation.

Information about related undertakings

In accordance with Section 409 of the Companies Act 2006, a full list of the Company’s subsidiaries and significant holdings is included

innote35to the Consolidated financial statements.

13. Events after the reporting period

There were no events after the reporting period which would materially impact the balances reported in the Company financial statements.

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Alternative performance measures

We monitor the underlying financial performance of the Group using alternative performancemeasures (APMs).

Thesemeasures are not defined in IFRS and, therefore, areconsidered to be non-GAAP measures. Accordingly,

therelevant IFRS measures arealsopresented where appropriate.

The Group uses these APMs as a mechanism to support year-on-year business performance and cash generation

comparisons, and to enhance management’s planning and decision-making on the allocation of resources. The APMs

arealso used to provide information in line with the expectations of investors, and when setting guidance on expected

future business performance. The Group presents these measures to the users to enhance their understanding of how

thebusiness has performed within the year, and does not consider them to be more important than, or superior to,

theirequivalent IFRS measures. As each APM is defined by the Group, they may not be directly comparable with

equivalently-named measures in other companies.

Purpose, definitions, breakdowns and reconciliations to the relevant statutory measure, where appropriate, are included below.

Sales

Purpose

Enables management to monitor the revenue of both the Group’s own subsidiaries as well as recognising the strategic importance in its industry

of its equity accounted investments, to ensure programme performance is understood and in line with expectations.

Definition

Revenue plus the Group’s share of revenue of equity accounted investments, excluding subsidiaries’ revenue from equity accounted investments.

Reconciliation of sales to revenue

2023

£m

2022

£m

Sales

KPI

25,284 23,256

Deduct: Group’s share of revenue of equity accounted investments (3,892) (3,342)

Add: Subsidiaries’ revenue from equity accounted investments 1,686 1,344

Revenue 23,078 21,258

Underlying EBIT

Purpose

Provides a measure of operating profitability, excluding one-off events or adjusting items that are not considered to be part of the ongoing

operational transactions of the business, to enable management to monitor the performance of recurring operations over time, and which is

comparable across the Group.

Definition

Operating profit excluding amortisation of programme, customer-related and other intangible assets (see note 9 to the Consolidated financial

statements), impairment of intangible assets, net finance costs and tax expense of equity accounted investments (EBIT) and adjusting items.

Theexclusion of amortisation of acquisition-related intangible assets is to allow consistent comparability internally and externally between our

businesses, regardless of whether they have been grown organically or via acquisition.

Reconciliation of underlying EBIT to operating profit

2023

£m

2022

£m

Underlying EBIT

KPI

2,682 2,479

Adjusting items 40 91

Amortisation of programme, customer-related and other intangible assets, and impairment of intangibles (116) (111)

Net finance income/(costs) of equity accounted investments 14 (25)

Tax expense of equity accounted investments (47) (50)

Operating profit 2,573 2,384

Return on sales

Purpose

Provides a measure of operating profitability, excluding one-off events, to enable management to monitor the performance of recurring

operations over time, and which is comparable across the Group.

Definition

Underlying EBIT as a percentage of sales. Also referred to as margin.

2023

£m

2022

£m

Sales

KPI

25,284 23,256

Underlying EBIT

KPI

2,682 2,479

Return on sales 10.6% 10.7%

227

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Alternative performance measures continued

Underlying earnings per share (EPS)

Purpose

Provides a measure of the Group’s underlying performance, which enables management to compare the profitability of the Group’s recurring

operations over time.

Definition

Profit for the year attributable to shareholders, excluding post-tax impact of amortisation of programme, customer-related and other intangible

assets, impairment of intangible assets, non-cash finance movements on pensions and financial derivatives, and adjusting items attributable to

shareholders, being underlying earnings, divided by number of shares as defined for Basic EPS in accordance with IAS 33 Earnings per Share.

Reconciliation of underlying earnings to profit attributable to equity shareholders

2023

£m

2022

£m

Underlying earnings 1,916 1,728

Adjustments:

Adjusting items 40 91

Amortisation of programme, customer-related and other intangible assets, and impairment of intangibles (116) (111)

Net interest income/(expense) on post-employment benefit obligations 44 (38)

Fair value and foreign exchange adjustments on financial instruments and investments (66) (136)

Tax impact of adjustments 39 57

Profit for the year attributable to equity shareholders 1,857 1,591

Reconciliation of underlying EBIT to underlying earnings

2023

£m

2022

£m

Underlying EBIT

KPI

2,682 2,479

Group and equity accounted investments underlying net finance costs (see reconciliation page 229) (211) (246)

Underlying tax expense (see reconciliation page 229) (472) (422)

Underlying profit for the year 1,999 1,811

Deduct: Non-controlling interest (83) (83)

Underlying earnings 1,916 1,728

Weighted average number of ordinary shares used in calculating basic earnings per share

(note 8 to the Consolidated financial statements) 3,031 3,112

Underlying earnings per share – basic

KPI

63.2p 55.5p

Weighted average number of ordinary shares used in calculating diluted earnings per share

(note 8 to the Consolidated financial statements) 3,072 3,153

Underlying earnings per share – diluted 62.4p 54.8p

Adjusting items

Purpose

To adjust items of financial performance from the reported underlying results which have been determined by management as being material

bytheir size or incidence andnot relevant to an understanding of the Group’s underlying business performance.

Definition

Adjusting items include profit or loss on business transactions, the impact of substantively enacted tax rate changes, and costs incurred which

are one-off in nature, for example non-routine costs or income relating to post-retirement benefit schemes, and other items which management

has determined as not being relevant to an understanding of the Group’s underlying business performance.

2023

£m

2022

£m

Profit on business disposals – 94

Gain related to settlements and past service costs on the pension schemes 60 13

Acquisition-related costs (20) (16)

Adjusting items 40 91

228

BAE Systems plc Annual Report 2023

Alternative performance measures

Underlying net finance costs

Purpose

Provides a measure of net finance costs associated with the operational borrowings of the Group that is comparable over time.

Definition

Net finance costs for the Group and its share of equity accounted investments, excluding net interest income/expense on post-employment

benefit obligations and fair value and foreign exchange adjustments on financial instruments.

2023

£m

2022

£m

Net finance costs – Group (247) (395)

(Deduct)/add back:

Net interest (income)/expense on post-employment benefit obligations (41) 37

Fair value and foreign exchange adjustments on financial instruments 57 128

Underlying net finance costs – Group (231) (230)

Net finance income/(costs) – equity accounted investments 14 (25)

(Deduct)/add back:

Net interest (income)/expense on post-employment benefit obligations (3) 1

Fair value and foreign exchange adjustments on financial instruments 9 8

Underlying net finance income/(costs) – equity accounted investments 20 (16)

Total of Group and equity accounted investments’ underlying net finance costs (211) (246)

Underlying effective tax rate

Purpose

Provides a measure of tax expense for the Group, excluding one-off items, that is comparable over time. During the year, the calculation of the

underlying effective tax rate has been re-presented to better align to the underlying profit of the Group. This has not impacted the prior year

effective tax rate.

Definition

Tax expense for the Group and its share ofequity accounted investments, excluding any one-off tax benefit/expense related to adjusting items

and other items excluded from underlying EBIT, as a percentage of underlying profit before tax.

Calculation of the underlying effective tax rate

2023

£m

2022

£m

Underlying EBIT

KPI

(see reconciliation on page 228) 2,682 2,479

Group and equity accounted investments’ underlying net finance costs (see reconciliation on page 229) (211) (246)

Underlying profit before tax 2,471 2,233

Group tax expense (386) (315)

Tax expense of equity accounted investments (47) (50)

Exclude:

Tax expense in respect of taxable adjusting items 11 –

Tax expense in respect of other items excluded from underlying profit (49) (54)

Tax rate adjustment (1) (3)

Underlying tax expense (472) (422)

Underlying effective tax rate 19% 19%

229

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Alternative performance measures continued

Free cash flow

Purpose

Provides a measure of cash generated by the Group’s operations after servicing debt and tax obligations, available for use in line with the

Group’s capital allocation policy.

Definition

Net cash flow from operating activities, including dividends received from equity accounted investments, interest paid, net of interest received,

net capital expenditure and financial investments, and principal elements of lease payments and receipts.

Reconciliation from free cash flow to net cash flow from operating activities

2023

£m

2022

£m

Free cash flow

KPI

2,593 1,950

Add back:

Interest paid, net of interest received 230 237

Net capital expenditure and financial investment 789 519

Principal element of lease payments and receipts 282 227

Deduct: Dividends received from equity accounted investments (134) (94)

Net cash flow from operating activities 3,760 2,839

Operating business cash flow

Purpose

Provides a measure of cash generated by the Group’s operations, which is comparable across the Group, to service debt and meet tax

obligations, and in turn available for use in line with the Group’s capital allocation policy.

Definition

Net cash flow from operating activities excluding tax paid net of research and development expenditure credits received and including net

capital expenditure (net of proceeds from funding of assets) and lease principal amounts, financial investment and dividends from equity

accounted investments.

Reconciliation from operating business cash flow to net cash flow from operating activities

2023

£m

2022

£m

Operating business cash flow 3,218 2,552

Add back:

Net capital expenditure and financial investment 789 519

Principal element of lease payments and receipts 282 227

Deduct:

Dividends received from equity accounted investments (134) (94)

Tax paid net of research and development expenditure credits received (395) (365)

Net cash flow from operating activities 3,760 2,839

Reconciliation of operating business cash flow tonet cash flow from operating activities by reporting segment

Operating business

cashflow

Deduct:

Dividends received

fromequity accounted

investments

Add back:

Net capital expenditure,

lease principal amounts

and financial investment

Net cash flow from

operating activities

2023

£m

2022

£m

2023

£m

2022

£m

2023

£m

2022

£m

2023

£m

2022

£m

Electronic Systems 811 650 (8) (6) 158 216 961 860

Platforms & Services 426 525 – – 198 108 624 633

Air 1,669 1,140 (112) (84) 251 146 1,808 1,202

Maritime 291 235 (7) (4) 345 187 629 418

Cyber & Intelligence 204 154 – – 57 37 261 191

HQ (183) (152) (7) – 62 52 (128) (100)

3,218 2,552 (134) (94) 1,071 746 4,155 3,204

Tax paid net of research and development expenditure credits received (395) (365)

Net cash flow from operating activities 3,760 2,839

230

BAE Systems plc Annual Report 2023

Alternative performance measures

Net debt (excluding lease liabilities)

Purpose

Allows management to monitor indebtedness of theGroup, to ensure the Group’s capital structure isappropriate and capital allocation policy

decisions aresuitably informed.

Definition

Cash and cash equivalents, less loans and overdrafts (including debt-related derivative financial instruments). Net debt does not include

leaseliabilities.

Components of net debt (excluding lease liabilities)

2023

£m

2022

£m

Cash and cash equivalents 4,067 3,107

Debt-related derivative financial instruments (net) 22 112

Loans – non-current (4,432) (5,189)

Loans and overdrafts – current (679) (53)

Net debt (excluding lease liabilities)

KPI

(1,022) (2,023)

Order intake

Purpose

Allows management to monitor the order intake of theGroup together with its equity accounted investments, providing insight into future

years’ sales performance.

Definition

Funded orders received from customers including theGroup’s share of order intake of equity accountedinvestments.

2023

£bn

2022

£bn

Order intake

KPI

37.7 37.1

Order backlog

Purpose

Supports future years’ sales performance of the Group together with its equity accounted investments.

Definition

Funded and unfunded unexecuted customer ordersincluding the Group’s share of order backlog of equity accounted investments. Unfunded

orders include the elements of US multi-year contracts forwhich funding has not been authorised by thecustomer.

Reconciliation of order backlog, as defined by the Group, to order book

2023

£bn

2022

£bn

Order backlog, as defined by the Group 69.8 58.9

Deduct:

Unfunded order backlog (2.3) (2.3)

Share of order backlog of equity accounted investments (13.5) (12.0)

Add back: Order backlog in respect of orders from equity accounted investments 4.0 4.3

Order book

58.0 48.9

1. Order book represents the transaction price allocated to unsatisfied and partially satisfied performance obligations as defined by IFRS 15 Revenue from Contracts

withCustomers.

231

BAE Systems plc Annual Report 2023

Financial statementsGovernance Additional informationStrategic report

Other sustainability information

Scenario planning – material climate-related risk and opportunity

Physical risk

Materiality of risk or opportunity/

timeframe

Short, medium and long term

Description Unmitigated potential impact Business readiness

We have assessed the future physical risk of

extreme weather on 140 priority sites globally.

We have operations in more than 40 countries,

witha focus in the UK, US, the Kingdom of

SaudiArabia and Australia; therefore our

operational exposure to physical risks is

diverseand varies by region.

Risks have been quantified for seven hazards

infuture periods to 2100 under three scenarios.

Unmitigated damage and disruption losses have

been financially quantified for 140priority sites.

The impact of the physical risks of climate

change, such as increasing frequency and

severityof extreme weather events, will

affect BAE Systems’ operations and vary

depending onthe particular hazard and

geography. Overall, extreme weather

events are likely to result in repaircosts,

adaptation investments and reductions

inproductivity.

Financial impact

Low

We currently assess the physical locations of ourglobal sites

against physical risk of extreme weather events. This includes

risk engineering reviews at site level and a quantification of

current potential financial impacts.

Any mitigation actions arising from these assessments are

included within sector IBP.

Our mitigation work is also supported by work underway and

planned by central and local government departments within

the countries and counties/states that we have facilities in.

Transition risk – regulation

Materiality of risk or opportunity/

timeframe

Medium term

Description Unmitigated potential impact Business readiness

We have assessed the transition risk of tightening

environmental laws and regulations in relation

tocarbon pricing globally. Carbon pricing is

anapproach used to reduce carbon emissions

through market mechanisms. It passes the

societal cost of climate change from the

emissions of GHGs back to the organisations

responsible for emitting them. Asaresult, it

hasthe purpose of discouraging the use of

GHG-emitting activities in order toprotect

theenvironment, address the causes ofclimate

change, and meet national and international

climate agreements. Carbon pricing instruments

can take many forms, with the most common

being carbon taxes, taxes on fuels, andtrading

schemes/levies.

The cost of carbon to 2050 was calculated

usingScope 1 and 2 measured emissions.

Thiswas performed using prices modelled

inthree IEA transition scenarios: STEPS,

APSandNZE (see page 233). The cost

ofcarbonassumes a 100%passthrough

fromenergy suppliers, and has been analysed

under two pathways: (a) static emissions;

and(b)decarbonisation tonet zero by 2050.

Carbon pricing has the potential to

increase operational costs via carbon

taxes and levies tothe business for

energy and fuel use; and indirect taxes

which are passed to the Group through

purchased energy.

Financial impact

Low

Our decarbonisation strategy andoperational lowcarbon

pathway will lower our exposure tocarbon taxes.

We will continue to monitor environmental lawsand

regulations in relation to carbon pricing,including any

potential financial impactson theGroup.

1. Short- (less than two years), medium- (three to ten years) and long-term (beyond ten years) time horizons. Time horizons are linked to the IBP process.

Climate scenario planning

We use climate scenarios to assess the

resilience of our business, decarbonisation

strategy and our approach to managing

climate-related risk and opportunities

including the impact on our financial results.

Climate scenarios demonstrate different

possible futures, based on expert peer

reviewed projections, but they are not

forecasts. They are designed for companies

totest their business resilience against a

range of different future states to inform

strategic decision-making. Scenario analysis

isa necessary exercise to understand what

parts of the business are exposed to and

impacted by climate change.

Climate change and nature-related risks

andopportunities extend beyond normal

business strategic planning cycles and have

the potential to impact BAE Systems over

short- (less than two years), medium-

(threeto ten years) and long-term

(beyondten years) time horizons.

During 2022, we built upon our qualitative

scenario planning work that we commenced

during 2021, by progressing material

physicalrisk and transition risks quantification

and continuing qualitative analysis on

transition opportunities.

Materiality of risk and opportunities was

based on the likelihood of occurrence and

potential impact on the Group. For each area,

we identified sub-risks and opportunities

forquantification. Analysis of these risk and

opportunity areas has helped BAE Systems

tounderstand the scale of the unmitigated

impact, through the development of a

methodology and calculation of the possible

financial impact.

We anticipate revisiting our scenario planning

as part of our next business review in 2025.

232

BAE Systems plc Annual Report 2023

Other sustainability information

We have used the following key assumptions within our scenarios:

Assumption Rationale

No action is taken by BAE Systems to mitigate

orlimit the impacts of each risk being assessed.

Uncovers what the implications are if climate risks

are left unmitigated to help facilitate a response

plan. These results can be used by the business

totest whether current mitigation is sufficient.

Mutual exclusivity is applied to the scenarios

andunderlying climate attributes (i.e. impacts

are not aggregated or offset).

Ensures that no impacts are cancelled out. We

donot assess scenarios where both transitions

risks and physical risks take place at the same

time (although this is inevitable).

Business activities are static over the future

period (revenue streams, operating model,

emissions, etc).

Isolates the climate element of the risks to

showimplications on strategy in a world

wherebusiness as usual remains.

For transition risks and opportunities,

IEAscenario data has been used, due to its

relevance to the Group’s decarbonisation

strategy, global and regional coverage,

timeframes considered and information on

drivers and frequency of scenario updates.

1.5°C Net Zero Emissions scenario (NZE)

Source: IEA Net Zero Economy by 2050

Announced Pledges Scenario (APS)

Source: IEA Announced Pledges Scenario

Stated Policies Scenario (STEPS)

Source: IEA Stated Policies Scenario

Transition risk – technology

Materiality of risk or opportunity/

timeframe

Medium to long term

Description Unmitigated potential impact Business readiness

In the UK, nearly half of BAE Systems’ emissions

come from heating buildings.To support the

decarbonisation ofourheating systems over

thelong term, wecould consider switching to

lower-emissionsheating technology.

The decarbonisation of energy for heating poses

achallenge, as most cost-effective solutions are

currently expensive and subscale. This could

resultin increased costs arising from the need

toreplace existing plant and equipment to

incorporate lower-emissions technologies,

suchasheat pumps.

We have reviewed the roll-out of heat pumps

asapotential option to replace current gas-fired

heating systems and this was assessed under

three IEApricing scenarios to 2050.

Introducing alternative energy sources

such asrenewable energy-powered heat

pumps will lower our emissions, but at

this point would require significant capital

expenditure to retrofit our sites and install

the devices. Due to the difficulties of

switching fuels and maintaining legacy

systems, installing heat pumps is

considered one of the best transition

solutions over the long term. This is

because heat pumps are more efficient

than other heating systems inproducing

more heat energy than the amount of

electricity consumed.

Heat pump technology is currently

expensive, asthe technology and market

is still developing.

Financial impact

Low

In the UK, we have considered the feasibility ofintroducing

renewable energy-powered heatpumps over the long term,

as part of thedecarbonisation strategy.

We will continue to monitor the development oflower-

emissions heating technology, over thelong term, as a way

tosupport the delivery ofour net zero ambitions.

Transition opportunity – products

Materiality of risk or opportunity/

timeframe

Medium

Description Unmitigated potential impact Business readiness

The transition to a low carbon economy presents

opportunities for BAE Systems and continued

innovation will be required to provide solutions

toexisting and new customer bases.

Our ability to increase revenues will be

dependent on applying advanced

engineering capabilities to develop new

products that support lower-emissions

requirements, creating new business lines

and enhancing competitive positions in

order to retain and grow market share.

Continued investment, both Group and

customer, in research and development

will be required.

To decarbonise by 2050, we must ensure thatourproducts

and services support a decarbonisation pathway. This will

beachieved byadvancing the efficiency of our products

andservices, in the short term, and transitioning to lower

orzero emissions products and technology longer term.

Thiswill require continued investment in our R&D activities.

We have been engaging with our customers tounderstand

their decarbonisation pathways including the challenges they

face regarding operational effectiveness and availability. Many

customers are setting targets and looking for lower carbon,

sustainable products. We are working to understand and

influence their futurerequirements to help inform and shape

product innovation and development.

Sustainable fuels will help facilitate our product and service

decarbonisation pathway over the long term.

BAE Systems can use the market presence and brand

recognition for its electric and hybrid propulsion systems

portfolio developed through the well-established urban transit

bus products, by leveraging and transitioning this expertise

toother, emerging and nascent markets such as aviation,

maritime and heavy industrial transport vehicle markets.

233

BAE Systems plc Annual Report 2023

Financial statementsGovernance Additional informationStrategic report

Other sustainability information continued

Greenhouse gas (GHG) emissions data

Absolute energy consumption

2023

2022

Global

kWh

Global

kWh

Energy consumption

Scope 1 and 2 1,315,552,368 534,961,834 1,469,387,190 594,930,180

GHG emissions data

2023

2022

Scope definition

Global

tonnes

Global

tonnes

1 Emissions from activities which

BAESystemsowns orcontrols (Scope 1) 107,360 54,204 113,089 55,686

2 Emissions from the electricity and steam

purchased for BAESystems’ use(Scope 2

– location-based) 243,457 54,456 281,182 60,374

Total gross Scope 1 and 2 emissions 350,817 108,660 394,271 116,060

3 Emissions from employee business travel

(Scope 3) 114,030 44,261 62,519 20,999

GHG emissions per employee

2023

2022

Global

tonnes

Global

tonnes

Per each full-time equivalent employee

(Scope1 and 2) 4 3 4 3

1. Relevant reporting period 1 November 2022

to31 October 2023.

2. Deloitte has provided independent limited

assurancein accordance with the International

Standard for Assurance Engagements 3000

(ISAE3000) and Assurance Engagements on

Greenhouse Gas Statements (ISAE 3410) issued

bythe International Auditing and Assurance

Standards Board (IAASB) over the selected metrics

identified with a

. Deloitte’s full unqualified

assurance opinion, which includes details of

theselected metrics assured, can be found

atbaesystems.com/annual-report

To see our Basis of Reporting 2023 visit

baesystems.com/annual-report

2023 key environment data

Water consumption

2023

cubic metres

2022

cubic metres

Mains 2,135,695 2,409,896

Abstracted 2,925,651 5,968,417

Total 5,061,346 8,378,313

Recycled 884,906 728,911

Waste production

2023

tonnes

2022

tonnes

Non-hazardous 58,482 42,413

Hazardous 9,308 5,072

Total 67,790 47,485

Recycled

32,870 33,167

Electricity consumption

2023

kWh

2022

kWh

Grid 755,301,151 877,726,240

Renewable 2,083,735 5,951,873

Total

757,384,886

883,678,113

1. Relevant reporting period 1 November 2022 to 31 October 2023.

2. BAE Systems Internal Audit has reviewed the systems, processes and controls

in place to collate, validate and report this data. Based on the procedures and

the evidence obtained, nothing has come to its attention that indicates the

disclosures have not been properly prepared in accordance with such systems,

processes andcontrols.

3. For 2022, includes non-hazardous and hazardous waste recycling.

4. For 2022, estimates now reported in line with SECR requirements.

5. Deloitte has provided independent limited assurance in accordance with the

International Standard for Assurance Engagements 3000 (ISAE3000) and

Assurance Engagements on Greenhouse Gas Statements (ISAE 3410) issued

bythe International Auditing and Assurance Standards Board (IAASB) over the

selected metrics identified with a

. Deloitte’s full unqualified assurance

opinion, which includes details of the selected metrics assured, can be found

at baesystems.com/annual-report.

Climate scenarios and data used

For physical risk, TCFD scenario analysis guidance recommends analysing at least three different climate scenarios to ensure a broad range

ofoutcomes are considered. Each scenario causes different levels of future physical risk, and resulting losses. This enables the user to draw

comparisons between the scenarios and the level of risk and subsequent damage and disruption for future periods. We have focused on

theworst-case scenario (SSP 5 – RCP 8.5)

in the analysis below, as this presents the most risk to our operations.

Physical risk scenario Intergovernmental Panel on Climate Change trajectory alignment Scenario policy action

>4°C SSP 5 – RCP 8.5

Temperature rise by 2100: 4.4°C

No additional policy action

2–3°C SSP 2 – RCP 4.5

Temperature rise by 2100: 2.7°C

Late policy action

<2°C SSP 1 – RCP 2.6

Temperature rise by 2100: 1.8°C

Early policy action

1. Shared Socioeconomic Pathway (SSP). Representative Concentration Pathway (RCP).

234

BAE Systems plc Annual Report 2023

Other sustainability information

Methodology

Greenhouse gas emissions data is reported in line

with an operational control method, we use the

Greenhouse Gas Protocol Corporate Accounting

and Reporting Standard as guidance to support

our approach to reporting. Our reporting

boundary for Streamlined Energy and Carbon

Reporting (SECR) is the same as our reporting

boundary for the purposes of our financial

statements. Unless otherwise stated data covers

a12-month period between the 1 November

2022 to 31 October 2023.

The GHG protocol allows participants to arrange

their organisational boundaries using two different

methodologies. One using the equity share or

two the control approach. The business has

chosen to use the control approach. Furthermore

the control approach selected allows for two

further methodologies to be applied to define

control either a financial approach or operational

approach. The business uses the latter.

As a business we utilise a tool called the Global

Property Database (GPD) to record and monitor

locations which we either own or lease. Prior to

this reporting period all locations listed in GPD

wehad deemed were within our organisational

boundary and we had operational control. In

2023 we reviewed our definition of operational

control in order to ensure we are not accounting

for emissions which are outside of our business

control and where we don’t have the ability to

influence. A review was undertaken to determine

the combined effect of the changes we’ve

introduced on the 2020 baseline. The changes

tooperational control along with improvements

such as the introduction of internal area being

used as a multiplier for kWh consumption

resulted in a 1% reduction to the baseline.

Therefore we have not considered this change

material requiring baseline recalculation.

Emission factors for fuels and UK electricity

arepublished at www.gov.uk/government/

collections/government-conversion-factors-for-

company-reporting. Emission factors for US

electricity are published at Download Data |

USEPA, natural gas and other fuels are published

at Simplified GHG Emissions Calculator | US EPA.

Emissions factors for Australia (AUS) electricity

and natural gas are published at National

Greenhouse Accounts Factors: 2023 – DCCEEW.

Emission factors for Sweden’s (SWE) natural

gasare published at https://unfccc.int/

documents/224123 and electricity European

Residual Mix | AIB (aib-net.org). Electricity

emission factors for Saudi Arabia (KSA), and

Restof World (ROW) are published at Emissions

Factors 2023 – Data product – IEA.

For this reporting cycle, the 2023 UK Government

emissions factors published by the Department

for Business, Energy and Industrial Strategy (BEIS)

have been used for majority of scope 1 and 3

calculations, this covers businesses located in the

UK, Australia, Kingdom of Saudi Arabia and rest

of world. Inorder to improve the accuracy of

reporting theInc. business in the US and Sweden

are nowusing US EPA emissions factors.

Scope 2 emissions factors are from a variety

ofsources including country specific emissions

factors such as, BEIS, Australian National

Greenhouse Gas Accounts 2023 , US

Environmental Protection Agency (EPA) and

International Energy Agency (IEA). The most

up-to-date Emissions and Generation Resource

Integrated Database (eGRID) factors published

byUS EPA are used for US electricity. For the

2023 reporting cycle, the most recent electricity

US factors are from the year 2021.

Emissions factors published by the UK

Government department for Energy, Security

andNet Zero – Business Energy and Industrial

Strategy, are presented as CO

e, they cover all

sixgreenhouses gases listed under the Kyoto

Protocol. For further information on the inclusion

of HFC’s in the reported inventory please refer

tothe section on fugitive emissions.

The principal record of the Group’s worldwide

facilities is its legal department’s Global Property

Database. The database holds records of all

locations which are either wholly owned, leased

or licensed sites.

Greenhouse gas emissions are primarily calculated

from energy consumption records e.g. invoiced

data or meter reads. For the UK & ROW these are

reported via the Group’s global environmental

database (CR Desktop). Data related to the Inc.

business is provided for internal use quarterly

along with full annual data submission. Where

consumption records are not available estimates

may be used and these will be highlighted in

thedatabase.

Where actual usage data is not available

forfacilities and residences within the Global

Property Database, an estimated consumption

isused based on the type and size of the building,

if no information is available on the size of the

building a default benchmark factor is used.

Greenhouse gas emissions related to business

travel include air travel data for the majority of

the global business, rail data for business units

operating in the UK and US, and vehicle

(including hire car, company car and personal car)

data for business units operating in the UK, US

and Australia. These data sets are taken from

suppliers’ procurement records.

The property database details are taken in

quarter3 of the financial reporting year (Jan–Dec),

this means any properties acquired between

quarter 4 of the previous year and quarter 3

ofthe reporting year are included within the

reporting boundary. If a business is acquired

within quarter 4 of the financial reporting year

itwill included in the reporting boundary in the

next full reporting year after the change.

If a business or facility has closed between

quarter 4 of the previous year and quarter 3

ofthe current year, it will not be included within

the reporting boundary. Any locations which

close in quarter 4 of the reporting year will be

removed from reporting boundary in the next

fullreporting year after the change.

Emissions from non-wholly owned subsidiaries

are included in the dataset if BAE Systems have

operational control at the location. They are

accurate as of 31 December 2023 and reflect

locations in operation at that time. For the majority

of these locations the joint venture either operates

from one of our CR Desktop reporting locations

or are included in benchmarked estimates. Some

companies listed were previously described as

dormant in 2022 and remain dormant in 2023.

For the purposes of calculating emissions, we

have excluded dormant companies as it has been

assumed that they do not consume energy.

Equity accounted investments and other

investments detailed in the Annual Report are

notincluded, these investments represent

BAESystems scope 3 emissions.

Emissions from pension scheme properties not

occupied by the group are not included.

Trading of emissions are not taken into account

for the purposes of reporting, for example

wherethe business has a requirement to maintain

compliance with trading schemes e.g. UK ETS,

the total energy consumed is reported regardless

of emissions trading.

The Scope 2 Greenhouse Gas Emissions

associated with the GHG Protocol ‘Market-Based’

method have been calculated as 209,612

tCO

In line with the GHG Protocol Guidance, this

figure has been calculated using residual-mix

emission factors where available for our UK and

US operations. In our other significant operating

regions, residual mix emission factors are either

unavailable or the resulting absolute emissions

atgroup level are within the margin of error

andtherefore country-specific emissions factors

have been used in line with the GHG Protocol

Guidance. If sites consume grid electricity backed

by Renewable Energy Guarantee of Origin

(REGOs), this has been taken into consideration

within the calculations.

1. Deloitte has provided independent limited assurance in accordance with the International Standard for Assurance Engagements 3000 (ISAE3000) and

AssuranceEngagements on Greenhouse Gas Statements (ISAE 3410) issued bythe International Auditing and Assurance Standards Board (IAASB) over

theselectedmetrics identified with a

. Deloitte’s full unqualified assurance opinion, which includes details of the selected metrics assured, can be found

atbaesystems.com/annual-report.

235

BAE Systems plc Annual Report 2023

Financial statementsGovernance Additional informationStrategic report

Registered office

6 Carlton Gardens

London

SW1Y 5AD

United Kingdom

Telephone: +44 (0)1252 373232

Company website: baesystems.com

Registered in England and Wales, No. 01470151

Registrars

Equiniti Limited (0140)

Aspect House

Spencer Road

Lancing

West Sussex

BN99 6DA

United Kingdom

If you have any queries regarding your shareholding or need to notify

any changes to your personal details, please contact Equiniti.

Equiniti’s website (help.shareview.co.uk) includes a comprehensive

set of answers to many frequently asked questions relating to managing

a shareholding. If you cannot find the answer to your question, there

isan online email form, which will help to ensure your question is

directed to the most appropriate team for a response. Alternatively,

youcan call the BAE Systems Helpline on 0371 384 2044 or, from

outside the UK, +44 121 415 7058. Lines are open from 8.30am

to5.30pm Monday to Friday, excluding UK bank holidays.

In addition, the following services are offered to shareholders:

– Shareview – online access to your shareholding, including

balancemovements, indicative share prices and information

onrecent payments.

– Dividend mandates – have your dividends paid directly into

eitheryour UK bank/building society account or an overseas

bankaccount.

– Dividend reinvestment plan (DRIP) – A DRIP is provided by

Equiniti Financial Services Limited. The DRIP enables the Company’s

shareholders to elect to have their cash dividend payments used

topurchase the Company’s shares. More information can be

foundat shareview.co.uk/info/drip.

More information on all these services can be found on Equiniti’s

website (shareview.co.uk).

American Depositary Receipts

BAE Systems plc American Depositary Receipts (ADRs) are traded

onthe over-the-counter market under the symbol BAESY. OneADR

represents four BAE Systems plc ordinary shares.

JP Morgan Chase Bank N.A. is the depositary. If you should have

anyqueries please contact:

JP Morgan Chase Bank N.A.

PO Box 64504

St Paul

MN 55164-0504, USA

Email: jpmorgan.adr@eq-us.com

Telephone (toll free from within US and Canada): +1 800 990 1135

Telephone from outside US and Canada: +1 651 453 2128

ShareGift

ShareGift, the share donation charity (registered charity number

1052686), accepts donations of small parcels of shares which may

beuneconomic to sell. Details of the scheme are available from

ShareGift at sharegift.org, by telephone on 020 7930 3737

orbyemail: help@sharegift.org

Share price information

The middle market price of the Company’s ordinary shares on

31December 2023 was 1,111p and the range during the year

was820pto1,129p.

For more information

Visit the Shareholder information section of our website:

investors.baesystems.com

Financial calendar

Financial year end 31 December

Annual General Meeting 9 May 2024

2023 final ordinary dividend payable 3 June 2024

2024 half-yearly results announcement 1 August 2024

2024 interim ordinary dividend payable 2 December 2024

2024 full-year results:

– preliminary announcement

– Annual Report

February 2025

March 2025

2024 final ordinary dividend payable June 2025

Shareholder information

Spot the warning signs

Fraudsters will often:

– contact you out of the blue;

– apply pressure to invest quickly;

– downplay the risks to your money;

– promise tempting returns that sound too good to be true; and

– say that they’re only making the offer available to you or

evenaskyou to not tell anyone else about it.

If you’re suspicious, report it

You can report the firm or scam to the FCA by contacting

theirConsumer Helpline on 0800 111 6768 or using the

reportingform using the link shown below.

If you’ve lost money in a scam, contact Action Fraud

on03001232040 or www.actionfraud.police.uk

How to avoid investment scams

Reject unexpected offers

Scammers usually cold call, but contact can also come

byemail, post,word of mouth or at a seminar. If you’ve

been offered an investment out of the blue, chances

areit’s a high-risk investment orascam.

Check the FCA Warning List

Use the FCA Warning List to check the risks of a potential

investment – you can also search to see if the firm is

known to be operating without its authorisation.

Get impartial advice

Get impartial advice before investing – don’t use an

adviser from thefirm that contacted you.

Beware of share fraud

Investment scams are often sophisticated and difficult to spot.

Be ScamSmart and visit

www.fca.org.uk/scamsmart

236

BAE Systems plc Annual Report 2023

Shareholder information

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 plc 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, appear in a number of places throughout this document and include statements

regarding the intentions, beliefs or current expectations of BAE Systems plc concerning, amongst other things,

itsresults in relation to operations, financial condition, liquidity, prospects, growth, commitments and targets

(including environmental, social and governance commitments and targets), strategies and the industry in

whichit operates. Forward-looking statements can be identified by the use of forward-looking terminology

suchas “believes”, “expects”, “may”, “intends”, “will”, “will continue”, “should”, “would be”, “seeks”,

“anticipates” or similar expressions or the negative thereof or other variations thereof or comparable

terminology. By their nature, forward-looking statements involve risks and uncertainties because they relate

toevents and depend on circumstances that may or may not occur in the future.

Forward-looking statements are not guarantees of future performance and the actual results of operations,

financial condition and liquidity of BAE Systems plc, the development of the industry in which it operates and

theability of BAE Systems plc to meet its commitments and targets may differ materially from those made

inorsuggested by the forward-looking statements contained in this document. In addition, even if results

ofoperations, financial condition and liquidity of BAE Systems plc, the development of the industry in which

itoperates and/or performance against commitments and targets are consistent with the forward-looking

statements contained in this document, those results, developments or performance may not be indicative

ofresults, developments or performance insubsequent periods.

These forward-looking statements speak only as of the date of this document. Subject to the requirements of

the Disclosure Guidance and Transparency Rules, the Market Abuse Regulation or applicable law, BAE Systems

plc explicitly disclaims any intention or obligation or undertaking publicly to release the result of any revisions

toany forward-looking statements in this document that may occur due to any change in its expectations or to

reflect events or circumstances after the date of it. All subsequent written and oral forward-looking statements

attributable to either BAE Systems plc or to persons acting on its behalf are expressly qualified in their entirety

bythe cautionary statements referred to herein and contained elsewhere in this document.

BAE Systems plc and its directors accept no liability to third parties in respect of this document 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.

Printed by Park Communications on FSC

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Park works to the EMAS standard and its Environmental Management Systemiscertified to ISO 14001.

100% of the inks used are vegetable oil based, 95% of press chemicals arerecycled for further use and,

onaverage, 99% of any waste associated withthisproduction will be recycled.

This document is printed on materialcontaining 100% recycled fibre.

This is a certified climate neutral print product for which carbon emissions havebeen calculated and offset by

supporting recognised carbon offset projects. The carbon offset projects are audited and certified according

tointernational standards and demonstrably reduce emissions. The climate neutrallabel includes a unique ID

number specific to this product which canbetracked at www.climatepartner.com, giving details of the carbon

offsetting process including information on the emissions volume and thecarbon offset project being supported.

Designed and produced by Radley Yeldar.

BAE Systems plc

6 Carlton Gardens

London

SW1Y 5AD

United Kingdom

T +44

(

)

1252 373232

baesys tems.com

Registered in England and Wales, No. 01470151

BAE SYSTEMS is a registered trade mark of BAE Systems plc.

Independent auditor’s reasonable assurance report to the Members of BAE Systems plc on the

compliance of the Electronic Format Annual Financial Report with Financial Conduct Authority (FCA)

Disclosure Guidance and Transparency Rule (DTR) 4.1.15R-DTR 4.1.18R

Report on compliance with the requirements for iXBRL mark up (‘tagging’) of consolidated financial

statements included in the Electronic Format Annual Financial Report

We have undertaken a reasonable assurance engagement on the iXBRL mark up of consolidated

financial statements for the year ended 31 December 2023 of BAE Systems plc (the “company”)

included in the Electronic Format Annual Financial Report prepared by the company.

Opinion

In our opinion, the consolidated financial statements for the year ended 31 December 2023 of the

company included in the Electronic Format Annual Financial Report, are marked up, in all material

respects, in compliance with DTR 4.1.15R-DTR 4.1.18R.

The directors’ responsibility for the Electronic Format Annual Financial Report prepared in compliance

with DTR 4.1.15R-DTR 4.1.18R

The directors are responsible for preparing the Electronic Format Annual Financial Report. This

responsibility includes:

• the selection and application of appropriate iXBRL tags using judgement where necessary;

• ensuring consistency between digitised information and the consolidated financial

statements presented in human-readable format; and

• the design, implementation and maintenance of internal control relevant to the application

of DTR 4.1.15R-DTR 4.1.18R.

Our independence and quality control

We have complied with the independence and other ethical requirements of Financial Reporting

Council’s (the ‘FRC’s’) Ethical Standard as applied to listed public interest entities, and we have

fulfilled our other ethical responsibilities in accordance with these requirements.

We apply International Standard on Quality Control 1

and, accordingly, maintain a comprehensive

system of quality control including documented policies and procedures regarding compliance with

ethical requirements, professional standards and applicable legal and regulatory requirements.

Our responsibility

Our responsibility is to express an opinion on whether the iXBRL mark up of consolidated financial

statements complies in all material respects with DTR 4.1.15R-DTR 4.1.18R based on the evidence we

have obtained. We conducted our reasonable assurance engagement in accordance with

International Standard on Assurance Engagements (UK) 3000, Assurance Engagements Other than

Audits or Reviews of Historical Financial Information (‘ISAE (UK) 3000’) issued by the FRC.

A reasonable assurance engagement in accordance with ISAE (UK) 3000 involves performing

procedures to obtain reasonable assurance about the compliance of the mark up of the consolidated

financial statements with the DTR 4.1.15R-DTR 4.1.18R. The nature, timing and extent of procedures

selected depend on the practitioner's judgement, including the assessment of the risks of material

departures from the requirements set out in DTR 4.1.15R-DTR 4.1.18R, whether due to fraud or error.

Our reasonable assurance engagement consisted primarily of:

• obtaining an understanding of the iXBRL mark up process, including internal control over the

mark up process relevant to the engagement;

• reconciling the marked up data with the audited consolidated financial statements of the

company dated 31 December 2023;

• evaluating the appropriateness of the company’s mark up of the consolidated financial

statements using the iXBRL mark-up language;

• evaluating the appropriateness of the company’s use of iXBRL elements selected from a

generally accepted taxonomy and the creation of extension elements where no suitabl

element in the generally accepted taxonomy has been identified; and

• evaluating the use of anchoring in relation to the extension elements.

In this report we do not express an audit opinion, review conclusion or any other assurance

conclusion on the consolidated financial statements. Our audit opinion relating to the consolidated

financial statements of the company for the year ended 31 December 2023 is set out in our

Independent Auditor’s Report dated 20 February 2024.

Use of our report

Our report is made solely to the company’s members, as a body, in accordance with ISAE (UK) 3000.

Our work has been undertaken so that we might state to the company those matters we are required

to state to them in this report and for no other purpose. To the fullest extent permitted by law, we do

not accept or assume responsibility to anyone other than the company and the company’s members

as a body for our work, this report, or for the conclusions we have formed.

Claire Faulkner (Senior statutory auditor)

For and on behalf of Deloitte LLP

Statutory Auditor

London, UK

6 March 2024