## Annual Report 2022 ## BAE Systems plc baesystems.com ## In this report ## Strategic report | Overview 01–15 | Delivering for our stakeholders 30–37 | Segmental review 92–115 | | --- | --- | --- | | Our purpose 01 | Our investment proposition 30 | Electronic Systems 94 | | Our business at a glance 02 | Our stakeholders 32 | Platforms & Services 98 | | Our financial highlights 04 | The work of the Board 34 | Air 102 | | Our business highlights 06 | | Maritime 106 | Sustainability 38–79 Chairman’s letter 08 Cyber & Intelligence 110 Our sustainability agenda 38 Chief Executive’s review 12 Looking forward by segment 114 Addressing climate risks 40 Strategy and performance 16–29 Ideas, innovation and technology 54 Risk 116–127 Our strategic framework 16 Creating opportunity for How we manage risk 116 peopleandcommunities 60 Our business model 18 Our risk management framework 118 Success through partnering 68 Our markets 20 Our principal risks 119 Our foundations 72 Our key programmes and franchises 24 Viability statement 126 Our investment in technology 26 Financial review 80–91 2022 financial highlights 81 Financial performance metrics 82 Guidance for 2023 90 ## Governance Directors’ report 128–210 Board and Executive Committee Annual remuneration report at a glance 165 diversityinformation 139 Governance at a glance 128 Annual remuneration report 167 Nominations Committee report 140 Chairman’s governance letter 129 Directors’ remuneration policy 190 Audit Committee report 145 Board of directors 131 Statutory and other information 206 Environmental, SocialandGovernance Governance framework 134 Committee report 151 Auditor’s report 211–220 Applying the UK Corporate Innovation and Technology Independent Auditor’s report 211 GovernanceCode Principles 136 Committee report 157 Compliance with the UK Corporate Remuneration Committee report 160 Governance Code provisions 138 ## Financial statements Group accounts 221–293 Consolidated cash flow statement 229 Company balance sheet 295 Preparation 222 Notes to the Group accounts 230 Notes to the Company accounts 296 Consolidated income statement 225 Company accounts 294–301 Financial glossary 302 Consolidated statement Company statement Shareholder information 304 of comprehensive income 226 of comprehensive income 294 Consolidated statement Independent Auditor’s reasonable Company statement of of changes in equity 227 assurance Report on ESEF prepared changes in equity 294 Annual Financial Report 307 Consolidated balance sheet 228 Cautionary statement: All statements other than statements of historical fact included in this document, including, without limitation, those regarding the financial condition, results, operations and businesses of BAESystems and its strategy, plans and objectives and the markets and economies in which it operates, are forward-looking statements. Such forward-looking statements, which reflect management’s assumptions madeon the basis of information available to it at this time, involve known and unknown risks, uncertainties andother important factors which could cause the actual results, performance or achievements of BAESystems or the markets and economies inwhich BAESystems operates to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. BAESystemsplc and its directors accept no liability to third parties in respect of this report save as would arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with Schedule 10A of the Financial Services and Markets Act 2000. It should be noted that Schedule 10A and Section 463 of the Companies Act 2006 contain limits on the liability of the directors of BAESystemsplc so that their liability is solely to BAESystemsplc. Strategic report Financial statementsGovernance ## Our purpose ## At BAE Systems, our purpose is to Through careful long-term ## serve, supply and protect those who sustainable management and ## serve and protect us, inacorporate governance ofour business we ## culture that is performance driven willcontinue to create value for ## and values led. ourstakeholders. ## We have an important role How our purpose connects ## insociety because we: toourstrategy • help our customers to provide security and safety; • We never lose sight of who are the users of our products and services – often members of the armed forces and security • contribute to the economic prosperity of the places where services – and the critical work they do to keep us safe. ourpeople live and work; • Our strategy sets out our actions for investing in the • support high-value jobs in our business and in our supply chains; long-term future of the Group based on driving operational • value our people and their diversity so they can fulfil their excellence, continuously improving our competitiveness and potential in an inclusive and supportive working environment; efficiency, and advancing and further leveraging our • seek to identify opportunities for individuals from technology. By doing this wewill fulfil the needs of disadvantagedbackgrounds; customers and build a sustainable future for our business for • support employees’ rights in relation to freedom of association; the benefit of our stakeholders. • inspire and excel in the work we do – the technologies we Page 16 develop and the talent we build; Our strategic framework • develop cutting-edge technologies to sustain the competitive strength of the Company in global markets; ## • create best-in-class products and services by forging strong How our purpose connects relationships with our suppliers and partners; ## toourculture • care for and support our local communities; and • use our knowledge and technologies to reduce the environmental • We are proud of the work we do to serve and supply those impacts of our activities. We have set ourselves the target of whoprotect us. We know our customers rely on us so we achieving net zero greenhouse gas emissions across our constantly innovate and go the extra mile in the products that operations (Scope 1 and 2) by 2030. wemake, the quality we deliver and the services we offer. • We recognise we are entitled to nothing and must earn everything. • We are accountable for all that we do and seek to do the right thing at all times. • Our culture values diversity and rewards integrity and merit sothateveryone can fulfil their potential. • The safety and wellbeing of our employees is paramount. • Wehave a deep commitment to supporting the communities inwhich we work and to reducing the environmental impacts ofouractivities. • At the heart of our business we are performance driven and valuesled. Page 32 Page 34 Our stakeholders The work of the Board BAE Systems plc Annual Report 2022 01 Strategic report / Overview ## Our business at a glance ## At BAE Systems, we provide some of the BAE Systems focuses ## world’smost advanced, technology-led defence, its operations across 3 ## aerospace and security solutions. We employ five key sectors: 1 ## askilled workforce of 93,100 people in around ## 40countries. Working with customers and local ## partners, we develop, engineer, manufacture, ## andsupport products and systems to deliver ## military capability, protect national security, and ## keep critical information and infrastructure secure. 2 2 2022 revenue 2022 sales Sales by sector 1 Electronic Systems 22% 2 Platforms & Services 16% ## £21,258m £23,256m 3 Air 33% 4 Maritime 20% 5 Cyber & Intelligence 9% 2 | Where we operate | Sales | by destination | | | --- | --- | --- | --- | | BAE Systems maintains leading positions in | A US 44% | | | | | B UK 20% | | 5 | majordefence andsecurity markets around C Kingdom of Saudi Arabia 11% 1 theworld – in the US, UK, theKingdom D Australia 4% ofSaudiArabia and Australia – as well as E Other international markets 21% established positions in a number of other 4 international markets. SALES 2 3 B A 11 C 6 10 EMPLOYEES 7 E D 9 8 | | 1 | | | 1 | | --- | --- | --- | --- | --- | | Total employees | | Employees by location | Employees by sector | | | | | A US 31,300 34% | 6 Electronic Systems 16,900 18% | | | | | B UK 39,600 43% | 7 Platforms & Services 12,200 13% | | | 93,100 | | C Kingdom of Saudi Arabia 6,700 7% | 8 Air 24,400 26% | | | | | D Australia 4,900 5% | 9 Maritime 24,200 26% | | | | | E Other 10,600 11% | 10 Cyber & Intelligence 10,500 11% | | 11 HQ/Other 4,900 6% Page 20 Page 24 Page 38 Page 80 Page 93 Our markets Our key programmes and franchises Our sustainability agenda Our financial review Segmental review 1. Including share of equity accounted investments. 2. Sales is defined in the Financial Glossary on page 302. 3. The Group has five operating sectors which, together with HQ, make its six operating segments as defined by IFRS 8 Operating Segments. 02 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance Page 94 ## Electronic Systems Segmental review We provide: – Command, Control, Communications, Computers, Intelligence, Surveillance and – Design, build and support of integrated Reconnaissance (C4ISR) systems for airborne electronic warfare systems. persistent surveillance, identification systems, – Development and production of avionics signals intelligence, underwater and surface andelectronic systems for military and warfare solutions, and space resiliency. commercial aircraft. – Electric and hybrid power and propulsion – Design and manufacture of state-of-the-art solutions to advance vehicle mobility, systems and technology to enable the efficiency and capability. execution of precision strike missions. – Next-generation threat detection, countermeasure and attack solutions. Page 98 ## Platforms & Services Segmental review We provide: – Sustainment activities and services, including naval ship repair, modernisation and overhaul – Design, manufacture, upgrade and support in the US. oftracked and amphibious combat vehicles. – Management and operation of government- – Manufacture, maintenance, repair and owned munitions facilities in the US. upgradeof naval gun systems, artillery, advanced weapons, missile launchers and – Production and upgrades for tracked and wheeled precision munitions. military vehicles for Turkish and international customers through a 49% interest in FNSS. Page 102 ## Air Segmental review We provide: – Design and integration of new technology andsystems upgrades to existing aircraft. – World-leading capabilities in military and commercial aircraft technology. – Advanced computer simulation to create realistic and immersive synthetic environments. – A wide range of munitions, explosives, gun systems and artillery systems. – Advanced radar solutions to detect threats quicker and enable faster response times. – Training to the armed forces to train the right people to the right standard, at the right time. – Design and manufacture of missiles and missile systems through a 37.5% interest – Test support to commercial, military and inMBDA. aerospace customers. Page 106 ## Maritime Segmental review We provide: – Design and delivery of training systems andservices for maritime platforms – Design, manufacture and support andequipment. ofsubmarines and complex warships. – Design and manufacture of ammunition, – In-service support to surface shipsand precision munitions, artillery systems facilities management in the UK. andmissile launchers for UK and other – Design, manufacture and support of naval armedforces. gunsystems, torpedoes, radars, and navalcommand and combat systems. Page 110 ## Cyber & Intelligence Segmental review We provide: – Air and space force solutions to modernise, maintain, test, and cyber-harden aircraft, – Cyber, intelligence and security capabilities radars, strategic missile systems mission toUS, UK and other government agencies applications and information systems. todetect, deter and dissuade threats to national security. – A range of space capabilities that enable integration across cyberspace, sea, land and – Engineering, integration and sustainment air, allowing secure access to intelligence. services for critical weapon systems, Command, Control, Communications, Computers, Cyber, – Mission-enabling solutions and services to Intelligence, Surveillance and Reconnaissance intelligence and federal/civilian agencies. (C5ISR) and cyber security. BAE Systems plc Annual Report 2022 03 Strategic report / Overview ## Our financial highlights ### We monitor the underlying financial performance of the Group using the alternative performance ### measures defined in the financial performance metrics on page 82. These measures are not ### defined in International Financial Reporting Standards (IFRS) and, therefore, are considered to be ### non-Generally Accepted Accounting Practice (GAAP) measures. Accordingly, the relevant IFRS ### measures are also presented where appropriate. 1 ### Financial performance measures defined by the Group Sales KPI Order intake BONUS KPI 2 | £23,256m 4% growth | | | | | | £37,093m £15,635m increase | | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | 2022 | | | | 23,256 | | 2022 | | | | | | | | 37,093 | | | | 2021 | | | 21,310 | | | 2021 | | | 21,458 | | | | | | | | | 2020 | | | 20,862 | | | 2020 | | | 20,915 | | | | | | | | | | | | | | KPI | | | | | 3 | | | | | BONUS | KPI | | Underlying EBIT | | | | | | Underlying earnings per share | | | | | | | | | | | | | | | | | 2 | | | | | | | | | | | 2 | | £2,479m 5% growth | | | | | | 55.5p 9% growth | | | | | | | | | | | | 2022 | | | | 2,479 | | 2022 | | | | | | | | 55.5 | | | | 2021 | | | 2,205 | | | 2021 | | | | | | | 47.8 | 50.7 | | | | 2020 | | 2,037 | | | | 2020 | | | | | | 44.3 | | | | | | Free cash flow | | | | | KPI | Net debt (excluding lease liabilities) | | | | | | | | | BONUS | KPI | | £1,950m £86m higher | | | | | | £ | ( 2,023 | ) m £137m decrease | | | | | | | | | | 2022 | | | | 1,950 | | 2022 | | | | | ( 2,023 | ) | | | | | | 2021 | | | | 1,864 | | 2021 | | | | | | ( 2,160 | ) | | | | | 2020 | 1,367 | | | | | 2020 | | | | | | | | ( 2,718 | ) | | Order backlog ## £58.9bn £14.9bn increase | 2022 | | 58.9 | | --- | --- | --- | | 2021 | 44.0 | | | 2020 | 45.2 | | 04 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance KPI 1. The definitions of all financial performance measures, and purpose for financial performance measures defined by the Group, are References to Key Performance Indicators provided on pages 82 to 83. (KPIs) throughout the Annual Report. 2. Growth rates for Sales, Underlying EBIT and Underlying EPS are on a constant currency basis (i.e. current year compared with prior year BONUS translated at current year exchange rates). All other growth rates 75% of the UK executive directors’ annual and year-on-year movements are ona reported currency basis. bonuses are based on the achievement of 3. Growth rate disclosed excludes the impact of the 2021 one-off financial KPIs (see page 179). taxbenefit of £94m in respect of 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 (see note 6). For 2021, Underlying EPS of47.8p is shown excluding the one-off tax benefit and of 50.7p including the one-off tax benefit. 1 ### Financial performance measures derived from IFRS | Revenue | | | | | Order book | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | £21,258m 9% growth | | | | | £48.9bn £13.4bn increase | | | | | | 2022 | | | | 21,258 | 2022 | | | | 48.9 | | 2021 | | | 19,521 | | 2021 | 35.5 | | | | | 2020 | | | 19,27 7 | | 2020 | 36.3 | | | | | Operating profit | | | | | Basic earnings per share | | | | | | £2,384m Stable | | | | | 51.1p 7% decrease | | | | | | 2022 | | | | 2,384 | 2022 | | | 51.1 | | | 2021 | | | | 2,389 | 2021 | | | | 55.2 | | 2020 | | 1,930 | | | 2020 | 40.7 | | | | | Net cash flow from operating activities | | | | | Group’s share of net post-employment benefits surplus/(deficit) | | | | | | £2,839m £392m higher | | | | | £0.6bn £2.7bn improvement | | | | | | 2022 | | | | 2,839 | 2022 | | | | 0.6 | | 2021 | | | 2,447 | | 2021 | | ( 2.1 | ) | | | 2020 | 1,166 | | | | 2020 | | ( 4.5 | ) | | Dividend per share ## 27.0p 7.6% growth | 2022 | | | 27.0 | | --- | --- | --- | --- | | 2021 | | 25.1 | | | 2020 | 23.7 | | | BAE Systems plc Annual Report 2022 05 Strategic report / Overview ## Our business highlights ## In 2022, we delivered on our customers’ key programmes ## inachallenging global environment. ### Typhoon and Hawk ### inservice Eight Typhoon aircraft now delivered and in service with the Qatar Emiri Air Force. Nine Hawk advanced jet trainer aircraft accepted and delivered to 11Squadron, the joint Qatar-UK Hawk squadron based at RAFLeeming, UK. ### Launch of the ### Global Combat ### Air Programme ### Acquisition of Bohemia BAE Systems will ### Interactive Simulations support defence ### (BISim) partners in the UK, Japan and The experienced BISim Italy to deliver teamof engineers develops the next high-fidelity, cost-effective generation of training and simulation combat air software products and fighter jets. components to meet the growing demand for defenceapplications. ### Industry-leading Gen3 electric drive technology US-based bus manufacturers Hometown Manufacturing and ElDorado National both chose our next-generation Gen3 electric drive technology to power their zero emissionvehicles. ### F-35 Lightning IIprogramme The F-35 Lightning II programme has delivered a cumulative total of over 1,200 electronic warfare systems. We are also supporting the Block 4 modernisation efforts under multiple contracts worth over $957m (£796m). F-35 rear fuselage manufacturing continued at full-rate production through 2022, with 150 rear fuselage assemblies completed during the year. 06 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### HMS Glasgow, first of Class ### Type26frigate HMS Glasgow successfully completed float-off in December 2022 in a deep-water location in the West ofScotland. HMS Glasgow has been under construction since steel was cut in 2017. The second and third ships, HMS Cardiff and HMS Belfast, are currently in build in Govan. Also during 2022, the Ministry of Defence awarded BAE Systems a £4.2 billion contract to build a further five Type 26 City Class frigates for the Royal Navy, sustaining 4,000 jobs across BAE Systems and the wider UK maritime supply chain. ### Fifth Astute Classsubmarine, HMSAnson, commissioned Our shipyard in Barrow-in-Furness, Cumbria, hosted thecommissioning of the fifth Astute Class submarine, HMSAnson, which exited our Barrow shipyard to commence sea trials in February 2023. The Astute Class isthe most technologically advanced attack submarine ever operated by the Royal Navy. ### Gold Medal Awardsin2022 BAE Systems Naval Ships and Munitions businesses were awarded RoSPA Gold Medal Awards in 2022, with both receiving the awards now for five consecutive years. ### CV9035 infantry fightingvehicles As part of a government-to-government agreement between Sweden and theSlovak Republic, the Ministryof Defence of theSlovak Republic has signed a$1.4bn (£1.2bn) agreement for the deliveryof 152 CV9035 infantry fighting vehicles fromBAESystems. ### Beowulf selected for US Army Arctic Strategy Our Beowulf vehicle won the US Army’s Cold Weather All-Terrain Vehicle competition. Under a five-year contract worth $278m (£231m), Beowulf will replace legacy Small Unit Support Vehicles and provide extended operations and force projection capabilities under extreme, Arctic weather conditions. BAE Systems plc Annual Report 2022 07 Strategic report / Overview ## Chairman’ s letter ## As one of the world’s largest defence contractors, ## our technology, capabilities and global footprint ## ensure we play a leading role in helping our ## government customers meet the elevated ## threatenvironment. | Our performance over the last 12 months | During my time as Chairman, I have | | --- | --- | | has delivered results which are a credit | witnessed BAE Systems build and supply | | tothe outstanding leadership of | some of the finest defence equipment and | | CharlesWoodburn, Tom Arseneault and | services in the world. Amongst others, the | | Brad Greve who continue to lead our | Queen Elizabeth and Prince of Wales aircraft | | remarkable people across the globe with | carriers, the Typhoon military jet, Type 26 | | professionalism, energy, authenticity and | and Hunter Class frigates, the Astute Class | | absolute integrity. This has enabled the | submarine, advanced electronics and | | Board to reward shareholders through | armoured vehicles for the UK, Europe, and | | thebuyback of £788m of our own shares | the US. I have also seen our outstanding | | and to recommend a final dividend of | teams commence work on the next | | 16.6pence making a total of 27.0 pence | generation of submarines, Dreadnought, | | forthe full year. | and the sixth generation of fighter aircraft, | Tempest, to ensure the UK and its allies are Throughout my time as Chairman, I have protected for decades to come. been fortunate to be supported by executives of the highest calibre and a workforce of Whilst achieving remarkable feats of considerable ability with absolute dedication engineering, it is an industry that is sometimes to our purpose: serving, supplying and misunderstood, but fundamentally a force protecting those who serve and protect for good. It helps governments deliver their us.And for that, I thank them all. prime responsibility in providing security and safety for their citizens whilst In recent times, however, the case against There is no doubt that being Chairman of simultaneously underpinning the prosperity defence has drifted to a wider group in the Board of a global defence and security agenda with high-quality, well-paid, theinvestment community whose analysis company is occasionally challenging, but sustainable employment. of the Environmental, Social and isfundamentally engaging and satisfying, Governance qualities of all companies and ithas been my privilege to have had Not everyone shares this perspective. has,on occasion, failed to adequately this role forthe last nine years. Thereare some who believe that all arms characterise BAE Systems, and companies manufacture is wrong and that the moral like ours, who are highly regulated, It has provided an unparalleled platform dimension should supersede all other ethicallyled, and government-backed ofengagement in geopolitics, government arguments. Their views are to be respected, defence contractors. policy, the military, and cutting-edge if not accepted. technology. It has also enabled me to work It is a mischaracterisation that is both with some of the most talented and able dangerous anddamaging to the reputation engineers, technologists and technicians of some ofthe finest companies in the onthe planet. UKand ultimately to their cost of capital and their ability to invest and to attract the fine mindsthat are required to preserve the cutting-edge capabilities that are vital toglobal security. Visit to Osborne Naval Shipyard Sir Roger on a visit to Osborne Naval Shipyard, South Australia, November2022. 08 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ## BAE Systems continues ## to make a significant ## contribution to both ## theprosperity and ## levelling up agendas in ## the UK and elsewhere ## in the world. ### Sir Roger Carr ### Chairman 1 Over the course of this year, the war in rainy day – it is to invest in the industrial Employees Ukraine has caused many to recalibrate umbrella that will build skills, secure theirviews on defence and has reinforced employment, and provide prosperity the understanding that a strong defence whilepeace prevails. ## 93,100 capability is essential to deter well-armed And to that end, BAE Systems continues aggressors from furthering conflict. In tomake a significant contribution to both particular, the war in Ukraine underpins the the prosperity and levelling up agendas case for the UK’s continuous at sea nuclear inthe UK and elsewhere in the world. 2 deterrent in keeping foes in check. Sales In 2020, according to Oxford Economics, It should not have taken a war to wake up inthe UK alone, we contributed over £10bn the West and catalyse NATO members to to the country’s GDP and around £4bn to ## meet their commitments to invest 2% of £23,256m exports, as well as supporting a total tax GDP in their own protection, but it did. contribution approaching £3bn and | And it should not have taken a war for the | 143,000 full time jobs across the UK | | | --- | --- | --- | | investment community to reassess the value | through a supply chain of 5,000 companies. | | | of BAE Systems shares, but it has. | We invest more than £1bn in technology | Dividend per share | and R&D. This includes ourown capital The case for defence and security is not andthat of our customers and partners. simply to have the right equipment for the ## 27.0p (7.6% growth) 1. Including share of equity accounted investments. 2. Sales is defined in the financial glossary on page 302. 3 3 ### 25.1p 23.7p 23.2p 22.2p 3. 2020 does not include the interim dividend paid of13.8p per share paid in September in respect ### 2021 2020 2019 2018 of2019 performance. This amount is reflected inthe 2019dividend history. BAE Systems plc Annual Report 2022 09 Strategic report / Overview / Chairman’s letter Throughout our history we have been In November, we were fortunate to be committed to supporting young people, joined by Cressida Hogg, who will replace Apprentices at recruiting more than 1,000 apprentices me as Chair when I step down at the AGM, theAcademy for inthe UK this year alone, and making some and Lord Mark Sedwill as non-executive Skills& Knowledge significant headway in recruiting more directors. Both will add to the substance inSamlesbury and women to make our Group more diverse. and breadth of the Board with Cressida ourWarton site bringing a wealth of experience as both a inLancashire, UK. We provide considerable in-kind support chair and business leader and Lord Sedwill working with Local Enterprise Partnerships having served as Cabinet Secretary and across the UK to develop communities and Head of UK National Security. Finally, I mentoring small businesses to help improve would like to thank Philip Bramwell, who those that arefar behind in productivity. retired last year after serving 15 years as As a result, we have a direct impact in Group General Counsel. He was a trusted thecommunities in which we operate adviser to the Board and a highly respected andbecause, for strategic reasons, military member of our executive leadership team. equipment sites were located outside of Finally, I am pleased to report that when I cities and major towns, some 40% of our step down as Chairman at the AGM, I will employees reside in some of the UK’s leave the Company in good health and safe mostdeprived regions. hands led by a Board and executive team | We are committed to making important | with impeccable credentials and invaluable | | --- | --- | | economic and social contributions wherever | skills, who are united by a passion and pride | | we are active – in the US, the Gulf and | in what we do and a commitment to the | | Australia. Added to this, we are making | principles of being both performance | | progress against a 2030 net zero | drivenand values led. | (Scope1and 2) carbon target across I wish the Company and all of its ouroperations and developing exciting stakeholders continued success and sustainable technologies to support aprosperous future. ourroute to net zero. So, as a Board, our focus is not simply howmuch money we make, but how wemake money. During the last 12 months, the Board hascontinued to be refreshed as those whohave made a major contribution ### tothedevelopment of the Company Sir Roger Carr concludetheir nine-year tenure and are ### Chairman replaced by a new generation of talented businesses leaders. Against this background, Ian Tyler steppeddown from the Board at last year’sAnnual General Meeting (AGM) having chaired both our Remuneration andESG Committees and having been amaterial contributor to the strategic direction of the Company. 10 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance BAE Systems plc Annual Report 2022 11 Strategic report / Overview ## Chief Executive’s review ## I am pleased to report another year of strong operational ## performance which has delivered increased sales and underlying ## earnings per share, and is underpinned by a record annual order ## intake and another exceptional year for free cash flow. ### Overview I am pleased to report that BAE Systems delivered another strong year of performance in 2022, both financially and operationally. This was achieved despite theheadwinds presented by the COVID-19 pandemic, continued supply chain disruptions, rising inflation and ongoing labour shortages. Whilst we expect that some of these challenges will persist, weenter 2023 with a robust competitive position, multiple new business opportunities, and significant financial resources – all of which point to another productive year ahead for BAESystems andour shareholders. These outcomes were driven by our people, their unwavering focus on our purpose – “to serve, supply and protect those who serve and protect us” – and avalues-led culture, committed to sustainable business practices and inclusion. This is underpinned by a robust governance structure and high ethical standards. In 2022, global events resulted in a renewed recognition of the importance of the defence industry and our role in assisting governments in protecting their countries and citizens. ## Our record orders and financial performance ## give us confidence in delivering long-term ## growth and to continue investing in new ## technologies, facilities and thousands ## ofhighly skilled jobs, whilst increasing ## shareholder returns. ### Charles Woodburn ### Chief Executive 12 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance | As one of the world’s largest defence | Our standing as the UK’s largest defence | Our healthy opportunity pipeline is growing | | --- | --- | --- | | contractors, our technologies, capabilities | company, a top 10 defence prime contractor | with domestic, export and collaboration | | and global footprint ensure we play a | in the US, the largest defence company in | opportunities, and we have the capabilities | | leading role in helping our customers meet | Australia, our enduring relationships with | to support our UK customer in its emerging | | an elevated threat environment. | multiple customers in the Middle East, and | space ambitions. | strong European presence contributed to This past year, the Group designed, In Europe, where the threat level is acute, arecord annual order intake of £37bn, developed, and manufactured a cutting- the need for new equipment is most driving our defence order backlog up to edge set of products – across the domains urgentand many defence budgets are £59bn. This geographic footprint also of air, land, sea, cyber and space – that rising. Our involvement in the Eurofighter provides us with the ability to export from ourcustomers count on. Our exceptional Typhoon consortium, shareholding the US, the UK, Australia and Sweden into product portfolio is enhanced with enabling inmissile-maker MBDA, ownership countries which are also planning to technologies including artificial intelligence, ofthegrowing Hägglunds and Bofors increase defence spending. autonomy, cryptography, and cyber defence, businesses, acquisition of Bohemia ensuring we remain at the forefront of In the US, by far the world’s largest Interactive Simulations and participation national security-related technologies. defencemarket, we are well aligned inUS foreign military sales enable us to totheDepartment of Defense (DoD)’s serve the European/NATO market through In addition to our defence portfolio, emphasis on advanced technologies, multiple channels. wecontinued to see a recovery in our whichis the fastest growing part of the commercial aviation product lines, as The Air sector continues to support a USbudget. In areas like electronic warfare, passenger flying hours continue to globalcustomer base and we have a multi-domain operations, Command, increase.Further, demand for our low significant operational business presence Control, Communications, Computers, andzero emission hybrid and fully electric inthe Middle East, notably in the Kingdom Intelligence, Surveillance and drive and propulsion systems continued to of Saudi Arabia, Qatar and Oman. Reconnaissance (C4ISR) systems and grow, withemerging opportunities to take advanced Defense Advanced Research In December 2022, the governments of the these applications into the defence arena, Projects Agency (DARPA) projects, UK, Japan and Italy announced their shared as well as maritime and airapplications. BAESystems technologies are world-class ambition to develop a next-generation ### Our markets and map directly into priorities in the fighter aircraft under a new Global Combat USNational Defense Strategy. In addition, Air Programme (GCAP). The launch of A differentiating strength of BAE Systems we expect the renewed importance of GCAP firmly positions the UK, alongside isour geographic diversity and exposure armoured combat vehicles in the Ukraine Japan and Italy, as leaders in the design, tomany of the world’s largest national conflict to benefit our combat vehicles development and production of next- defence budgets. Most of the countries in business. generation combat air capability. Working which weoperate have either announced closely with our UK industry partners, the increases or are making plans to increase In the UK, the 2021 Defence Command Air sector intends to strengthen its ties with spending to address the elevated threat Paper renewed commitments to our major Japanese and Italian industries as we work environment. Whilst global economic and programmes in complex warship, submarine together to deliver this programme. fiscal pressures weigh on governments, and combat aircraft design and build, thecommitment to defence in our major allowing for long-term investment in these markets remains robust. key sovereign capabilities, as well as strong support for the cyber domain. Returns to shareholders ## £1,590m Order backlog Showcasing safety technology Managing Director of BAE Systems Maritime Australia, Craig Lockhart, and Anika Talukder introduce novel ## £59bn technology being used at the company’s Osborne shipbuilding site in Australia to Charles Woodburn. BAE Systems plc Annual Report 2022 13 Strategic report / Overview / Chief Executive’s review ### 2022 financial performance 2022 operational performance Our Platforms & Services sector maintained relatively stable sales, whilst Our key financial metrics of sales, margin, Set against the backdrop of macro- delivering margin expansion in 2022. underlying earnings per share, and free economic challenges and heightened global Theimpacts from the COVID-19 pandemic cashflow increased despite supply chain tensions, we made excellent progress in negatively affecting the business began interruptions, labour shortages and meeting the strategic objectives we have toabate in 2022. Our US combat vehicles theinflationary environment. This been pursuing for several years. Our intense business has ramped up the production waspossiblebecause of the excellent focus on operational excellence continues ofkey programmes like the Armored workofour employees onprogramme tobenefit our customers and shareholders Multi-Purpose Vehicle (AMPV) and execution,as well as the internal as we execute on complex, long-duration Amphibious Combat Vehicle (ACV), and efficiencyand competitiveness initiatives programmes like the Astute and ourSwedish Hägglunds business recorded wehave underway. Dreadnought submarine programmes, outstanding levels of new orders. Margins Type26 and Hunter Class frigates, Typhoon On a constant currency basis, we grew in our Ship Repair business have improved and F-35 fighter jets, electronic warfare salesby 4%, increased return on sales by as we worked to address workforce systems, and a leading portfolio of land 20basis points, grew underlying earnings challenges and operational performance combat vehicles, among many other per share by9%, and recorded another post-COVID. programmes. This relentless attention to exceptional year for free cash flow of £2.0bn. delivering for our customers has positioned Our Air sector posted steady sales growth Together with 2020 and 2021, we over- the Group as a trusted supplier of advanced and increased margins, highlighted by the performed onour stated three-year free technology solutions and industrial production of Typhoon fighters for Qatar, cash flow target by more than £1bn. | | capabilities to help customers achieve their | Germany and other customers, andthe | | --- | --- | --- | | This collection of strong results was | critical national and global security missions. | delivery of F-35 aft fuselage tail sections. | | enhanced by our share repurchase | | The Tempest technology maturation | Each of our business sectors contributed to programmes. In 2022, we repurchased programme is progressing well, and work making 2022 a strong year for the Group: | £793m of our shares, or about 3% of | | continues toplan on the Future Combat | | --- | --- | --- | | ouroutstanding shares, completing the | Our Electronic Systems sector was | AirSystem (FCAS) Concept & Assessment | | remainder of the Board’s 2021 £500m | thebusiness unit most impacted by the | Phase, a contract we received in2021. | | authorisation and the initial trancheof the | global shortage of microelectronics, as well | In2022, the UK government announced | | Board’s three-year £1.5bn authorisation, | as by labour and staffing shortages within | plans to lead the development of a new | | approved in mid-2022. | our operations and across our supply chain. | flying combat air demonstrator, setto fly | | | The team developed operational | within the next five years, and theGCAP | ### Balance sheet strength | | approaches that helped mitigate the | coalition with Japan and Italy. Inaddition, | | --- | --- | --- | | BAE Systems ended 2022 with a strong | schedule and financial impacts of the supply | we renewed a major portion ofour | | balance sheet, featuring a cash position of | chain constraints, producing another solid | Saudisupport business foranother five | | £3.1bn, net debt (excluding lease liabilities) | year with continued high margins and | years under a UK/Saudi government-to- | | of £2.0bn, and a net pension position that | arobust order book. We are optimistic that | government agreement. | | hasswung from a significant accounting | these supply chain pressures will continue | | | deficit to an accounting surplus, thanks | toease in the near term. | | tothe Group’s funding commitments overthe years and the higher interest rateenvironment. The outcome of the triennial review with the pension Trustee and the Pensions Regulator was positive and has enabled theGroup to move forward with asensible capital allocation strategy that prioritises investing in the business for the long term through R&D and acquisitions in high CV90 combat vehicles The Czech Republic, Sweden and growth/high return parts of the business, BAESystems have signed a non-binding and capital expenditures to ensure our Memorandum of Understanding that systems and facilities are modern and can provides a framework for negotiations support the Group’s expected growth. We ofan agreement to deliver CV90 combat are also committed to returning value to vehicles to theArmed Forces of the shareholders through an attractive dividend CzechRepublic. which has increased for 19 consecutive years, and share buybacks based on our confidence in the outlook. 14 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Our Maritime sector posted good sales Our ESG agenda Executive Committee changes growth in 2022, and maintained steady We operate our business for the long term In the second half of 2022, we welcomed margins, as major submarine and and place incorporating sustainable business two new membersto our Executive shipprogrammes continued to ramp up. practices in all aspects of our operations at Committee (EC).Caitlin Hayden has joined Margin performance reflected the high the core of our approach. This includes, for as Group Communications Director volume of Dreadnought sales and increased example, our focus on employee safety and following her role as Senior Vice President Company-funded R&D expenditure. The wellbeing, creating a diverse and inclusive of Communications at BAE Systems, Inc. Dreadnought nuclear deterrent submarine workspace, supporting and engaging with inthe US. Ed Gelsthorpe also joined the and the Global Combat Ship programmes the communities in which we operate and ECas Group General Counsel. Ed has (UK’s Type 26, Australia’s Hunter Class and delivering leading apprentice and graduate enjoyed a long and varied career in the Canada’s licensed frigate) all grew year- programmes to prepare the next generation Group and has served in several senior over-year. of workers for the future. It also includes legalleadership positions. The Cyber & Intelligence sector ourfocus on responsible environmental ### Summary | recordedgood sales growth and margin | stewardship in our operations. We underpin | | | --- | --- | --- | | performance. The sector benefited from | everything with a robust governance | As we close the book on 2022, on behalf | | better workforce utilisation and efficiency | structure that applies to all aspects and | ofall of my BAE Systems colleagues, I am | | following the worst of the pandemic. In | required adherence to our Code of Conduct. | proud to report that the fundamentals | | theUS, the Intelligence & Security business | | ofthe business are strong, the outlook | I am exceptionally proud of what the continued to demonstrate the value of its isbright, and our team is focused on our Groupaccomplished in 2022. We hired differentiated systems integration expertise, purpose – “to serve, supply and protect arecord number of UK apprentices and providing leading engineering, modelling those who serve and protect us”. While it graduates and I am particularly pleased and simulation capabilities to its customers, istragic that it took a war in Europe to raise thatwe increased the number of women expanding in this area through the acquisition the awareness of the importance of defence to30% of that intake. We progressed our of Bohemia Interactive Simulations. In the around the globe, BAE Systems is well climate resilience programmes and each UK, we established the Digital Intelligence positioned to help national governments ofour sectors developed decarbonisation business, bringing together capabilities keep their citizens safe and secure in an roadmaps to outline short-, medium- and incyber, space, intelligence, security and elevated threat environment. long-term activities to support the Group’s data into one organisation to improve net zero ambition by 2030 (Scope 1 and 2). For shareholders, the record order intake ourcustomer alignment. Our employees continue to be engaged in and increased order backlog, our position our sustainability programmes, actively on major and enduring programmes, participating across many elements. We thepension accounting surplus, and have made substantial progress in our management’s continued attention to sustainability agenda over the past several operational excellence and financial years, and we recognise there is more work discipline together provide a high level to do in the years ahead. I am convinced ofvisibility for sales growth, margin these efforts will make us a better, expansion, cash generation and capital higher-performing company in the future. returns over the coming years. Thank you for your support of the Group ### New Chair and our strategy for value creation. We look This year’s Annual General Meeting of forward to another productive and rewarding shareholders will mark the conclusion year in 2023 for all stakeholders. ofSirRoger Carr’s remarkable tenure asChair. We have named Cressida Hogg asSir Roger’s successor, completing an intensive search for the mostqualified ## I am proud to report candidate to fill the role. Weall look ## thatthe fundamentals forward to benefiting from herexperience, Charles Woodburn ### wisdom and energy in thecoming years. Chief Executive ## of the business are ## solid,the outlook is ## bright and our team is ## focused on our purpose. BAE Systems plc Annual Report 2022 15 Strategic report / Strategy and performance ## 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. | 1 | Sustain and grow our | 3 | Develop and expand our | 5 | Enhance financial performance | | --- | --- | --- | --- | --- | --- | | | defencebusiness | | international business | | and deliver sustainable growth | | | • Deliver on our commitments | | • Mature our international activities, | | in shareholder value | | | effectively and efficiently | | broadening our offerings to our | | • Seek opportunities to drive | | | | | established customers | | efficiency,standardisation | • Develop our offerings to meet the | | future defence and security needs | | • Develop relations with additional | | andsynergies | | --- | --- | --- | --- | --- | --- | | | | | customers | | • Identify opportunities for higher- | | 2 Continue to grow our business | | | | | | | | | 4 | | | margin offerings | | | inadjacentmarkets | | Inspire and develop adiverse | | | | | | | workforce to drive success | 6 Advance and integrate our | | • Take our capabilities into adjacent ### attractive markets • Ensure we diversify our thinking sustainability agenda andharness the full potential of • Emphasise the vital role we play in • Develop dual-use opportunities ourpeople protecting countries and civilians delivering civil solutions to leverage back to meet challenges for our • Create an environment and andsupporting our communities defence customers proposition in which our people • Progress the delivery of our willthrive decarbonisation strategy ## Our strategic priorities ## ... which are embedded throughout the Group, provide the link between our ## longer-term strategy and near-term business objectives for all our employees. ### Drive operational Continuously improve Advance and further ### excellence competitiveness and efficiency leverageour technology ## Our sectors | Electronic | | Platforms | | | | Cyber & | | --- | --- | --- | --- | --- | --- | --- | | | | | | Air | Maritime | | | Systems | | &Services | | | | Intelligence | | | | | | Page 102 | Page 106 | | | | Page 94 | | Page 98 | | | Page 110 | ## Our values: ## Trusted, Innovative and Bold 16 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ## Our strategy in action ### Drive operational excellence F-35 programme BAE Systems has been part of the F-35 programme since its inception, bringing our expertise into the development, advanced manufacture, electronic warfare systems and sustainment of the world’s largest defence programme. Led by the US, with participation from the UK, Italy, Netherlands, Australia, Canada, Denmark and Norway, this collaborative programme delivers astealthy, multi-role combat aircraft capable of operating from land and sea to nations across the globe. As a key partner, we collaborate with the programme’s prime contractor, Lockheed Martin, to deliver around 15% of each aircraft (excluding propulsion), playing a major role in the development, production and sustainment of each jet. UK MoD © Crown Copyright ### New Jacksonville, Florida ship lift Continuously improve competitiveness and efficiency To improve production efficiency and increase capacity, we have embarked on the process of constructing a new, modern ship lift/ land-level ship repair complex atour Jacksonville, Florida shipyard. Once it is fully operational, the complex will feature a ship lift that can easily move vessels in excess of 25,000 tons, and the new land-level repair complex will enable the team to work on three or more ships simultaneously parked ashore with access to their hulls. The $200m (£166m) investment will bring a 300% increase to the shipyard’s current dry-docking capacity and expand the shipyard’s customer diversity by bringing in more commercial work. ### Advance and further leverageour technology Team Tempest BAE Systems is working with partners to design and deliver a newflying combat air demonstrator, which will play a critical role in the delivery of the UK’s Future Combat Air System. The flagship project is part of a suite of novel technologies being developed byTeam Tempest, which will see BAE Systems engineers lead thedesign, test, evaluation and build process and bring together new digital engineering technologies. The first flight of the demonstrator is set to take place within the next five years. BAE Systems plc Annual Report 2022 17 Strategic report / Strategy and performance ## Our business model ## Our unique strengths Our values of Trusted, Innovative, and Bold ## and resources provide andour Company Behaviours ensure our focus ## opportunities to create is on how we create value for stakeholders. ## sustainable value for Ourpeople are empowered to make the right ## our stakeholders. decisions and know where to seek help. ## Inputs: ### Our people Our culture values diversity, and rewards integrity ### Identifying customer needs and merit so that everyone can fulfil their potential. We are committed to nurturing talent and • We have established positions developing highly skilled people. We are training onlong-term programmes the next generation of engineers and business • We build strong and collaborative leaders to be able to drive innovation, solve relationships with our customers complex challenges, and support decarbonisation • Our position as a trusted supplier of our operations, products and services. allows us to identify emerging Page 60 trends and opportunities for growth Creating opportunity for people and communities ### Services, sustainment Research and development ### Our technology ### andupgrade • Technology and innovation underpin We focus on technology innovation and our strategy, and the development engineering excellence, prioritising and investing • We provide competitive services of our products and services in next-generation research and development that add value for our customers programmes to deliver competitive solutions to • We partner with academic and • We develop technical expertise, meet our customers’ needs, now and in the future. industrial leaders todevelop new which is acquired through product technologies that support our Page 26 design anddevelopment Our investment in technology future product strategies • We use flexibility and responsiveness • We have a clear focus for our tomaximise availability ofour research and development ### Responsible sourcing and impact customers’ products spend,and that of our customers, We take pride in managing our operations aligned to future product and responsibly. We use our expertise to reduce the services strategies environmental impacts we have around the globe and to develop products and services for our customers to reduce their impacts on the environment. Our goal is to achieve net zero ### Advanced manufacturing, greenhouse gas emissions across our operations ### (Scope 1 and 2) by 2030. commissioning and ### Page 40 integration Bidding and contracting Addressing climate risks • We continuously invest in advanced • We focus on value for our customers manufacturing techniques while effectively managing risk andfacilities ### Our governance framework • We maintain a record of delivery • We focus on operational excellence oncomplex projects We are accountable for all that we do and our with safety as a priority robust governance framework sets out how we • We develop partnerships with do business. Together with our Code of Conduct, • We manage complex projects anetwork of suppliers supporting which requires our employees to conduct andcollaborations across global economic prosperity and business inan ethical way, it enables us toearn supply chains development and maintain the trust ofour stakeholders. ### Designing and developing Page 134 • We provide engineering expertise in Governance framework developing cutting-edge products and services | Our partners and key relationships | | • We develop products designed to | | --- | --- | --- | | We recognise the important contribution | | minimise environmental impacts | | provided by our suppliers and partners and we | | during service and at end of life | | maintain close relationships with them, which | | • Our products are designed and | | helpus to create best-in-class, cost-effective | | developed in a way that provides | | products and services. | | forfuture flexibility with the ability | | | Page 68 | toupgrade in an agile manner | Success through partnering 18 BAE Systems plc Annual Report 2022 Strategic report Governance Financial statements ## The value we create: ![img-0.jpeg](img-0.jpeg) ### Employment We support high-value jobs in our business and in our supply chains, this includes through direct employment as well as indirect employment in our supply chain and through those jobs supported by the consumer spending of our employees and of those in our supply chain. - In the UK, our award-winning early career and skills programme supported around 4,500 young people in training in 2022, with women representing 30% of the 2022 intake. In 2023, we plan to further expand our career and skills programme. Read more on page 62. - During the year, BAE Systems was accredited as a 'Menopause Friendly Employer', through work to raise awareness of menopause symptoms and provide resources and training to help create a working environment that supports everyone to be the very best they can be. ### Supporting our 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, caring for and supporting communities in which we operate, and causes that have meaning to our business, is vitally important to us and our employees. - Our support for the military has once again won us an Employer Recognition Scheme Gold Award from the UK Ministry of Defence. - We were awarded 'Employer of the Year' at the Movement to Work Social Mobility Awards, in recognition of our contribution to supporting the recruitment of young people during the COVID-19 pandemic. Read more on page 63. - We provided £160,000 to foodbanks associated with the Trussell Trust, providing emergency food and support to people locked in poverty across the UK, including those local to our sites in Kent, Cumbria, Hampshire, Monmouthshire, Lancashire and Glasgow. ![img-1.jpeg](img-1.jpeg) ![img-2.jpeg](img-2.jpeg) ### Customers Our largest customers are governments, but we also sell to large prime contractors and commercial businesses. We never lose sight of who are 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. - BAE Systems has continued to invest in research, design and development during the year, integrating advanced technology into our products. Our dedicated FAST Labs™ R&D group creates advanced technologies that give our customers an edge. We have continued to work in partnership with small and large companies across industries and academic institutions to develop new capability to support our customers. - During the year, BAE Systems opened a new engineering and manufacturing centre of excellence in Cedar Rapids, Iowa as well as a new engineering and production facility in Austin, Texas. These facilities are providing a world-class work environment that will support innovation, production, and teamwork, and will help our teams to continue to deliver cutting-edge technology to our customers. ![img-3.jpeg](img-3.jpeg) ### Returns for shareholders Through the careful long-term sustainable management and governance of our business we are well placed to continue to generate good returns for our shareholders. - For the year ending 31 December 2022, we had a record annual order intake of £37bn, driving order backlog to £59bn. - During the year, the 2021 commitment to return £500m to shareholders through share buybacks was completed. In June, a further return of £1.5bn was announced. - Dividends have increased for a 19th year in a row, with 27.0p returned to shareholders in 2022. - A total of £1.6bn was returned to shareholders via dividends and buybacks during the year. ### Environment We acknowledge the significant and lasting impacts of climate change. Our goal is to develop and implement a long-term strategy that reduces the impact of our activities, supply chain and products on the climate by using our world-class engineering capabilities and cutting-edge technologies. We will also work to progress our ambition of net zero greenhouse gas emissions (Scope 1 and 2) by 2030. - This year, BAE Systems set out a roadmap towards reaching our net zero targets. Read more on page 40. - We further progressed our climate resilience programmes, and our sustainability agenda. Read more on page 47. ![img-4.jpeg](img-4.jpeg) BAE Systems plc Annual Report 2022 19 Strategic report / Strategy and performance ## Our markets ## BAE Systems maintains leading positions in major defence andsecurity markets around ## the world – in the US, UK, theKingdom of Saudi Arabia and Australia – as well as ## established positions in a number of other international markets. 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. 1 ## Value of the top global defence markets accessible for business by the Group 1 2 3 4 ## US UK Kingdom of Australia ## Saudi Arabia ## $817bn $70bn $35bn ## $65bn 5 ## International ## $297bn India $67bn France $55bn Germany $53bn South Korea $50bn Japan $41bn Italy $31bn 1. Markets inaccessible for business by BAE Systems are excluded. Source: The US budget figure shown is the enacted defense budget for fiscal year 2023 and, outside the US, Jane’s Defence Budgets (basedon2022 total defence budgets and forecast average exchange rates for 2023 in US dollars respectively). 20 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Supporting our customers’ These major programmes demonstrate Response to increasing theglobal nature of the defence industry ### evolvingneeds threatenvironment and how nations are collaborating and Our strategy, as shown on page 16, is Our business continues to evolve and coordinating to operate in a multi-domain focused on providing a vital advantage to respond to geopolitical and technology environment to address the significantly our customers around the world through trends that will influence and shape our elevated level of geopolitical threat. advanced technologies, innovation and customers’ defence and security priorities agility, global industrial capacity, and In addition, our diverse portfolio of now and in the future. Our demonstrated responsiveness. In particular, we have built capabilities in the air, maritime, land excellence in complex engineering, strong positions aligned with our core andcyber domains provides us with a developing cutting-edge technology and defence platforms to support our customers comprehensive offering for our customers seeking innovative solutions enables us to in our principal markets. These principal around the world, making us one of the respond to our customers’ requirements for markets – the US, UK, the Kingdom of broadest and most geographically diverse greater agility, global reach, and advanced Saudi Arabia and Australia – have shown major defence companies. technology products and services. asignificant and sustained commitment Our market positions and discriminating ### Growth aspirations totheir defence and security, and support capabilities are aligned with enduring for their allies. BAESystems has established In response to significantly elevated global defence priorities, to include our strong and enduring relationships in these tensions and the acute threat environment, customers’requirements to operate markets and is recognised as playing a key many countries around the world have injointall-domain environments. role in the industrial capability of each of announced and are in the process of ### these countries. Programme diversity and longevity enacting defence and security budget increases. We are only now beginning The Group’s wide diversity of capabilities, ### Our unique position and capabilities tosee the new orders related to these products and programmes, together with Our strong position in the US through increases. Along with the order backlog the geographical spread of our operations, theSpecial Security Agreement, together of£59bn, we have confidence in the means we are not heavily concentrated with our standing as the leading defence medium-term outlook for sustained onasmall number of key programmes contractor in the UK and Australia, provides top-linegrowth. Through ourlong-standing orfranchises. Additionally, our record us with unique capabilities that can be customer relationships and the development annual order intake of £37bn, driving leveraged across the Group to support our of new ones we expect to see further orderbacklog to £59bn, includes major customers. Examples include our major role opportunities in anumber of international programmes that are well positioned to on the F-35 programme, our involvement markets as theincreased defence spending extend beyond their current funded backlog alongside Japan and Italy in the Global from thesenations provides a response to for many years, andin some cases, multiple Combat Air Programme to design, develop themulti-faceted threat environment. decades (seeOur key programmes and and produce the next generation of franchises onpage 24). combatair capability, as well as being wellpositioned to support the emergent AUKUS defence co-operation agreement between Australia, the UK and the US. ### BAE Systems’ global defence market position Top ten global defence contractors’ revenue ($bn) | 1. Lockheed Martin | | | | | | | 64 | | --- | --- | --- | --- | --- | --- | --- | --- | | 2. Raytheon Technologies | | | | | | 42 | | | 3. Boeing | | | | | 35 | | | | 4. Northrop Grumman | | | | 31 | | | | | 5. General Dynamics | | | | 31 | | | | | 6. Aviation Industry Corporation of China | | | | 30 | | | | | 7. BAE Systems | | | 26 | | | | | | 8. China State Shipbuilding Corporation Limited | | 19 | | | | | | | 9. China North Industries Group Corporation Limited | | 18 | | | | | | | 10. L3Harris Technologies | 15 | | | | | | | Source: Defense News Top 100 for 2022 (based on 2021 numbers). Exchange rate applied to BAE Systems is$1.263/£1. BAE Systems plc Annual Report 2022 21 Strategic report / Strategy and performance / Our markets | 1 US | | 2 UK | | 3 Kingdom of Saudi Arabia | | | --- | --- | --- | --- | --- | --- | | | 1 | | 1 | | 1 | | Sales | by destination | Sales | by destination | Sales | by destination | 44% 20% 11% | £10,166m | £4,608m | £2,539m | | --- | --- | --- | | The US continues to be the single | As the largest defence company | The Kingdom of Saudi Arabia | | largest defence market in the | inthe UK, BAE Systems has strong | continues to be a leading military | | world. BAE Systems is a top ten | and enduring relationships with | | ### power in the Middle East and one of ### defence prime contractor in the US. the UK Ministry of Defence and ### the largest defence markets globally. ### Through a range of innovative technologies ourdomestic supply chains. BAE Systems continues to work closely with and proven capabilities, the US business In the UK, the government continues to industry partners and the UK government continues to sustain its diverse portfolio provide budgetary support to more than to ensure that the export licences required oflong-term defence programmes for the meet the NATO target of spending at least to enable the Group to fulfil its contractual US Department of Defense and international 2% of Gross Domestic Product on defence. obligations in the Kingdom are in place. allies. This US-based portfolio is well aligned The budgetary outlook, provided in late to our customers’ highest priority areas. We provide support and sustainment 2022, maintained a defence funding These include electronic warfare, precision- services to the country’s air and naval outlookthat enables the UK government guided munitions, space security, naval forcesthrough UK/Saudi government-to- tomaintain its commitments to our major shiprepair and modernisation, and combat government programmes. The Saudi British long-term programmes in complex warship, Defence Co-operation Programme was vehicles. The threat environment is driving submarine and combat aircraft design, renewed in 2022 for another five-year continued bi-partisan support for defence buildand support, ensuring these key period and we anticipate the Salam spending increases. The backlog forthe sovereign capabilities remain world-class, Typhoon project will be extended early US-based business remains robust and aswell as strongly supporting the UK’s in2023, also for a five-year term. provides multi-year visibility. cyber capabilities. The Kingdom of Saudi Arabia’s ‘Vision BAE Systems is a leader in advanced Despite the significant domestic economic 2030’ outlines a route map for transforming electronic systems, real-time intelligence challenges, we have long-term visibility for the social and economic landscape in the and analysis, naval gun systems, naval ship our major UK programmes and operations Kingdom of Saudi Arabia through increased repair and modernisation, and tracked and we see further prospects in a number accessibility – removing barriers to industry, combat vehicles. Our position is supported of new capability requirements which will and appealing to international and domestic by our key role on a number of franchise create opportunities in the coming years. visitors and tourists – and a continuing USdefence programmes, including Asone of the UK’s largest employers of commitment to attract and support internal F-35Lightning II and legacy fighter engineers, we have a central role in the and external investment; to unlock non-oil programmes, B-21 bomber, Sentinel and engineering and manufacturing fabric related economic opportunities; to achieve Minuteman ICBM, M109 self-propelled ofthe country and we are currently greater regional and global integration, and howitzer, Armored Multi-Purpose Vehicle trainingaround 4,500 apprentices and co-operation; and to promote in-Kingdom and Amphibious Combat Vehicle. graduates on our early careers programmes. industrialisation. In addition to our position on US defence We collaborate with suppliers, SMEs and Three of the key pillars of Vision 2030 are: programmes, the US-based portfolio also regional partners, including universities, a‘Vibrant Society’, a ‘Thriving Economy’ benefits from Foreign Military Sales and tosupport and deliver long-term economic and an ‘Ambitious Nation’. Each of these direct international sales to allied nations. growth and productivity, technological aredirectly supported and championed We continue to deliver on and enhance know-how and the development of skills. bytheGroup through: (i) the localisation existing commercial programmes, including Cyber security and information advantage ofsovereign defence capability and related engine and flight controls, and electric isan increasingly critical area for national technology transfers; (ii) a focus on Saudi drivepropulsion systems and capabilities, security and is achieved through advanced National human capital, resulting in which weare leveraging to advance digital capabilities that we are building increased employment and Saudisation; and sustainable technologies across multiple inour workforce and for our customers. (iii) economic diversification, creating direct markets anddomains. TheUK cyber budget is well supported and indirect benefits in the communities Opportunities: Budget increases or andwe are positioned to benefit from that we are part of. prioritisation towards our capabilities; thisincreased focus. Finally, we continue to work with key local increased Foreign Military Sales; continuation Opportunities: Leveraging our expertise partners, including Saudi Arabian Military of civil aerospace post-COVID recovery; and capabilities into new domestic and Industries, to explore additional collaboration technology investments to market and export prospects and partnerships; expand opportunities to build on our lengthy history synergy with existing capabilities; expanded capabilities and offerings in the digital, in the Kingdom of Saudi Arabia. We remain work scope platform positions; and cyber and space domains. well placed, as a leading in-country contractor, commercial operation expansion especially in support of air defence platforms and in sustainable technologies and space. Risks: Long-term spending pressure training systems for the Royal Saudi Air Force, onsome capabilities due to shift in as well as support for mine countermeasure Risks: Continued supply chain disruptions economic priorities. vessels forthe Royal Saudi Naval Forces. around microelectronics and other critical components; labour availability; defence Opportunities: Extending Salam budget constraints driven by US debt levels Typhooncontract; securing orders for or spend priorities; slower civil aerospace additional support and training, new recovery cycle post-pandemic. equipment, upgrades and defence infrastructure programmes. Risks: Scope changes to long-term support contract renewals, changes in spending priorities, nation-to-nation relations and licensing changes. 22 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance | 4 Australia | | 5 International | | | --- | --- | --- | --- | | | 1 | | 1 | | Sales | by destination | Sales | by destination | 4% 21% | £854m | £5,089m | | | --- | --- | --- | | As the largest defence company | BAE Systems has many strong and enduring relationships | | | inAustralia, BAE Systems has a | ininternationalmarkets. | | | strong presence across all domains | Acute security tensions around the | In the Middle East, in addition to our | | | world,the growing emphasis on | business in the Kingdom of Saudi Arabia, | ### and is growing as the country’s indigenouscapabilities, the need for the contract for 24 Typhoons and nine ### defence budget increases and alliedinteroperability, and varying economic Hawks for the Qatar Emiri Air Force is ### major programmes ramp up. conditions continue to influence defence progressing well and our relationships are spending internationally. BAE Systems aims strengthening as we implement our support Australia’s defence budget increases are to further its already strong relationships and training commitments with the Qatari being driven by the regional Asia Pacific with partners and customers in a number of Armed Forces. We also continue to support threat environment and the need to rapidly countries in the European/NATO community, other customers that operate the Hawk modernise its military and incorporate the Middle East and elsewhere. platform, such as Oman and Bahrain. advanced technologies to ensure the | country’snational security and its ability to | In Europe, we are meeting the increased | In Canada, BAE Systems is the warship | | --- | --- | --- | | interoperate with key allies in all defence | demand for advanced military equipment | design partner on the Canadian Surface | | and security domains. The government’s | across all domains, as countries are | Combatant programme of up to 15 ships | | commitment to defence, as evidenced by | transitioning away from older generation | fortheRoyal Canadian Navy. | | itsten-year funding model for defence | systems and recapitalising with modern, | | In India, we have long-established spending, is fuelling a major recapitalisation more advanced air-, land- and sea-based relationships with local industry partners of air, maritime and land programmes. Our systems. Through our shareholding in onHawk aircraft and on M777 howitzers. business in Australia is also underpinned by MBDA, our position in the missiles and the government’s policies of developing a missile systems market continues to In Turkey, we are collaborating on the strong, sustainable and secure Australian growinEuropean and other international development of the indigenous fifth- defence industry and supporting leading- markets. We are also working with the generation fighter jet, TF-X, for the Turkish edge technological innovation. Eurofighter Consortium on potential Air Force and we maintain our position opportunities for further orders from inarmoured combat vehicles for Turkish As part of this commitment, the government thePartner Nations. Our ownership of andinternational customers through the has made clear its objective to build a robust, theSweden-based Hägglunds and Bofors FNSS joint venture. resilient and internationally competitive businesses positions us to benefit from domestic defence industry to ensure its In the Asia-Pacific region, we are a current opportunities and future demand, industrial base expertise effectively supports supplierto a number of armed forces, as the conflict in Ukraine has reawakened Australia’s national security. bothdirectly and through joint ventures. the importance of tracked combat vehicles, We are also pursuing an expanded Initial details of the strategically important mobile artillery and cold-weather military technology and industrial relationship AUKUS submarine and defence technology transport. We are making excellent progress withJapan, highlighted by co-operation co-operative agreement are due to be on the Tempest next-generation combat air onthe GCAP, as that countryreassesses released in early 2023. We believe we are system. In 2022,we announced our intention itsdefence posture, withplans to double well positioned to assist the Australian to fly anew combat air demonstrator within itsdefence budget to2% of GDP over government to meet its goals under this thenext five years, which is an accelerated thenext five years. | programme with our established workforce | schedule as compared to legacy fighter | | | --- | --- | --- | | across more than 25 sites throughout | aircraft programmes. | Opportunities: Sustained demand for | | thecountry, in addition to a strong ability | | upgrades to existing equipment, and for | In December 2022, the governments of the toleverage BAE Systems’ international next-generation combat air systems, means UK, Japan and Italy announced their shared positions to support domestic products that we are confident in our long-term ambition to develop a next-generation ininternational markets. business prospects, including development fighter aircraft under a new Global Combat of the GCAP. A significant part of our Opportunities: Securing additional Air Programme (GCAP), which will bring income comes from providing upgrade, workshare from the increased spending together the Tempest and F-X programmes. support and training services. outlook and the AUKUS agreement. The launch of GCAP firmly positions the UK, alongside Japan and Italy, as leaders in the Risks: Threat environment and political Risks: Long-term spending pressure design, development and production of priorities change and economic pressures onsome capabilities due to shift in next-generation combat air capability. may mean defence spending reduces or government priorities. isdeferred in certain jurisdictions. The Group’s US-based business exports combat vehicles, electronics and precision weapon systems, amongst other systems, toa number of allied customers and participates in additional international markets through partnerships in defence and commercial electronics markets. 1. Sales is defined in the Financial glossary on page 302. BAE Systems plc Annual Report 2022 23 Strategic report / Strategy and performance ## Our key programmes and franchises ## BAE Systems has strong, established and growing positions supplying defence equipment, ## electronics and services, as well as cyber, intelligence and security solutions for governments. ## Wealso have adjacent commercial positions, including in the sustainable technology and ## spacemarkets, which we aim to expand pursuant to our strategy. ## The programmes and franchises underpinning these positions are primarily long term in ## naturegiving us high visibility of our order backlog and sales outlook. This allows us to plan ## effectively to ensure we have the right people, processes and facilities to enable delivery. ## We have strong technological Defence electronics ### andprogramme diversity across Design, manufacture and support of avionics equipment across a range of US and other ### our sectors. 1 allied nations’ military aircraft programmes, Sales by key programme including a leadership position in the ### Electronic Systems D E A Defence electronics 68% electronic warfare market. Our leading C A B F-35 Lightning II 16% position on the US fixed and rotary C Commercial avionics equipment 10% wingplatforms, a number of which are B D Commercial other 3% E Space 3% 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 | | | E | | A Combat vehicles 50% | | --- | --- | --- | --- | --- | | Platforms & Services | D | | | | | | | | A | B US naval ship repair 18% | ## equipment C Munitions 16% D Weapon systems 14% Design, manufacture and support of avionics C E Other 2% equipment across multiple commercial aircraft platforms, including engine and flight controls, B and cabin and cockpit systems, together with aftermarket support services. BAE Systems is a leading supplier of engine controls for GE, and is a major supplier of flight control electronics for Boeing and other aircraft | Air | | E | | A Typhoon 40% | | | --- | --- | --- | --- | --- | --- | | | | | A | | platforms. Working with our key customers, | | | D | | | B Tornado 22% | | | | | | | C Weapons Systems 18% | we scaled the business during the COVID-19 | | | | | | D F-35 Lightning II 1 4% | pandemic, whilst ensuring we maintained | | | C | | | E Other 6% | our capabilities to meet the expected | returnof long-term demand. B ## Weapon systems ## andmunitions | | E | | | Design and manufacture of naval gun | | --- | --- | --- | --- | --- | | Maritime | | | A Submarines 43% | | | | | A | | systems, munitions, torpedoes, radars, | B Complex warships 24% D C UK naval support 13% navalcommand and combat systems, D Munitions 6% artillery systems, missile launchers and, C E Other 14% through a 37.5% interest inMBDA, missiles and missile systems. BAESystems manages B and operates complex US Army ammunition plants to produce energetics for insensitive munitions and propellant grains. The increasing number of new platforms entering C D A US government 66% service in the coming years, combined with ### Cyber & Intelligence A B UK and other governments 28% the elevated threat environment, will create C Commercial 5% opportunities for this set of capabilities. B D Other 1% 1. Sales is defined in the Financial glossary on page 302. 24 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ## F-35 Lightning II Submarines Unmanned and future Design and manufacture of seven Astute ## manufacturing airsystemcapabilities Class nuclear-powered attack submarines Design and manufacture of sub-assemblies Development of future air system capabilities, for the Royal Navy. The first four Astute inthe UK, including the aft fuselage and including joint investment with the UK Class submarines are in operational service empennage. Provision of equipment in the government and industry in a next- with the Royal Navy, while the fifth boat US, including the electronic warfare suite. generation combat air system under the exited our Barrow shipyard to commence BAE Systems has a significant workshare Tempest programme, which was launched sea trials in February 2023. Theremaining onthe world’s largest defence programme. in 2018 in support of the UK Combat Air two boats are at an advanced stage of Production levels are at full-rate and Strategy. The Tempest programme is build, and the final boatis expected to expected to be maintained for over a progressing, with the development of a enterservice in the mid-2020s. Design and decade, based on a programme of record newflying combat air demonstrator, set to manufacture of fourDreadnought Class ofmore than 3,000 aircraft. fly within the next five years. The Tempest nuclear-powered submarines to carry the partners are currently working on more UK’s Trident ballisticmissiles. Manufacture ## Air support and training than 60 technology demonstrations, and of the first three Dreadnought Class boats we are operating under an initial Concept Provision of support to operational capability, isunderway, with production on the and Assessment Phase contract. including maintenance, support and training programme to continue into the 2030s. for Typhoon aircraft in service with the UK, Early design and mobilisation activities are ## Combat vehicles | Saudi Arabian, Qatari and Omani air forces. | underway on theSubmersible Ship Nuclear | | | --- | --- | --- | | Under the Saudi British Defence Co-operation | Replacement (SSNR) programme, which will | Upgrade of tracked vehicles, including: | | Programme, delivery of contracts for labour, | deliver a replacement for the Astute Class. | Bradley Fighting Vehicles and M88 recovery | | logistics and training, training aircraft | | vehicles; design and manufacture of | | (including Hawk) and upgrades to Tornado | Naval ship repair and support | M109self-propelled howitzers and Armored | | aircraft in the Kingdom of Saudi Arabia. | | Multi-Purpose Vehicles; and development | Provision of naval ship repair and Contracts to support Hawk aircraft across ofnext-generation combat vehicles. modernisation services in the US and UK, 14countries and support for the F-35 Manufacture of amphibious vehicles for together with support to the navies Lightning II fleet and systems around the theUS Marine Corps and international oftheUS, UK and Australia, at home and globe, including in-country support in the customers. The franchise offers good on deployment. In the US, BAE Systems has UK and Australia. visibility from a robust backlog of combat facilities located on the Atlantic and Pacific vehicles to be delivered in the coming years coasts. In the UK, we support the operation ## Typhoon and Hawk by US Combat Mission Systems, together of HM Naval Base Portsmouth onbehalf with upgrade, production and support ofthe UK Ministry of Defence. Our key ## manufacture and capability awards for CV90 and BvS10 combat customers in the US, UK, Australia and vehicles by the Hägglunds business in ## development Canada are looking to extend and modernise Sweden, as well as a pipeline of domestic Manufacture of Typhoon major units and their fleets in the coming years, which will and international opportunities across final assembly of aircraft. Expansion of the create further support opportunities. theproduct set. In the UK, there is the capabilities of the aircraft with the E-Scan vehicle upgrade, build and support to ## radar and ongoing development of new Complex warships theBritish Army through a joint venture technologies aligned with the UK Combat Design and manufacture of eight Type 26 with Rheinmetall. Air Strategy and forward progress on the frigates for the Royal Navy. The first Tempest programme. Typhoon manufacturing Type26is expected to be delivered in the ## Cyber security | is currently underpinned by the orders from | mid-2020s. Contract signed in 2018 with | | | --- | --- | --- | | Qatar, Germany and Spain which will ensure | the Australian government that provides the | andintelligence | | continuity of production of major units | framework for the design and manufacture | | Delivery of a broad range of intelligence, intothe mid-2020s. of up to nine Hunter Class Frigates. Provider security and synthetic training services of the warship design for the Canadian toenable the US military and government ## Space Surface Combatant programme. This to recognise, manage and defeat threats. | World leader in radiation-hardened | business is accordingly well positioned | Support to UK and other government | | --- | --- | --- | | electronics for spacecraft and satellites, | forsales growth in the coming years. | agencies in their intelligence missions. The | | withmore than 10,000 cumulative years | | increasingly sophisticated technology and | | inorbit. Our orbital expertise combined | Sustainable technology | threat environment is leading to increased | | with next-generation ground resiliency | Global leader in electric drive systems for | government cyber spend in markets such | | anddata analytics solutions help to keep | low and zero emission propulsion systems | asthe US, UK and Australia, and we are | | assets performing effectively in the harsh | with an extensive installed base on urban | well placed tosupport our customers in | | environments of space. The acquisition, in | transit buses. We are leveraging our existing | these markets. | | 2021, of In-Space Missions has added the | product portfolio and advancing sustainable | | | capability to design, build and operate | vehicle mobility, efficiency and capability | | | satellites and satellite systems. | fora range of applications in public transit, | | maritime, air and military markets. BAE Systems plc Annual Report 2022 25 Strategic report / Strategy and performance ## Our investment in technology ## Technology and innovation are central to our business. They underpin ## our strategy and the development of our products and services. ## Developing innovative technologies is a key part of the work we do ## toensure we have asustainable business that will continue to create ## value for our stakeholders and inspire our employees. ## Focus areas ### There are five core technology areas that support our aspirations for growth beyond our core defence franchises. ## Autonomy Military equipment is becoming increasinglyautonomous and this trend isset to accelerate. Supporting human decision-making as well as taking people out of harm’s way is a clear advantage, butwe also need to help our customers think about how they would respond to adversaries’ use of autonomous weapons. In recent and ongoing conflicts we can see the growing importance of Uncrewed Air Vehicles (UAVs), which have proven highly effective in both reconnaissance and in delivering explosive payloads. Whilst the We have also continued our prominent role ### Uncrewed Air System technology majority of these UAVs have been controlled indeveloping the flight control and navigation We released our new Uncrewed Air System systems for the Royal Australian Air Force’s remotely by a human operator, there is concepts, which are currently being developed Ghost Bat programme, working alongside nodoubt that future iterations will have to enhance the operational effect of current Boeing. This work is helping certification of increasing levels of autonomy. andfuture crewed platforms by augmenting theplatform, where we need to prove to the theforce mix. These concepts have the potential Our military customers cannot be at a Defence and Civil Aviation Authorities that the to add combat power, carrying between 40kg vehicle will perform safely in shared airspace. disadvantage to adversaries using autonomy and 500kg payloads and are designed to be on the battlefield, so we are developing re-usable in multiple missions, whilst being arange of autonomous platforms at sea, affordable enough to be sacrificed. onland and in the air. Inparallel, we are developing a common autonomous architecture so that platforms can more easily be integrated with command and control systems, as well as having the ability to share data and collaborate. During the year, our P24 autonomous smallboat took part in the NATO ‘REPMUS’ trials in Portugal, preventing access to a vessel taking on the role of an adversary. Wecontinue to develop this boat as well asdeveloping a larger version, which will beable to carry a greater range of payloads. Surveillance andReconnaissance (C4ISR) ### ® Autonomous detection capabilities Undersea, we unveiled our Herne Extra business collaborated to quickly and successfully Leveraging customer R&D funding, Electronic Large Autonomous Underwater Vehicle. integrate this object detection technology into ™ | | Systems FAST Labs | hasbeen on the leading | | | | --- | --- | --- | --- | --- | | Herne brings together our proven | | | the Geospatial eXploitation Products (GXP) | | | | edge of developing 3D shape-based object | | | ® | | experience in payload integration, sensor | | | software ecosystem. GXP | software enables | detection technologies that can quickly, packages, mission planning, electronic timely and effective decision-making through accurately and autonomously recognise objects discovery, exploitation, analysis and architecture and mothership integration in challenging conditions like rain and fog. dissemination of mission-critical geospatial data. todeliver an agile and adaptive solution. Theteam has matured this technology such that With the help ofaGXP customer, the teams it drastically shortens the time it takes to find realised that the GXP product could be further objects of interest and engage with them. enhanced by FAST Labs’ object detection In 2022, Electronic Systems employees in technology, as it would help with tackling FASTLabs and the Command, Control, hard-to-find targets. Communications, Computers, Intelligence 26 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance data from a range of sensors and analyse for use in defence, space, intelligence, ## Space that information in space, allowing it to research, and commercial missions, resulting The use of systems in space is becoming more rapidly flag threats to users. It will in our selection by the Department of increasingly important for our customers deliver timely, actionable intelligence, Defense to qualify a new generation todetect and actively monitor activity essential for military operations and ofintegrated circuit technology for use around the globe. | | disasterresponse and our aim is to launch | inthe harsh environment of space. The | | --- | --- | --- | | We added to our space capability in 2021 | the cluster in 2024. As wellas supporting | new12-nanometre technology uses a | | with the acquisition of In-Space Missions, | military customers, Azalea will also be able | smaller feature size that provides a dramatic | | aUK-based satellite company, which | to support civilian operations such as disaster | leap forward in space-based computing | | givesus additional Low Orbit capability, | response, coastaland flood monitoring. We | compared to current 45-nanometre | | complementing what we do in secure | are also now talking to other third parties | technology, marking a significant | | communications and tracking, telemetry | on what they could bringto Azalea. | improvement in functionality for space | | and control. | | vehicles where volume and power are | In the US, we are a world leader in limited resources. We are developing a new multi-sensing developing, manufacturing and deploying satellite cluster, Azalea, which will collect state-of-the-art, radiation-hardened circuits entirely by battery, requiring only a single asreroutes. We are investigating technologies ## Sustainability charge each day. that could help us manage this type of Our ambition is to deliver more sustainable sustainable battery technology, and we are products without compromising performance In addition to our existing work to provide in a unique position to develop and deliver – even enhancing performance where lowand zero emission urban transit bus integrated flight controls and propulsion possible. systems, we are developing sustainable solutions to this emerging market. airtransportation to reduce its carbon We are exploring a number of technologies emissions. Key technology to providing safe, We are also playing an important role in to help achieve this and have created an affordable and reliable hybrid electric and integrating a hybrid electric drive into the R&D fund specifically to support early-stage fully electric aircraft in this domain is the Bradley armoured fighting vehicle. For more sustainability technology projects. One development of sustainable battery information on this and how we are using example is our work with Clean Maritime technology that is dense enough to store our technological expertise to deliver our on the Thames Clipper, where we proved adequate energy for air travel and safety sustainability agenda please see pages 54 that Thames Uber boats could be powered margins necessary for contingencies such to59. BAE Systems plc Annual Report 2022 27 Strategic report / Strategy and performance / Our investment in technology ## Manufacturing anddesign As military equipment advances it becomes more complex, but we are determined to make our future platforms more quickly and economically. To achieve this we need to develop and apply new technologies. Manufacturing efficiency is a key element in making good on our ambition to deliver the next-generation combat aircraft quicker and cheaper than previously. One example is how we’re simulating temperature-controlled environments through digital twins. To manufacture parts for individual aircraft across international locations we currently need to carefully control temperature andhumidity, because aluminium panels flex and stretch if these factors change. Wehave now combined 5G connectivity and machine learning to dynamically adjust the position of the machines to allow for variations in temperature and humidity, machining parts so they are the correct shape and specification for a given set ofenvironmental conditions. This way, we no longer need to heat an entire hangar, so are reducing both CO 2 and energy usage. One of the most transformational changes manufacturing, while improving quality. ### Factory of the future in manufacturing and design are our digital Building on these initiatives, we facilitated an In our Electronic Systems Factory Workplace Automated On-Time Delivery tool to provide ways of working. We can now transfer a ofthe Future, digital transformation is bringing ahigh-fidelity view of what was expected digital design into manufacture much more accurate and actionable data to our fingertips, tobedelivered and when it needed to ship. quickly, given that our flexible robotic evolving our legacy manufacturing operations, Thisdramatically reduced the number of manufacturing facility can work from the and achieving operational excellence. In hoursspent collecting and analysing the design file with far less interim steps than Electronic Combat Solutions, our team used data.The teams were recognised with a data-driven dashboards and interfaces to has been previously possible. Manufacturing Leadership Award from the manage the business’s manufacturing operations USNational Association of Manufacturers’ and drive a dramatic reduction in the cost of Manufacturing Leadership Council. Cloud technology is likely to enable many ## Multi-domain and advances in data integration for our military ## digitalintegration customers, particularly across domains and in maintaining dynamic access to platform The future battlefield and the future data. We are working with a number of security environment will have many providers to explore the use of the cloud, common features including huge volumes including Microsoft, to create a ‘digital of data, arange of people and platforms thread’ with our naval platforms, to enable requiring coordination, and a need to data to be shared securely and then respond quickly. We are using our extensive analysed in order to inform maintenance experience across both military domains and future design choices. andgovernment digital services to help integrate and make sense of this data In the US, the Electronic Systems forour customers. ™ FASTLabs research and development organisation won a contract from the We launched our deployable open ™ AirForce Research Laboratory to introduce networking product, NetVIPR , which artificial intelligence into an interactive provides intelligent and secure military game environment to revolutionise air communication networks linking everything operations planning for contested from small reconnaissance drones to environments. As part of the Fight Tonight combat vehicles, fighter jets, aircraft carriers programme, we will provide air operations or military commands. Recognising the planners with the tools they need to range of systems used by militaries around dramatically accelerate the process of the world, NetVIPR is a software product planning complex air attack operations, as designed to work in any standard platform well as generate and assess multiple plan regardless of hardware vendor. options and select the most robust one. 28 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### How we innovate We have a number of research labs across the Group that act as incubators for applying new technologies in order to solve customer problems. Our labs also foster collaborative partnerships with academic and other outside organisations inorder to bring a greater level of diverse thinking into BAE Systems. We have research labs in the following businesses: ™ • BAE Systems, Inc. – FAST Labs • Australia – Red Ochre Labs • Air – AirLabs Synthetic training • Maritime – MarLabs Our engineers are • Digital Intelligence – AI Labs harnessing the power of technologies ### Research and Development (R&D) including virtual andmixed reality We structure our R&D activities around totrain fast jet pilots ourbusiness and product strategy, ensuring and maintainers. a clear focus for our R&D spend. We also continually scan the horizon for new technologies and developments in defence technology around the world. | | Our global reach also allows us to help | We will continue to work on a suite | | --- | --- | --- | | In 2022, we spent £2.0bn (2021 £1.6bn) | support collaboration across governments, | ofautonomous vehicles, along with a | | onR&D, of which £287m (2021 £255m) | such as in the development and production | commonautonomous architecture to allow | | wasfunded by BAE Systems. In addition, | of the Global Combat Ship. Sufficient | these vehicles to be more interoperable | | the Group’s share of the R&D expenditure | commonality will be retained to create | withone another and with third-party | | of its equity accounted investments in 2022 | opportunities for sharing training, operational | platforms and services. | | was £0.4bn (2021 £0.4bn). | experience and shipbuilding skills, each of | | Sustainability remains an important and which offers enormous value in bringing We continue to protect our investments in complex area for us and our customers, friendly maritime nations together. | technologies and have a portfolio of patents | | given the need for maximum performance | | --- | --- | --- | | and patent applications covering more than | Under a $60m (£50m) contract from the US | in all operating environments. Our work | | 2,500 inventions internationally. Combined | Army Contracting Command – Rock Island, | into electrification will continue, for | | witha clear strategy for managing our | the FAST Labs organisation is developing | example our pursuits on quadcopters that | | intellectual property (including technology | certaintypes of next-generation, radiation- | could take on some traditional helicopter | | and know-how), we seek to create value | hardened bydesign microelectronics. In | roles, as well as further capability | | indifferent ways through, for example, | collaboration with Cadence Design Systems, | improvements on our hybrid electric | | licensing, industrial participation, sales | Carnegie Mellon University, Movellus, | andfully electric propulsion systems, | | ofrights and R&D collaborations as part | Reliable MicroSystems, Sandia National | whichhavebeen installed on buses, ferries | | ofoffset agreements. | Laboratories, and others, the team is | and now an armoured vehicle. We will | | | building a new design library that can be | continue to explore a range of technologies | ### Collaboration | | used to develop advanced, high-reliability | to support our work towards our own | | --- | --- | --- | | As technology gets more complex, no single | microelectronics and expand the domestic | netzero target across our operations | | company can specialise in every area. That’s | supply of this technology for the defence | (Scope1 and 2) by 2030. We will also | | why we work with six strategic universities | and aerospace community. | progress several projects supported by | | in the UK, a number of preferred academic | | aninternal Sustainability Accelerator fund | | partners in the US, two formal university | Priorities for 2023 | | todevelop cutting-edge technologies to partners in Australia and another in Malaysia. Data and data exploitation will continue help us and our customers. We also bring in expertise from a range of tobe a focus in 2023, helping both In 2023, we will be developing our cluster small to medium enterprises (SMEs) such supportour physical platforms and deliver ofmulti-sensing satellites in order to deliver asDIEManalytics, an SME with specialist actionable intelligence. highly detailed radar imagery day and night, understanding of data analysis and artificial By making our ships, aircraft, vehicles in any weather conditions. intelligence, to explore the potential of andother platforms digitally enabled from newand untested technologies in the We will also continue our government the ground up, we are able to more easily development of a future combat air system. digital transformation work, which has provide insights that reduce overall support already delivered impressive results We are continuously looking to help small and maintenance costs. While we have supporting the police in finding criminal innovative companies bring something been doing this for a number of years, in gangs who exploit children and the unique to defence, by helping them 2023 we will be testing new approaches vulnerable. In 2023 we plan to offer overcome the barriers to entry that are tosecurely analysing data and making it thisservice to more customers. common to the market. Since running more available to engineers. In design and theUK Ministry of Defence Serapis manufacture, our increasing use of digital framework, we have doubled the number twins will continue to reduce the need of SMEs working onspace projects for the forphysical prototypes and testing, UK government. contributing to our sustainability goals. BAE Systems plc Annual Report 2022 29 Strategic report / Delivering for our stakeholders ## Our investment proposition ## These strategic priorities, together with our ## ESG agenda, strong business performance ## outcomes, risk management, and sustainable ## At BAE Systems weserve, supply management and governance of our ## business are creating and delivering value ## and protect those who serve and ## forour stakeholders. ## protect us. ## We are well positioned to successfully build ## onour track record of… | As one of the world’s largest aerospace and | Shareholder returns | | | --- | --- | --- | | defence companies, employing a highly | 19 years of dividend increases | | | skilledglobal workforce of approximately | 2022 | 27.0p | 1 | 93,100 | people located in around 40 countries, | 2021 | | | 25.1p | | --- | --- | --- | --- | --- | --- | | the geographic diversity of our business is | | | 1 | | | | | | 2020 | | 23.7p | | | amajor strength and differentiator among | | | 1 | | | | | | 2019 | | 23.2p | | ## ourpeers in the defence sector. We are the 2018 22.2p ## largest defence contractor in both the UK 1. 2020 does not include the interim dividend paid of 13.8p per share paid in ## andAustralia, and a top ten defence prime September in respect of 2019 performance. This amount is reflected in the 2019 dividend history. ## contractor in the US. Our business spans all ## domains of the global security market, from ## Clear, consistent and careful capital allocation ## airand space, to land, sea and cyber domains. Investment in our people Investment in business ## BAE Systems is poised for further top-line Capex to drive growth – included in earnings and cash outlook ## growth and profitability based on robust end R&D ## markets, the value drivers of our operating ## model, and thestrategic actions we are taking, Free cash flow ## presenting a compelling investment case for ## current andprospective shareholders. Dividend M&A Buyback ## Our investment proposition is driven by our Maintain investment-grade credit rating and balance sheet flexibility ## consistent strategy and strategic priorities to… ## Our sustainability agenda (see page 38) ## Drive operational excellence Our key pillars: ## Continuously improve competitiveness Addressing Ideas, innovation ## andefficiency climate risks andtechnology ## Advance and further leverage ## ourtechnology | | Creating opportunity | Success through | | --- | --- | --- | | | for people and | partnering | | Page 16 | communities | | Our strategic framework Our foundations: Safety, Diversity, Product Environmental Accountability Robust health& equity & trading,quality impact &transparency ethics& wellbeing inclusion & safety management governance 1. Including share of equity accounted investments. 30 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ## Our outlook and investment proposition is ## supported by our five key competitive advantages: Contract backlog provides high level of sales Diverse geographic footprint 1 3 visibilitydriven by multi-year programmes – deep customer relationships • Record annual order intake of £37bn, driving backlog up to £59bn – Largest defence contractor in UK and Australia and top ten prime 1 expect another solid year of order activity in 2023 . contractor in the US. • Incumbent positions on key long-term programmes in all sectors. 1 E Sales by destination • Backlog represents only currently funded scope, which in many A casesisasubset of the expected value of the programme lifecycle. A US 44% Examples include: B UK 20% C Kingdom of Saudi Arabia 11% – F-35; D Australia 4% – Dreadnought submarines; E Other international markets 21% – Type 26 and Hunter Class frigates; C – Typhoon support; – Kingdom of Saudi Arabia support; – US combat vehicle production; and – Electronic warfare technology. 1. Sales is defined in the financial glossary on page 302. • Provides visibility on value generators for years to come. • All sectors positioned to grow from backlog and known programmes Differentiated technology with a good opportunity pipeline. 4 1. Projections are based on internal management estimates and reflect management’s current assumptions, including assumed receipt of • We have differentiated technology incumbent positions and are futureorders. fostering a high-performance, innovative culture. • More than 2,500 inventions protected by patents or patent applications. World-class defence capabilities • We are positioning for future growth aligned to customer priorities 2 asthreats in the grey zone mean defence needs to adapt. • The Group’s investment in R&D is increasing as we look to build Electronic Warfare Combat Air onexisting world-leading technologies and generate new | A leader in full-spectrum electronic | Consortium positions on F-35 and | differentiatingcapabilities. | | --- | --- | --- | | warfare technology and solutions – | Typhoon – proven availability model | | | continued customer focus supporting | forcombat aircraft support – leading | • We are accelerating the pace of innovation through collaboration and | | growthexpectation. | development of sixth-generation | partnerships with leading defence laboratories and educational institutions. | Tempestcombat air systems and relatedtechnologies. R&D investment increasing Combat Vehicles Undersea Warfare Build four of five vehicles in US Heavy Design, build, combat management Manufacturing Advanced Multi-domain Autonomy Brigade Combat Team; CV90/BvS10 systems, weapons and autonomous anddesign electronics manufactured in Sweden for systems capabilities. alliedcustomers. Sustainable Electronic Sensors and Space Cyber | | | technology | | warfare | processing | | --- | --- | --- | --- | --- | --- | | Cyber | Naval Ships | | | | | | Trusted partner for allied nations in | Design, build, support and integrate | | | | | | anincreasingly critical market in cyber | complex naval ships. | | Value-creating operating model | | | | security, technology support, modelling | | 5 | | | | and simulation. Attractive operating model that runs on negative working capital Multi-Domain Capabilities Efficient CAPEX – self- and Well positioned to offer differentiated solutions in autonomous, networking, Balanced mix R&D model customer-funded Advance communications anddata exploitation – augments and differentiates our ofproduction, – customer-, self- – franchise payments platformbusinesses. aftermarket and collaboration- specific funded ## Creating attractive shareholder returns ### What we look to achieve in the coming years… – Strong consistent programme – Secure further opportunities and widen – Strong cash conversion performance market base – Focused capital allocation – Technology investment – Accelerate our sustainability agenda – Higher return on capital employed – Efficiency and simplification in working – Top-line growth (ROCE) – Portfolio shaping for value creation – Increased return on sales D BAE Systems plc Annual Report 2022 31 B Strategic report / Delivering for our stakeholders ## Our stakeholders ## 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. Stakeholders Areas of interest Why we engage How we engaged in 2022 – Safety and wellbeing The skills, capabilities and We used a range of channels to engage with employees ### Our people – Ensuring our people commitment of our people across the Group, including in-person and virtual meetings, Employees of BAESystems canfulfil their potential arecritical to ensuring the briefings, conferences, toolbox talks, stand-downs and atwork long-term sustainability of listening forums at all levels. Leaders provided regular ourbusiness and delivering updates through videos and podcasts, as well as attending – Recruitment theinnovation needed to events throughout the year. We also used digital channels – Training and development solveour customers’ including our Employee App, intranet, email and TV systems. – Reward and recognition complexchallenges. Employees were encouraged to share feedback and get – Diversity, equity and Effective engagement involved in Group activities. We ran surveys and insight inclusion enablesour employees sessions to measure employee sentiment in the year. – How we work together tocontribute to improving Engagement has continued with trades unions in Australia – Business conduct business performance and the UK and labour unions in the US. andhelpsus to create – Environmental and anenvironment in which We engaged with employees on health and safety issues socialconsiderations everyone is valued and through regular communications, as well as ensuring canfulfiltheir potential. ongoing maintenance and review of health and safety standards to ensure compliance. We have an active commitmentto account for thehealth and safety of all | Page 62 | | employees, and to provide | | | --- | --- | --- | --- | | More information | | asafe working environment. | | | | – Value for money | Understanding our customers’ | Following travel disruption caused by the global | ### Our customers – Quality of products needsand challenges is pandemic,we have engaged with our customers and ### andend-users centralto our strategy and end-users in person. We attended major events including andservices Large governments and howand where we invest in the Farnborough International Airshow in the UK and – Risk management theirprocurement bodies, technologies and infrastructure. theWorld Defense Show in the Kingdom of Saudi Arabia. – Timely delivery International summits like the Shangri-La Dialogue largeprime contractors Our end-users protect people, andcommercial businesses – Safety and wellbeing (Singapore) and Atlantic Future Forum (New York City) information and nations. – Environmental and provided strategic access to key customers and stakeholders. The people who use our socialconsiderations We engage at customer meetings and programme reviews productsand services, often members of the armed forces – Reliability of our teams and are proud to host customers at our international sites. andsecurity services torectify issues quickly An example was the roll-out ceremony for the first Typhoon aircraft to the Qatar Emiri Air Force. We also worked closely with end-users at customer facilities, bases and sites. We continue to have regular dialogue with senior military | Page 75 | | | leaders as well as senior ministers and political officials in | | --- | --- | --- | --- | | More information | | | our key markets. | | | – Labour and skills | Our suppliers and an effective, | We worked hard to engage directly with our suppliers | ### Our suppliers requirements efficientand sustainable supply andmaintained close relationships to ensure continuity The companies we work – Cost of materials chain are essential to enable ofsupply and to proactively manage risks arising from withtodeliver products and andoperations usto deliver forour customers supply chain disruptions as a result of global events. services toourcustomers and end-users. Thisenabled us to support our suppliers, for example – Terms of trade byproviding extended demand visibility, and providing – Timely payment Engaged suppliers perform ourexpertise to find mutual solutions to identified risks. atamuch higher level, – Sustainable sourcing knowingthey are regarded We also engaged on the topic of sustainability, sharing – Supply chain resilience asvalued partners and critical ourambitions and expectations so that we can generate andcontinuity of supply tomutual success. value for mutual benefit. Page 78 More information 32 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance Stakeholders Areas of interest Why we engage How we engaged in 2022 – Product and service We benefit from collaborating We engaged extensively with our partners, which ### Our partners development with other organisations to use includedour second annual PhD event to share research Other industry companies – R&D investment our collective expertise and co-sponsored with UK Research and Innovation. We have oracademic institutions who technology to offer the best maintained regular dialogue with industry partners, weworkwith | | | possible products and services | organisations such as think tanks and customers around | | --- | --- | --- | --- | | | | to our customers. | challenges that require a multi-partner approach, such | | Page 68 | | | asmulti-domain integration, resilient use of space for | | More information | | | intelligence and communications, and sustainability. | | | – Profitability, growth | To ensure the owners of our | We conducted an enhanced investor programme with | ### Our shareholders potential and cash shares and potential investors anInvestor Relations Officer now based full time in the Investors who provide capital generation inthe Company have a full US,allowing us to conduct more investor engagements tothebusiness – Capital allocation; returns understanding of our business inNorth America. Meeting format was a mix of in-person viadividend and buyback including the strategy, growth and virtual. Engagements were a balance of management potential and risks in the and Investor Relations meetings, attendance at investor – Operational performance business as well as the overall conferences, trade shows and bank-led Q&A sessions. – Quality of management performance of the business. In addition to the core programme, we hosted briefings – ESGconsiderations with a number of investors at the Farnborough – Share price performance International Airshow and held a capital markets event Page 36 More information focused on ESG and our Digital Intelligence business. – The value we bring to To ensure we maintain the Fundraising returned to our sites in 2022, with large- ### Our communities thecommunities in which trustof the communities scaleemployee fundraising activities taking place, as The people who live where weoperate wherewe work. To understand wellas longer-term, cause-based, fundraising campaigns. weworkand charitable – Employment and respond to any issues We continued to support the advancement of skills and organisations we support important to our communities. education initiatives across our markets through charitable – Local community factors and non-charitable sponsorships with new and existing including environmental To provide employment partners, as well as supporting our local communities andsocial considerations opportunities and contribute through new forms of skills-based volunteering. tothe economic prosperity | Page 60 | | ofthe places where our people | | | --- | --- | --- | --- | | More information | | live and work. | | | | – Relevant laws | In order to have a constructive | We liaised openly and constructively with various | ### Regulators andregulations dialogue with those who regulators, including conducting ongoing discussions Governmental bodies oversee the regulations which withUK and US regulators in support of efforts to drive thatoverseeindustry can impact our business. efficient compliance, improve bilateral and multilateral orbusinessactivities defence trade co-operation and support the Group’s | Page 75 | | | licensing strategy. We supported initiatives by industry | | --- | --- | --- | --- | | More information | | | associations to work with regulators to the same end. | | | – Group performance | To make sure current and | We continued to engage with our UK members via our | ### Our pension – Member benefits former employees in our pensions website, ensuring they have access to key scheme ### schememembers pension schemes are informed documents and pensions information. All members – Pension fund Members and trustees about how we continue to received a newsletter to keep them updated and engaged investmentstrategy ofourpensionschemes meetour commitments to in their pension planning; for members of our defined – Deficit recovery themand ensure they have benefit pension schemes, this included an annual report on access to all the information the financial health of their particular scheme. We worked they need to manage their with our Consultative Committees, to ensure ongoing pension arrangements. dialogue between the Company, the Trustee and members. During 2022, consultations with members of the UK Page 36 schemes with defined contribution benefits took place More information regarding a change in provider for pension provisions. We also engage with other organisations who have a focus on business or defence and security issues to understand factors that can impact our business and how we operate. BAE Systems plc Annual Report 2022 33 Strategic report / Delivering for our stakeholders ## The work of the Board ## We set out our business model on page 18, which highlights the key ## elements of how we do business. The requirements of the s.172 directors’ ## duty are closely aligned to those that underpin our business model and ## these principles are not only considered atBoard level, they are firmly part ## ofhow we do business across the Company. In order to achieve long-term ## sustainable success, the Board regularly considers the views and interests ## ofstakeholder groups throughout itsdecision-making process. In this ## statement, we highlight some of the key discussions and decisions ## undertaken by the Board during 2022. ### The Board receives an update ## Key matters considered and decisions made in 2022 ### from the Executive Directors at ### Environment and climate change As part of its annual Strategy Review, ### each Board meeting which details theBoard considered how climate change The Group has set a net zero ambition for ### any substantial engagement considerations are increasingly impacting Scope 1 and 2 operations by 2030 andto be defence and commercial markets. The ### anddevelopments with working towards a net zero value chain by strategy adopted by the Board in 2022 ### keystakeholders. 2050. During the year, the Board and identifies business solutions in defence Environmental, Social and Governance (ESG) andadjacent markets. These include Committee received updates on the building on the success of our low and progress towards our 2030 target, and zeroemission vehicles business based in the thework undertaken to increase usage US, further investment in the electrification ofgreen energy sources and improve the ofland, sea and air platforms, for both Group’s ability to monitor and measure military and commercial customers, and carbon emissions. The Group has also thedevelopment of sustainable solutions initiated a programme of activities aimed at forcustomers in support of climate developing its reporting against Task Force change-related goals. on Climate-related Financial Disclosures | | | (TCFD) requirements – a methodology | The Board also undertook further | | --- | --- | --- | --- | | | | tomodel climate change-related risks and | externallyfacilitated training to ensure that | | | | opportunities. This has also been the subject | we continue to improve our knowledge of | | Companies Act 2006, Section 172 | ( 1 ) | | | | | | of Board and ESG Committee review. | the matter and understand the risks and | | “A director of a company must act in the | | | opportunities for the Group. | To better articulate our decarbonisation way, he considers, in good faith, would strategy, the Group undertook a detailed bemost likely to promote the success evaluation of its carbon reduction plans. ofthecompany for the benefit of its The output of this is embedded in the membersas a whole, and in doing so Integrated Business Plan (IBP) that sets the haveregard (amongst other matters) five-year financial plan against the strategic tothefollowing factors: priorities for the business. With regards to (a) the likely consequences of any the Scope 1 and 2 elements of our net zero decisioninthe long term; programme, the resulting IBP outputs were (b) the interests of the company’s reviewed and approved by the Board in employees; November. This includes the work undertaken (c) the need to foster the company’s in our business sectors to identify areas to business relationships with suppliers, reduce energy consumption and increase customers and others; efficiency of energy use. The Board recognises that in order to meet our net (d) the impact of the company’s operations zero ambitions for our value chain (Scope 3), onthe community and the environment; we will need to work closely with customers (e) the desirability of the company and suppliers to advance green technology maintaining a reputation for high solutions and align how we are working to standards of business conduct; and define and achieve common objectives. (f) the need to act fairly as between members ofthe company.” 34 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Company culture and The Board appreciates the importance Suppliers ofworkplace culture in the attraction and ### employeeengagement The macroeconomic disruptions resulting retention of a high-performance workforce. In accordance with Provision 5 of the from COVID-19 and geopolitical instability In particular, it welcomed the emphasis the UKCorporate Governance Code 2018 from the Ukraine war caused a strain on businesses have placed on developing the (theCode), theESG Committee undertakes supply chains for us and many other right workplace culture and the work being workforce engagement on behalf of the companies. Throughout 2022, the Board done to maintain that, as we adopt more Board, and Dr Jane Griffiths, Chair of the placed a high priority on monitoring how flexible working practices with increased ESG Committee, provides regular updates our supply chain teams were managing levels of home working. tothe Board on employee engagement. thechallenges and mitigating the impact Additionally, reports from members of The Board was pleased to learn of the onperformance. Supply chain disruption theExecutive team, and our first-hand number of former employees electing to was, and continues to be, a significant interactions with employees, allowed for return to the organisation, and the positive issuefor the business but early recognition discussions on various employee-related implications of that in terms of our culture of the potential problem, coupled with matters throughout the year. We engaged and workforce offering. In order to gauge active engagement by supply chain and directly with employees through a mix sentiment, the UK business launched business teams, has helped contain the ofsite visits, town hall Q&A sessions, monthly pulse surveys which allowed for a impact on performance. informaldiscussions during on-site lunches, consistent assessment of culture throughout Over the past few years, the Board and dinners with high-potential employees. the year. Positive results in key indicators hasbeensupportive of the priority the Afuller overview of our engagement such as financial performance, ethics ChiefExecutive has placed on developing duringthe year and our employee concerns, safety performance, absence rates aGroup-wide procurement function. The engagement framework can be found and commercial success, highlighted the transformation programme for the function onpages 152 to 153. improvements in the Group’s culture. has focused on developing its people and The Group ESG, Culture &Business The Behavioural Framework is a key element systems and introduced long-term supply Transformation Director engaged with us of how we provide clear guidance on what contracts that leverage the scale of the onkey employee-related matters. During we expect from our business leaders and Group and deepen our relationships with these conversations we remarked on the stress the equal importance of what we do key commodity suppliers. These efforts step-change we achieved in the quality and how we do it. The Group HR Director werevital in helping the Company mitigate ofemployee communications during the explained that these behaviours were supply chain disruption in the last year and peak of the pandemic, when engagement embedded within the personal objective- are evolving beyond procurement, to was more direct and personal. We have setting process, as well as within include other aspects of the supply chain. continued to build on these foundations development and training materials for Supplier relations are also crucial to how inorder to progress conversations on managers and individual contributors. weprogress our decarbonisation ambitions. wellbeing and mental health and to foster We also received updates about the During the year, a review of the Group’s inclusive practices. In September, the Board variousinitiatives underway across the supplier base was undertaken to assess looked in detail at how organisational Group in response to the rising cost of living ESGrisks and create better metrics transformation activity is being used to crisis and the resulting impact on employees tosupport value chain decisions. create a more agile and efficient organisation and their families. The Chief Executive kept with greater emphasis on employee Our Chief Procurement Officer also us appraised on the progress of pay empowerment, diversity, equity and updatedus on the refreshed Supplier negotiations with our unionised workforce, inclusion, talent development and retention. Principles which have been revised to and the positive outcome achieved for all encourage suppliers to assess the impact The Board discussed at length the parties – further details can be found on oftheir operations through an ESG lens. challenges of post-pandemic global pages 63 to 64. Employees were also The Board noted that the Group was increases in workforce attrition and labour reminded ofthe resources available by way exploring opportunities to share skills shortages, and the impact the cost of living of the Employee Assistance Programme, andsupport supplier development, in crisis is having on our employees. Various theemployee Credit Union and other recognition of the more broadly based initiatives were deployed across the Group mental health and wellbeing resources relationships we are looking to develop to attract, develop and retain a talented tomanage additional stresses. within the supply chain. workforce for now and for the future. In our US business, an Employer of Choice initiative sought to better articulate our employee value proposition and career development prospects. To ensure that employees felt included and were aware of the career development opportunities available to them, our HR teams worked with line managers to support them in dealing with changes in the ### Stakeholder engagement workplace resulting from more flexible ways The Company engages with a variety of stakeholders on a regular basis. Feedback is received of working. Overall, wemade progress in atanumber of different levels and helps inform decisions madeon a delegated basis across the addressing the labour attrition issue through Company – but within the highly developed governance structure approved and overseen by a hiring and retention strategy that stressed theBoard. Stakeholder feedback is also received by the directors, either directly, via executive the quality of our employment proposition management or through formal reporting processes. Further information on stakeholders and – often offering job-sharing and more howwe engage can befound in the following sections of this Annual Report: flexible work patterns for employees. | Page 32 | Page 60 | Page 151 | | --- | --- | --- | | Our stakeholders | Creating opportunity for | Environmental, Social and | | | people and communities | Governance Committee report | BAE Systems plc Annual Report 2022 35 Strategic report / Delivering for our stakeholders / The work of the Board ### Investors The Group provides regular updates toinvestors and engages in meaningful Spotlighting our dialogue on operational and financial disruptive technology performance, and increasingly ESG matters, FAST Labs ™ research & to allow investors to take a holistic view development team leaders ofthe Group’s performance. The Board has brief members of the Innovation & Technology discussed how the Group can best Committee during a communicate its ESG credentials and the September visit to the progress and ambitions it had in respect Electronic Systems ofthese issues. We agreed the need for Merrimack, New theGroup to continue to be transparent on Hampshire facility. the progress we are making on the ESGagenda and provide purposeful updates in our communications to stakeholders. Wealso heard about the Group’s performance in ESG ratings and indices. Throughout the year, the Chairman and ### theExecutive Directors reported on the Hisconversations with investors are focused Capital allocation – share discussions they’d had with investors on governance matters and he regularly ### buybackdecision regarding ESG progress and to highlight provides feedback to the Board on these In publishing its half-year results in July theimportance of defence and security, meetings. During the year, he reported on theBoard announced a three-year £1.5bn andthe role played by the defence industry. the positive commentsmade by investors share buyback programme. This decision on the Group’s performance and their Building on the positive feedback from was based on continued good operational support for the executive team. We heard theprevious year, the Group held an performance, a positive outcome to the that progress in managing succession ESGevent in October 2022. More than UKpension triennial review and confidence planning isa key issue for investors and 150investors dialled in or attended the in the future outlook for the Group. wehave provided more information on event in person. The Chairman, Chair of thisin the Nominations Committee report In making this decision, the Board considered theESG Committee, and the Executive (see pages140 to 143). its stakeholders, the long-term needs of Directors presented a detailed overview thebusiness, investor feedback and the ofour Company purpose and the progress To provide the directors with direct need to maintain the necessary flexibility against our ESG priorities in the year. feedback on how the Group is viewed toprudently manage the Group’s Attendees were also given an overview byinvestors, we also undertook an operations. It was important to us that we ofhow we apply ESG across the Group, externally facilitated investor study, continued to maintain our capital allocation including case studies on how we are whichincluded interviews with 20 leading priorities and manage the balance sheet implementing novel heat and power investors, representing a third of the conservatively, whilst maintaining our solutions, reducing energy consumption, Company’s issued share capital. Overall, objective of paying dividends, in line with adopting low and zero carbon emission investor comments were positive. The our policy of cover of around two times transport options, developing employees interviews showed that investors valued underlying earnings. We also noted that and embedding ESG considerations into theimproved financial performance, theGroup’s continued investment in R&D future programmes. strongleadership team and well-balanced had increased during the year, and we were geographic spread of the Group’s portfolio. Following the full-year and half-year satisfied that the level of Group-funded Investors also stressed the importance results,the Chief Executive, President R&D was appropriate. ofthe Group maintaining strong andChief Executive Officerof BAESystems, operationalperformance and robust One of the key stakeholder groups we Inc. and Group Finance Director undertook programme execution. considered was the Group’s employees various investorroadshows and discussed –past and present, and the protection the Group performance with shareholders From our various engagements with oftheir post-employment benefits within representing over 50% of the share capital. investors during the year we gained a the pension schemes. In light of the Thekey themes of these conversations goodunderstanding of their view of capital strength ofthe Company’s covenant, and concerned capital allocation priorities, supply allocation priorities, including investment noting that all schemes were fully funded chain pressures, labour market challenges inR&D, value-adding M&A and on a technical provisions basis at their last and how heightened geopolitical threats shareholderreturns. actuarial valuations, the Company made could affect order intake. In response, we itsfinal deficit reduction contribution under continued to provide updates on these the previously agreed main scheme recovery matters in our half-year results and trading plan in March 2021. The elimination of this statements. Separate from the investor funding obligation materially strengthened relations work that the executive directors the balance sheet. As part of the buyback undertake, the Chairman also engages decision, the Board also agreed that a regularly with shareholders. payment would be made to the scheme, inaccordance with an agreement with theTrustee. 36 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Ethical business conduct Community engagement During 2022, funds raised through theprogramme were committed to ### Behaving ethically is fundamental to our andinvestment sixcommunity projects in the UK, the values and at the bedrock of our culture. The Board understands that the Group’s Kingdomof Saudi Arabia and Australia, The Board sets the ethical standards that operations put it at the heart of local further details of which can be found guide all that we do as a Group. The Group communities – the places where we operate onpages 66 to 67. operates in highly regulated sectors which and our employees live and work. The require strict adherence to local and Group seeks to play a constructive role ### Customer and other stakeholder international regulations and our Code intackling issues through engagement and ### engagement ofConduct makes our expectations clear investment, and by identifying what is The Group engages with a variety of toemployees. In implementing key important to these communities and how stakeholders on a regular basis. Feedback considerations and decisions made in the best to collaborate to find solutions. isreceived on a number of different topics year, the Board considered the different In 2019, the Company received shareholder and helps inform numerous decisions made interests of our stakeholder groups and approval to amend the Company’s Articles on adelegated basis across the Group – sought to act fairly between them. of Association, in order to facilitate an butwithin the highly developed governance We regularly review the efficacy of the assetre-unification programme to identify structure approved and overseen by Group’s ethics programmes by undertaking shareholders who had lost touch with the theBoard. Stakeholder feedback is also an annual review into ethical conduct. Company. In 2020, the Board agreed a receivedby the directors, either directly, During our most recent review in July, we programme whereby unclaimed shares were viaexecutive management or through reviewed key indicators from various data sold and the proceeds used to fund good formal reporting processes. In particular, and metrics, to monitor trends, provide causes benefiting the local communities theChief Executive briefs the Board insight and facilitate benchmarking on wherein we operate (with a proportion regularly on key customer relationships, theethics programme. An analysis of this offunds retained to be used, should it be which is supplemented by feedback data was undertaken against a global possible to locate the former owners of provided by the Chairman based on his benchmark which gave usreassurance that theassets at a future date). These monies high-level engagement with customers the programme waseffective. The Board would allow for further commitments for inthe UK, Kingdom of Saudi Arabia noted certain workplace and external community initiatives, in addition to our andAustralia. Further information on factors that will need to be monitored to regular funding. stakeholders and how weengage can ensure they do not impact performance, befound on page 32. including increased levels of remote working, workplace stress and the cost ofliving challenge. ® A look inside the APKWS factory Board members tour the Electronic Systems factory where APKWS laser-guidance kits are produced. BAE Systems plc Annual Report 2022 37 Strategic report / Sustainability ## Our sustainability agenda ## Sustainability is fundamental to our business performance and the ## delivery of our sustainability agenda is how we address our material ## Environment, Social and Governance (ESG) risks and opportunities. ### Our sustainability agenda supports our Sustainability integrated into all we do Our foundations and key pillars purpose – “to serve, supply and protect Our sustainability agenda is driven from the We recognise that sustainability is a broad those who serve and protect us”. Our top by our Chief Executive, who has primary area with many criteria. We focuson the products andservices help to enable responsibility for delivery of the Group’s areas which are most material to our sector, governments todefend the lives and strategy. He is supported on sustainability our communities and our business. We then freedoms of people around the world, matters by the Group ESG, Culture & collectively address these areas with our support international stability and keep Business Transformation Director who customers and supply chain. people safe. At the same time our business advises on the strategy with input from supports the prosperity agenda of nations Our agenda has evolved during 2022 to awide range of stakeholders. with high-quality, well-paid sustainable both confirm thestrong ESG foundations employment and being avalued member Sustainability is integrated throughout that are core to ourbusiness and the four ofthe communities weoperate in. ourbusiness from our strategic framework, key pillars which present opportunities our governance systems and policies, to forusto accelerate our agenda and Many of our programmes are complex, theintegrated financial planning process harnessourstrengths and capabilities. pushing the boundaries of current and business review cycles. Cross-functional Theprogresson both our core foundations technology. The products we design and andcross-sector steering groups provide andthe work to embed the four key pillars build now will remain in service for decades expertise and oversight and our assurance is detailed below. to come which emphasises the need to framework and Internal Audit regularly develop long-term sustainable solutions. assess compliance with policies and This is why we are strongly aligned with processes. governments’ national decarbonisation programmes, working closely with our Our Board Environmental, Social and customers and partners in developing Governance Committee provides oversight sustainable solutions, as well as setting and assurance of the Group’s agenda and atarget of achieving net zero greenhouse progress, including approving ESG-related ## Our key pillars: gas emissions across our own operations objectives and targets which form part of (Scope 1 and 2) by2030. the executive incentives. At each meeting the Committee hears from both senior Reducing the impact of our products and management and the Group’s subject wider value chain, whilst maintaining or matter experts. TheCommittee routinely improving delivery of our customers’ reviews data andparticipates in site visits capability, is also a key part to this. To do and meetings to engage directly with thiswe collaborate with our customers employees and heartheir views. This dialogue andpartners and every year we invest enables the Committee to reflect employee inresearch, development and skills. perspectives in boardroom discussions. Our ability to meet these complex Clear and open two-way communication engineering and technology challenges from the boardroom, through the executive depends on the commitment, skills and and across all our sites ensures our talent of our people and it is critical that employees understand, appreciate and wecontinue to attract, retain and develop cancontribute to the sustainability agenda the very besttalent. To do this we must which underpins strong operational ensure thatour workplaces provide an performance and value for stakeholders. environment where our employees feel valued, included and able to thrive in their professional development. By contributing to activities and organisations that align ## Our foundations: with our business, we also aim to make a positive social and economic contribution to the communities in which we live and work. 38 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance | Addressing | | Ideas, innovation | | | --- | --- | --- | --- | | climate risks | | andtechnology | | | | Read more on page40 | | Read more on page54 | | Creating opportunity for | | Success through | | | --- | --- | --- | --- | | people and communities | | partnering | | | | Read more on page60 | | Read more on page68 | | | | Safety, | | | | | | Diversity, | | | | | Product | | | | | | Environmental | | | | Accountability | | Robust | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | health & | | | | | | equity & | | | | | trading,quality | | | | | | impact | | | | & transparency | | ethics& | | | | | wellbeing | | | | | | inclusion | | | a a | | & safety | | | | | | management | | | | | | governance | | | | | | | | | | | | | r r e e | | n n | | | | | | | | | | | | | | | | | | | | | | | | | u u | | | | d d | | | | | | | | | | | | | | | | | | | | | | | c c | | | | | | s s | | | | | | | | | | | | | | | | | | | | | | e e | | | | | | | u u | | | | | | | | | | | | | | | | | | | | s s | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | s s | | | | | | | | | | | | | | | | | | a a | | | | | | | | | | | t t | | | | | | | | | | | | | | | | | | | | | | | | | | | | a a | | | | | | | | | | | | | | | | r r | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | i i | | | | | | | | | | | | | | o o | | | | | | | | | | | | | | n n | | | | | | | | | | | | | | f f | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | a a | | | | | | | | | | | | g g | | | | | | | | | | | | | | | | b b | | | | | | | | | | | n n | | | | | | | | | | | | | | | | | | l l | | | | | | | | | | i i | | | | | | | | | | | | | | | | | | e e | | | | | | | | | | t t | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Read more | | | | | | Read more | | | | | Read more | | | | | | Read more | | | | Read more | | Read more | | | a a | | onpage72 | | | | | | onpage73 | | | | | onpage75 | | | | | | onpage75 | f f | | | onpage75 | | onpage75 | | | | | | | | | | | | | | | | | | | | | | | u u | | | | | | | v v | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | t t | | | | | | o o | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | u u | | | | | | n n | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | r r | | | | | | | | | | | | | | | | | | | | | | | | | | | | e e | | | | | | n n | | | | | | | | | | | | | | | | | | | | | | | | | | | | I I | | BAE Systems plc Annual Report 2022 39 | | | | | | | | | | | | | | | | | | | | | | | | | ### Ideas, innovation Creating opportunity Success through Addressing ### climate risks and technology for people and Partnering ### communities Diversity, equity Safety, health Accountability & transparency & wellbeing & inclusion Product trading quality Robust ethics & governance & safety Environmental impact management Strategic report / Sustainability / Our sustainability agenda ## Our key pillars ## Climate change is one of society’s ## Addressing ## greatestchallenges. There is growing ## climate risks ## recognition of its impact on the operational ## sustainability of businesses as well as ## theneed for companies to proactively ## managethe impacts they have on ## theenvironment. ### Our aims ## Why is this important Net zero | to BAE Systems? | • We have set ourselves the target of: | | | --- | --- | --- | | Solving the challenge of climate change | – achieving net zero greenhouse gas | | | requires all of us to act together. Our | | emissions across our operations (Scope | | approach to climate resilience includes | | 1 and 2) by 2030 – we aim to do this | | bothassessment of the physical and | | byreducing our emissions as a minimum | | strategic impacts on our own sites | | in line with the 1.5°C pathway; and | | andoperations and the development | – working towards a net zero value chain | | | ofawider decarbonisation strategy | | by 2050. | thatencompasses the transition plan • This will be achieved by investing in (whereplanned actions are summarised renewable power, optimising energy onpage 42) and sector net zero roadmaps, efficiency across our operations and with the aimof: manufacturing processes, switching | • decarbonising our operations by 2030 | tolower carbon alternative fuels and | | --- | --- | | toreduce the impacts of our own | reducing overall energy use. We are | | activities (see page 42); | working toreduce eventual exposure to | | • supporting our customers on their | offsets but will develop a responsible | | transition to net zero by developing | strategy touse these where required. | lowcarbon products and services Environmental stewardship (seepage 56); • Measuring and monitoring the • developing the skills and capability of our environmental impacts of our business. employees to drive innovation to deliver • Responsibly consuming resources by: aportfolio of low carbon products and services (see page 63); – reducing energy used and waste generated; and • supporting and collaborating with suppliers on their sustainability journeys – minimising water use. (see page 56); and • Collaborating with customers and • working with our local communities suppliers (see page 56). tosupport sustainable initiatives (see Biodiversity and natural capital page64). • Progressing our understanding of how This is underpinned by strong governance, our operations and climate change impact with the capability in place to contribute to natural habitats and affect the natural global decarbonisation efforts. resources necessary for ouroperations. Our contribution to the UN Sustainable Development Goals (SDGs) 40 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Building a sustainable community At each stage of the development, we sought to create open, natural spaces, re-use and recycle materials, promote walking and The closing of the Bishopton Royal Ordnance Factory in 2001, cycling, protect and enhance ecological biodiversity, and support which had manufactured explosives in Scotland for over 80 years, the local economy. presented us with a significant opportunity to transform this 2,400-acre brownfield site into a sustainable community where The programme has won awards from the Royal Town Planning housing, facilities and infrastructure have been built alongside Institute, Homes for Scotland, the Scottish Environmental Protection green spaces and in harmony with the natural environment. Agency and Green Apple, as well as three Brownfield Awards. From design to delivery, we’ve invested significantly in the The work at Bishopton demonstrates how we conduct our business sustainable regeneration of the site. We have created accessible in a socially responsible manner, valuing the communities we work off-road paths, landscaped green spaces and community in, and leaving behind a positive legacy for future generations. woodland areas as well as park and ride facilities, to allow thecommunity to have increased access to nature. BAE Systems plc Annual Report 2022 41 Strategic report / Sustainability / Our sustainability agenda / Our key pillars / Addressing climate risks Net zero programme ### What have we achieved in the year? 1 emissionsreductionlevers Activity Timeline Progress towards net zero Invest in renewable energy • Power purchase agreements Short to Our ambition is to be carbon neutral across mediumterm • On-site renewables our operations (Scope 1 and 2) by 2030; we will seek to minimise the requirement for Reduce and optimise energyconsumption • Real estate utilisation/consolidation Short to offsets through this process. mediumterm • Implement energy efficiency We have established a roadmap based on measures – LED lighting, phases of activity and level of investment, switchtoelectric fleet vehicles, retrofitting buildings tomonitor our progress to decarbonise ouroperations (Scope 1 and 2) by 2030. Switch to lower carbon alternativefuels • Replace operational aviation Short to Inputting together the roadmap we have fueluse with alternatives mediumterm considered the commitments made by the • Monitor and apply development Medium to UK government. We have aligned our Scope oflow carbon heat sources longterm 1 and 2 carbon reduction roadmaps to a | science-based pathway of 1.5°C and set | Offset | • Offset residual greenhouse | Medium to | | --- | --- | --- | --- | | progress against this in both our in-year | Our current approach is based on | gasemissions | longterm | | andlong-term incentives (see page 181). | theprinciple of reducing emissions asfar | | | aspracticable prior to engaging in offsetting Wecontinue to mature our approach to thequantification and understanding of the more complex Scope 3 emissions. We will 1. Short- (less than two years), medium- (three to ten years) and long-term (beyond ten years) time horizons. therefore delay our submission to the Timehorizons are linked to the Integrated Business Planning Process. Science Based Targets Initiative (SBTi) whilst | we continue to do this. We remain | of heating systems via electric power and | All sectors are developing plans for | | --- | --- | --- | | committed to aligning to a 1.5°C reduction | carbon capture technology. We will also | increasing renewable energy generation | | pathway for Scope 1, 2 and 3. | continue to monitor and apply developing | inline with our net zero roadmaps, whilst | | | technologies over the medium to long term | progressing energy efficiency measures. | Our in-year and long-term incentives to further decarbonise our operations. As arealigned to the Group achieving a We have continued to progress activities are added to the roadmaps, they 4.2%operational greenhouse gas (GHG) activitiesacross our sites to reduce waste will be included as part of the IBP process. | emissions reduction target, in line with | | byaddressing the specific production | | --- | --- | --- | | ascience-based pathway of 1.5°C, | Once our emissions have been reduced as | andnon-production waste streams | | year-on-year over ten years (against | much as practicable, we will consider the | ofprogrammes and facilities. | | abaseline year of 2019), with a 90% | useofoffsets to decarbonise our operations | | Activities have included reducing the amount reduction in GHG emissions being by2030. of waste going to landfill via recycling, achievedby 2050. As our understanding We have also strengthened our governance treatment and incineration, and adapting ofScope 3 emissions matures, we will model to support our transition to a low our manufacturing processes. consider reduction pathways in line with carbon company, amending key policies and ascience-based pathway of 1.5°C. The sectors have also continued to minimise processes including our environment policy the water used across our facilities and Our sectors have each developed and Operational Framework to consider manufacturing processes, in order to decarbonisation roadmaps that outline climate-related impacts. protect and support the water ecosystems short-, medium- and long-term activities We continue to assess and manage the on which our facilities and communities tosupport the Group’s decarbonisation climate-related physical risks and impacts depend. Some sectors set initiatives and ambition against three emissions reduction across our global facilities, implementing targets to reduce water consumption levers – increase use of renewable energy improvement recommendations, including annually as appropriate. Initiatives are through investment in both power purchase investment to improve facilities. specific to how the sectors consume agreements and self-generation, reduce wateroperationally and incorporate stages andoptimise energy consumption, and Environmental stewardship of manufacture, forexample, flooding of invest in and procure green technology. We have continued to proactively dry docks. These roadmaps form the basis of our net managethe impactsofour business on zero programme, and identify the level of During 2023, we will be establishing theenvironment by responsibly consuming activity and investment required across the Grouptargets for water use and waste resources. Consumption of resources and business, to decarbonise our operations by management. These targets will be materials canbe different year-on-year, 2030. Key activities outlined within the disclosed in 2024. dueto the differences in geography and roadmaps are included within the Integrated stage of manufacture of our platforms Biodiversity and natural capital Business Plan (IBP), which is reviewed andprogrammes. Nature loss and degradation poses a annually by the Board as part of our We are taking a business-led approach majorrisk to both the environment and Strategy review and are part of the Group’s tosetting reduction targets and driving society. We are undertaking surveys financial planning. Activities include improvement programmes and activities andassessments to better evaluate how long-term power purchase agreements, site tosupport responsible consumption. ourfacilities and operations impact the consolidations, improving energy efficiency Sectorsset objectives to improve the surrounding natural habitat. of buildings, on-site renewable energy performance of their operations such as installations, LED lighting and wider use reducing energy used and the generation ofelectric vehicles. Other activities and ofwaste, emissions and other discharges, opportunities to improve efficiencies and such as effluents. reduce emissions are being considered over the long term, for example, decarbonisation 42 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Operationally, significant aspects Building sustainably andwellbeing centre designed by our ofbiodiversity are addressed via our employees, for our employees. It was In the autumn of 2022, we finished environmental management system (EMS) constructed to high environmental building the Maritime Integration whichincludes protecting natural habitats, standards and achieved a rating of andSupport Centre in Portsmouth. conserving protected species and the ‘excellent’ from BREAAM (Building The£10m investment provides a management of invasive species in and Research Establishment Environmental specialistfacility for research and around our sites. Assessment Method) which puts the collaboration onRoyal Navy warships centre in the top 10% of UK non-domestic Our sectors have established a number andcombat systems and technologies. buildings in terms of energy efficiency. ofinitiatives to support their local The building was designed with Thecentre features many environmentally- ecosystems from installing bat roosts, sustainability in mind. We installed friendly elements such as natural lighting removing invasive species, planting water-efficient appliances and digital and renewable energy generation. wildflowers to attract bees, cleaning monitoring to allow a 40% reduction upwater courses and restoring A wetland garden developed to the initsoverall water usage. Responsible underwaterenvironments. rearofthe building has turned into a waste management, and recycled or thriving habitat for local wildlife. Nearby, Across major UK sites, we also undertook a sustainably sourced materials, were also our solar farm, the size of eight football lifecycle environmental assessment for our used throughout the new building. pitches, helps to power the advanced products to understand our nature-related In Samlesbury, our eco-friendly-designed manufacturing of world-class fighter impacts, supported by natural capital Bowland Centre houses a restaurant jetson-site. evaluations carried out by third parties across major UK sites. We are monitoring the progress of the TaskForce on Nature-related Financial Disclosures. Climate and environmental riskmanagement Climate and environmental risk is embeddedwithin our approach to risk management (see page 124) via our business and project risk registers. Climate- related physical and transition risks have been identified and assessed as part of ourdecarbonisation strategy. Wider environmental risks have been identified as part of our EMS – consideration of current and emerging regulation is key tomitigating risk. Identified regulatory risksinclude energy-related taxes and theincreased costs of compliance with energy-related schemes. Understanding how our businesses may beimpacted by changing environmental factors is important to mitigating emerging, medium- and longer-term risk. Water scarcity is an example of an environmental factor that has the potential to impact our operations, for example, at those sites extracting water for process use. The direct environmental risks we have identified and have set mitigation plans • social and political change, differing the near-term financial planning or have toaddress include: legislation and policy in our various awider reputational or strategic impact. markets; and | • expanding environmental regulation | | During 2022, our sectors started to | | --- | --- | --- | | andpermitting requirements; | • risks associated with climate-related | incorporate wider climate risk within risk | | | physical and transition risks (see page 124). | registers, including probability, speed and | • transitioning to a low carbon economy; mitigation impact. This activity will progress • physical risk related to extreme Indirect environmental risk includes the in 2023 supported by the maturing over weatherevents; impact of product use by customers and time of sector net zero roadmaps. supply chain risk. • technology and innovation evolution | required to respond to future | Climate change and environment is | | --- | --- | | requirements of customers; | identified as one of the principal risks | | • maintaining skills and capabilities to | forthe Group (see page 124). Climate- | | sustain ourcurrent and future operations; | related risks may present as financial or | non-financial risks depending on the extent to which their impacts are associated with BAE Systems plc Annual Report 2022 43 Strategic report / Sustainability / Our sustainability agenda / Our key pillars / Addressing climate risks ## Task Force on Climate-related Financial Disclosures (TCFD) The following tables summarise our disclosures relating to the four TCFD Recommendations and the 11 Recommended Disclosures pursuant to Listing Rule 9.8.6(R)(8). We have made considerable progress in our net zero programme. We have established a roadmap based on phases of activity and level of investment, to monitor our progress to decarbonise our operations by 2030 (Scope 1 and 2). Our sectors have each developed decarbonisation roadmaps that outline short-, medium- and long-term activities to support the Group's decarbonisation ambition. We have aligned our Scope 1 and 2 carbon reduction roadmaps to a science-based pathway of 1.5°C and set progress against this in both our in-year and long-term incentives. We believe our approach is consistent with nine of the 11 TCFD Recommendations. The areas we will continue to work on during 2023 are: Metrics and Targets, part b and c, and we expect to be able to make a recommended disclosure in respect of these items in our 2023 Annual Report. ### Governance | Pillar/recommendation | Key points | Further detail | | --- | --- | --- | | **Disclose the organisation's governance around climate-related risks and opportunities** | | | | a) Describe the Board's oversight of climate-related risks and opportunities. | Our Board oversees, through the Environmental, Social and Governance (ESG) Committee, our approach to sustainability, including climate change. The 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. Other elements of our approach to sustainability have oversight via other Board committees. During 2022, the Board and ESG Committee received updates on the progress towards our 2030 target, and the work undertaken to increase usage of green energy sources and improve the Group's ability to monitor and measure carbon emissions. With regards to our net zero ambition, the Integrated Business Plan (IBP) reviewed and approved by the Board in November, underpins how the Group plans to achieve its Scope 1 and 2 ambitions, including the work undertaken in our business sectors to identify areas to reduce energy consumption and increase efficiency of energy use. The Board recognises that in order to meet our net zero ambitions for our value chain (Scope 3), we will need to work closely with customers and suppliers to advance green technology solutions and align how we are working to define and achieve common objectives. As part of its annual Strategy Review, the Board considered how climate change considerations are increasingly impacting defence and commercial markets. The strategy adopted by the Board in 2022 identifies business solutions in defence and adjacent markets. During 2022, the ESG Committee also received training on climate risk. Progress of our decarbonisation strategy is embedded within our senior executives' remuneration. | Page 34 The work of the Board Page 131 Board of directors Page 134 Governance framework Page 139 Board information Page 140 Nominations Committee report Page 151 Environmental, Social and Governance Committee report Page 160 Remuneration Committee report | | b) Describe management's role in assessing and managing climate-related risks and opportunities. | Climate-related risks and opportunities are embedded across our Operational Framework, including roles and responsibilities, key policies and processes. Our Executive Committee is responsible for managing climate-related risks and opportunities and for delivering the decarbonisation programme through our business and value chain. | Page 134 Governance framework | 44 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### How we manage climate-related risk and opportunity Oversight of climate-related risk andopportunity ## BAE Systems Board Environmental, Social Innovation Nominations Audit Remuneration and Governance andTechnology Committee Committee Committee Committee Committee The Board – has oversight of climate- Nominations Committee – is responsible Environmental, Social and Governance related risks and opportunities impacting for succession planning and ensuring Committee – is responsible for overseeing the Group and incorporates climate-related thefuture skills and experience required the Group’s ESG performance, including matters when setting overall strategy, forboth executive and non-executive overseeing the progress of the executive including climate-related expenditure members of the Board, including on team inensuring that the Group takes an andinvestments as part of our IBP process. climate-related matters. integrated, strategic approach to addressing Some elements of responsibilities are climate transition risks and opportunities Audit Committee – is responsible for delegated to committees of the Board. and monitors progress in this area, including reviewing and approving the content of Directors’ skills and experience are on progress against objectives and targets. ourTCFD recommendations for disclosure page139, including the details of those within our Annual Report, including auditor Innovation and Technology Committee who have experience inenvironmental requirements. The Committee also ensures – is responsible for overseeing efforts by andsocial matters. that, where material, climate change is theexecutive team to stimulate and maintain factored into the financial statements an innovative culture, which facilitates the anddisclosed appropriately. Group’s ability to make technological advancements through the introduction of low or zero emission technologies for existing or new products and services. Additionally, the Committee oversees the Group’s progress in identifying potential longer-term revenue opportunities in these technologies, in accordance with the Group’s strategy. Remuneration Committee – is responsible for determining our remuneration policy, including the introduction of Long-Term Incentive Plan (LTIP) performance conditionson climate change and other ESG-related matters. Management’s role in climate-related risk and opportunity Executive Committee Sustainability Council Functional Councils Net Zero Working Group Sectors Executive Committee (EC) – responsible She is also the owner of our Environmental Net Zero Working Group – co-ordinates for managing climate-related risks and Policy, which details our commitment to the progression of our decarbonisation opportunities and for delivering the addressing environmental impacts related ambitions. The group is made up of decarbonisation strategy to decarbonise toour products and activities including functional representatives, business leads ourbusiness and value chain, including climate-related issues. The net zero working and environmental specialists. This group climate-related expenditure and investments group and Safety, Health and Environment reports to the Group ESG, Culture & as part of our IBP process. (SHE) team report to her and shemonitors Business Transformation Director. and receives regular reports on progress. Group ESG, Culture & Business Sector net zero leads – progress Transformation Director – has day-to-day Sustainability Council – reporting decarbonisation ambitions of each sector. responsibility for environmental issues, totheGroup ESG, Culture & Business including those related to climate, and our Transformation Director, supports the decarbonisation strategy. She is part of the Group’s strategy, recommending to the EC and gives regular updates on our ECareas of sustainability to be given environmental and net zero programme. priorityand focus for the forthcoming yearand supporting Line and Functional leaders in the implementation of the Group’s sustainability agenda. BAE Systems plc Annual Report 2022 45 Strategic report / Sustainability / Our sustainability agenda / Our key pillars / Addressing climate risks Channels and frequency of climate-related information The Board Quarterly Updates from Committees | Chief Executive presentation | Annual strategy review process Integrated Business Plans – annual review alongside strategy and ongoing to monitor performance Audit Committee Environmental, Social Remuneration Committee Quarterly and Governance Committee Quarterly Operational Assurance Statement Quarterly Progress against climate-related objectives Risk Register and Non-financial Risk Register Non-financial Risk Register Progress against decarbonisation objectives and targets Executive Committee Monthly Decarbonisation progress against roadmaps and key deliverables | Sustainability Council Updates Operational Assurance Statement | Risk Register and Non-financial Risk Register | Integrated Business Plans Chief Executive’s Business Review (Core Business Process) Quarterly Top-level review of progress against decarbonisation strategy and key sector deliverables Quarterly Business Review (Core Business Process) Management review of the performance of each of the Group’s businesses against decarbonisation objectives and targets Integrated Business Plan (Core Business Process) Business Risk (Mandated Risk Management Policy) Twice a year Six-monthly Annual long-term strategy review and five-year plan for each sector, Includes Operational Assurance Statement (Mandated Process) includinginvestment case to decarbonise – Managementself-assessment of compliance with the Operational Framework andsummary of key risks Sustainability Council Monthly Net zero progress against roadmaps and key deliverables Net Zero Programme Monthly Group and sector progress and key deliverables 46 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Strategy Pillar/recommendation Key points Further detail ### 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 Our decarbonisation strategy supports our purpose and strategic framework Page 16 Our strategic framework risks and opportunities the indelivering a sustainable business and is an overriding initiative that organisation has identified encompasses the transition plan (where planned actions are summarised Page 18 overthe short, medium and onpage 40) and sector net zero roadmaps (see page 42). Our business model longterm; and It encompasses how we will decarbonise our operations and product andservice Page 26 Our investment in technology | b) describe the impact of | portfolio, whilst supporting our customers and suppliers in theirtransition, as a | | | --- | --- | --- | | climate-related risks and | minimum in line with a 1.5°C pathway. | Page 32 | | opportunities on the | | Our stakeholders | Our sector net zero roadmaps form the basis of our net zero programme organisation’s businesses, andidentify the level of activity and investment required across the business, Page 40 strategy, and financial planning. Addressing climate risks todecarbonise our operations (Scope 1 and 2) by 2030. Key activities outlined within the roadmaps are included within the IBP, which is reviewed annually Page 44 bythe Board as part of our Strategy review and is part of the Group’s UK pension scheme – TCFD statement financialplanning. Page 48 Decarbonisation of our products and services will be achieved by making Climate and environmental ourcurrent products and services more efficient where practicable and by riskmanagement introducing low or zero emissions products and technology for new and future Page 49 requirements. The Group has already established some lower carbon products Climate scenario planning and invested in simulation technology. Although the continued progression to low and zero emissions products and technology for the defence sector will Page 54 Ideas, innovation and technology require a significant transition it is anticipated it may leadto revenue opportunities for the Group over the long term. Page 68 Success through partnering We have set a decarbonisation ambition that will drive efficiency, innovation Page 116 andcollaboration across our value chain. We recognise that our supply chain Risk emissions are many times those of our Scope 1 and 2 emissions, and it is critical that we partner and collaborate with our suppliers to reduce supply chain emissions by 2050 (Scope 3 emissions). 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. 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 not considered to be material, provided that this risk continues to be appropriately managed and mitigated. c) Describe the resilience of the We have progressed scenario analysis to allow us to further test the resilience Page 44 UK pension scheme organisation’s strategy, taking ofour strategic framework and to ensure we continue to address material – TCFD statement into consideration different climate-related risks and opportunities. During 2022, we progressed climate-related scenarios, quantification of three global, material climate-related risks (physical and Page 49 Climate scenario planning including a 2°C or lower scenario. transition) and developed our qualitative understanding of transition opportunities. We will continue to address material climate-related risks andopportunities as part ofour decarbonisation strategy. In the UK, the Responsible Investment Committee, of the BAE Systems PensionsSchemes, has assessed the climate-related investment risk and opportunities relating to climate change for theScheme’s assets, liabilities, andemployer covenant. BAE Systems plc Annual Report 2022 47 Strategic report / Sustainability / Our sustainability agenda / Our key pillars / Addressing climate risks ## Risk management | Pillar/recommendation | Key points | Further detail | | --- | --- | --- | | **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. In 2020, as part of the Board's ongoing assessment of emerging and principal risks for the Group, climate change and environmental impacts were recognised as a principal risk for the Group. 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. Material climate and environmental risks were identified in 2021, as part of the Group's materiality assessment (see page 124), with further work undertaken during 2021 to develop our qualitative understanding of material climate-related risks and opportunities via scenario planning and the impact on the Group. During 2022, we progressed material physical risk and transition risks quantification and continued qualitative analysis on transition opportunities (see page 50). Material risks and opportunities identified are mitigated and managed as part of our sustainability agenda. Climate-related risks include those identified in our materiality assessment, scenario planning and decarbonisation strategy. Incorporation of climate-related risk within our registers will progress in 2023 supported by the maturing over time of sector net zero roadmaps and physical risk climate scenarios for Tier 1 critical suppliers. Associated climate-related risks are also embedded in our sector Environmental Management Systems. The potential impact and associated costs of addressing climate change are incorporated into our IBP, which identifies investment to achieve net zero across our operations (Scope 1 and 2) by 2030. This is reviewed annually by the Board. Our financial statements and viability statement reflect our best estimate of the impact of climate change on future business performance, based on currently available information and taking into account the mitigation measures we have in place. | Page 49 Climate scenario planning Page 116 Risk | ## Metrics and targets | Pillar/recommendation | Key points | Further detail | | --- | --- | --- | | **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 aim to reduce our emissions as a minimum in line with the 1.5°C pathway by achieving net zero greenhouse gas emissions across our direct operations (Scope 1 and 2) by 2030 and by implementing the actions set out in our net zero roadmaps for the relevant sectors, and working towards a net zero value chain by 2050. We have aligned our Scope 1 and 2 carbon reduction roadmaps to a science-based pathway of 1.5°C, and set progress against this in both our in-year and long-term incentives (see page 181). We continue to mature our approach to the quantification and understanding of the more complex Scope 3 emissions. Our in-year and long-term incentives are aligned to the Group achieving a 4.2% operational GHG emissions reduction target, in line with a science-based pathway of 1.5°C, year-on-year over ten years (from a baseline year of 2019), with a 90% reduction in GHG emissions being achieved by 2050. As our understanding of Scope 3 emissions matures, we will consider reduction pathways in line with a science-based pathway of 1.5°C. Building on 2022 net zero objectives, for 2023, decarbonisation of operations and setting targets for water use and waste management are part of our Executive Committee's objectives and remuneration targets. We use our GHG emissions per employee as our intensity ratio. We disclose revenue from alternative energy-related products within our Annual Report (see page 54) and Sustainability Accountability Standards Board (SASB) disclosure – Resource Transformation sector disclosure. We disclose our energy consumption within our Annual Report. And also disclose other key environmental metrics – water consumption, waste production and electricity consumption. | Page 26 Our investment in technology Page 40 Addressing climate risk Page 54 Ideas, innovation and technology Page 93 Segmental review Page 160 Remuneration Committee report | 48 BAE Systems plc Annual Report 2022 Strategic report Governance Financial statements ## Metrics and targets continued | Pillar/recommendation | Key points | Further detail | | --- | --- | --- | | | Sectors set objectives to improve the performance of their operations such as reducing energy consumed and the generation of waste, emissions and other discharges, such as effluents. Some of our sectors also set targets to reduce water consumption. We disclose our investment in R&D within our Annual Report (see page 29). As our decarbonisation strategy develops and matures, we will continue to develop the use of other metrics, including industry best practice, to assess climate-related risks and opportunities. | | | b) Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks. | We report our greenhouse gas 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 continue to mature our approach to the quantification and understanding of our more complex Scope 3 emissions. | Page 52 Greenhouse gas emissions | | c) Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets. | Our in-year and long-term incentives are aligned to the Group achieving a 4.2% operational GHG emissions reduction target, in line with a science-based pathway of 1.5°C, year-on-year over ten years (baseline year is 2019), with a 90% reduction in GHG emissions being achieved by 2050. For 2023 we aim to reduce operational Scope 1 and 2 emissions in line with a science-based pathway. We have established a roadmap based on phases of activity and level of investment, to monitor our progress to decarbonise our operations by 2030. Going forwards, progress towards the 2030 net zero milestone will also be aligned to long-term incentive plans and in-year remuneration targets (see page 181). Decarbonisation of operations and setting targets for water use and waste management are part of our Executive Committee's 2023 objectives and remuneration targets. During 2022, the Group was rated B in the 2022 CDP Climate Change disclosure and B- in the 2022 CDP Water Security disclosure. During 2023, we will be establishing improvement targets for water use and waste management. These targets will be disclosed in 2024. Our UK BAE Systems Pension Scheme has set targets, aligned with a 1.5°C pathway, for its investment portfolio to have net zero GHG emissions by 2050, recognising that the Trustee believes this to be in the best long-term financial interest of the scheme's members. To support this, interim targets have been set to aim to reduce the GHG emissions that are financed by a meaningful portion of the scheme's asset portfolio by 50% by 2030, relative to the emissions in 2021. | Page 160 Remuneration Committee report Page 49 UK pension scheme - TCFD statement | ## 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 last year, by progressing material physical risk and transition risks quantification and continuing qualitative analysis on transition opportunities (see pages 50 to 51). 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. BAE Systems plc Annual Report 2022 49 Strategic report / Sustainability / Our sustainability agenda / Our key pillars / Addressing climate risks Scenario planning – material climate-related risk and opportunity 1 Materiality of risk or opportunity/timeframe ### Physical risk Short, medium and long term Description Unmitigated potential impact Business readiness | We have assessed the future physical risk of | The impact of the physical risks of climate | We currently assess the physical locations of | | --- | --- | --- | | extreme weather on 140 priority sites globally. | change, such as increasing frequency and | ourglobal sites against physical risk of extreme | | We have operations in around 40 countries, | severityof extreme weather events, will affect | weather events. This includes risk engineering | | witha focus in the UK, US, the Kingdom of | BAE Systems’ operations and vary depending | reviews at site level and a quantification of | | Saudi Arabia and Australia; therefore our | onthe particular hazard and geography. Overall, | current potential financial impacts. | | operational exposure to physical risks is | extreme weather events are likely to result in | | Any mitigation actions arising from these diverseand varies by region. repaircosts, adaptation investments and assessments are included within sector IBP. reductions in productivity. Risks have been quantified for seven hazards Our mitigation work is also supported by work infuture periods to 2100 under three scenarios. Financial impact underway and planned by central and local Unmitigated damage and disruption losses have Low government departments within the countries been financially quantified for 140priority sites. and counties/states that we have facilities in. 1 Materiality of risk or opportunity/timeframe ### Transition risk – regulation Medium term Description Unmitigated potential impact Business readiness We have assessed the transition risk of tightening Carbon pricing has the potential to increase Our decarbonisation strategy andoperational environmental laws and regulations in relation operational costs via carbon taxes and levies lowcarbon pathway will lower our exposure tocarbon pricing globally. Carbon pricing is tothe business for energy and fuel use; and tocarbon taxes. anapproach used to reduce carbon emissions indirect taxes which are passed to the Group We will continue to monitor environmental through market mechanisms. It passes the through purchased energy. lawsand regulations in relation to carbon societal cost of climate change from the Financial impact pricing,including any potential financial emissions of greenhouse gases back to the Low impactson theGroup. organisations responsible for emitting them. Asaresult, it has the purpose of discouraging the use ofgreenhouse gas-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 51). 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. 1 Materiality of risk or opportunity/timeframe ### Transition risk – technology Medium to long term Description Unmitigated potential impact Business readiness In the UK, nearly half of BAE Systems’ emissions Introducing alternative energy sources such In the UK, we have considered the feasibility come from heating buildings.To support the asrenewable energy-powered heat pumps will ofintroducing renewable energy-powered decarbonisation ofourheating systems over the lower our emissions, but at this point would heatpumps over the long term, as part of long term, wecould consider switching to require significant capital expenditure to retrofit thedecarbonisation strategy. lower-emissionsheating technology. our sites and install the devices. Due to the We will continue to monitor the development difficulties of switching fuels and maintaining The decarbonisation of energy for heating poses oflower-emissions heating technology, over legacy systems, installing heat pumps is a challenge, as most cost-effective solutions are thelong term, as a way to support the delivery considered one of the best transition solutions currently expensive and subscale. This could ofour net zero ambitions. over the long term. This is because heat pumps result in increased costs arising from the need are more efficient than other heating systems toreplace existing plant and equipment to inproducing more heat energy than the amount incorporate lower-emissions technologies, of electricity consumed. suchas heat pumps. Heat pump technology is currently expensive, We have reviewed the roll-out of heat pumps asthe technology and market is still developing. asapotential option to replace current gas-fired heating systems and this was assessed under Financial impact three IEApricing scenarios to 2050. Low 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 Integrated Business Planning process. 50 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance 1 Materiality of risk or opportunity/timeframe ### Transition opportunity – products Medium Description Unmitigated potential impact Business readiness | The transition to a low carbon economy presents | Our ability to increase revenues will be dependent | To decarbonise by 2050, we must ensure | | --- | --- | --- | | opportunities for BAE Systems and continued | on applying advanced engineering capabilities to | thatourproducts and services support a | | innovation will be required to provide solutions | develop new products that support lower- | decarbonisation pathway. This will be achieved | | to existing and new customer bases. | emissions requirements, creating new business | byadvancing the efficiency of our products | | | lines and enhancing competitive positions in | andservices, in the short term, and transitioning | | | order to retain and grow market share. Continued | to lower or zero emissions products and | | | investment, both Group and customer, in | technology longer term. This will require | | | research and development will be required. | 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. For transition risks and opportunities, We have used the following key assumptions within our scenarios: IEAscenario data has been used, due to its Assumption Rationale relevance to the Group’s decarbonisation No action is taken by BAE Systems to mitigate Uncovers what the implications are if climate risks strategy, global and regional coverage, orlimit the impacts of each risk being assessed. are left unmitigated to help facilitate a response timeframes considered and information on plan. These results can be used by the business drivers and frequency of scenario updates. totest whether current mitigation is sufficient. | 1.5°C Net Zero Emissions scenario (NZE) | Mutual exclusivity is applied to the scenarios | Ensures that no impacts are cancelled out. We | | --- | --- | --- | | Source: IEA Net Zero Economy by 2050 | andunderlying climate attributes (i.e. impacts | donot assess scenarios where both transitions | | | are not aggregated or offset). | risks and physical risks take place at the same | | Announced Pledges Scenario (APS) | | time (although this is inevitable). | Source: IEA Announced Pledges Scenario Business activities are static over the future Isolates the climate element of the risks to Stated Policies Scenario (STEPS) period (revenue streams, operating model, showimplications on strategy in a world Source: IEA Stated Policies Scenario emissions, etc). wherebusiness as usual remains. 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 2 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 2 >4°C SSP 5 – RCP 8.5 No additional policy action Temperature rise by 2100: 4.4°C 2 2–3°C SSP 2 – RCP 4.5 Late policy action Temperature rise by 2100: 2.7°C 2 <2°C SSP 1 – RCP 2.6 Early policy action Temperature rise by 2100: 1.8°C 2. Shared Socioeconomic Pathway (SSP). Representative Concentration Pathway (RCP). BAE Systems plc Annual Report 2022 51 Strategic report / Sustainability / Our sustainability agenda / Our key pillars / Addressing climate risks ## Measuring progress ### Greenhouse gas emissions data 1. Relevant reporting period 1 November 2021 Absolute energy consumption to31 October 2022. 1 | | 2022 | | | 2021 | | 2. Deloitte have provided independent limited | | --- | --- | --- | --- | --- | --- | --- | | | 2 | | | | | assurance in accordance with the International | | Global | | UK | Global | | UK | | | kWh | | kWh | kWh | | kWh | Standard for Assurance Engagements 3000 | (ISAE3000) and Assurance Engagements on Energy consumption Greenhouse Gas Statements (ISAE 3410) issued Scope 1 and 2 1,469,387,190 594,930,180 1,624,601,505 725,396,538 bythe International Auditing and Assurance Standards Board (IAASB) over the selected metrics Greenhouse gas emissions data 1 identified with a . Deloitte’s full unqualified 1 | | | 2022 | | | | 2021 | | | assurance opinion, which includes details of | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | 2 | | | | | | | theselected metrics assured, can be found | | | Global | | | UK | Global | | | UK | | | | tonnes | | tonnes | | tonnes | | tonnes | | atbaesystems.com/annual-report | | Scope definition | CO | 2 e | | CO 2 e | CO | 2 e | CO | 2 e | | 1 Emissions from activities which BAESystemsowns orcontrols (Scope 1) 113,089 55,686 142,241 76,133 2 Emissions from the electricity and steam purchased for BAESystems’ use(Scope 2 – location-based) 281,182 60,374 268,735 71,602 Total gross Scope 1 and 2 emissions 394,271 116,059 410,976 147,735 3 Emissions from employee business travel (Scope 3) 62,519 20,999 24,094 4,145 Greenhouse gas emissions per employee 1 2022 2021 2 | Global | | | UK | Global | | | UK | | --- | --- | --- | --- | --- | --- | --- | --- | | tonnes | | tonnes | | tonnes | | tonnes | | | CO | 2 e | | CO 2 e | CO | 2 e | CO | 2 e | Per each full-time equivalent employee (Scope1 and 2) 4 3 5 4 1 ### 2022 key environment data | | | 2 | | | | 2 | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Water consumption | | | | | Waste production | | | | Electricity consumption | | | | | | | | | | 2022 | | 2021 | | | 2022 | 2021 | | | | 2022 | | | 2021 | | | cubic metres | | cubic metres | | | | tonnes | tonnes | | | | kWh | | | kWh | | Mains 2,409,896 2,270,390 | | | | | Non-hazardous 42,413 41,747 | | | | Grid 877,726,240 754,143,257 | | | | | | | | Abstracted 5,968,417 14,186,391 | | | | | Hazardous 5,072 8,690 | | | | Renewable 5,951,873 2,486,109 | | | | | | | | | | | | | | | | | | 4 | | | 5 | | | | Total 8,378,313 16,456,781 | | | | | Total 47,485 50,437 | | | | Total | | 883,678,113 | | | 756,629,366 | | 3 Recycled 728,911 951,847 Recycled 33,167 42,103 1. Relevant reporting period 1 November 2021 to 31 October 2022. 2. BAE Systems Internal Audit has reviewed and confirmed effective systems, processes, and controls are 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 2021, includes non-hazardous, hazardous and construction waste recycling. For 2022, includes non-hazardous and hazardous waste recycling. 4. For 2021, restated to include estimates in line with SECR requirements. For 2022, estimates now reported in line with SECR requirements. 5. Deloitte have 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 4 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 | Abstracted water volumes have decreased | Our aim is to continually improve energy | entity includes the emissions for these | | --- | --- | --- | | compared to 2021 consumption due to the | efficiency and to decarbonise our energy | facilities within their environmental | | three-yearly fluctuations in production/ | supply to reduce greenhouse gas | reporting obligations. | | operational activities at one of our UK | emissions.Once implemented our net | | The majority of our operational greenhouse locations. Recycled water volumes have zeroprogramme will provide the gas emissions come from the gas and decreased compared to 2021 due to frameworkto accelerate reductions. electricity we use across our facilities. reductions at sites in the Kingdom of During 2020, we removed two facilities Ourfocus is on making our facilities more SaudiArabia. Hazardous waste volumes from our organisational reporting efficient and generating electricity from have decreased largely due to reductions boundary,as we do not have operational lower-emission sources. atone of our US sites. control of these facilities. Another business 52 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance Methodology For the 2022 reporting cycle, the 2022 UK within the reporting boundary. If a business government emissions factors published by the isacquired within quarter 4 of the financial Greenhouse gas emissions data is reported in Department for Business, Energy and Industrial reporting year it will be included in the reporting linewith an operational control method; we Strategy (BEIS) have been used for the majority of boundary in the next full reporting year after usethe Greenhouse Gas Protocol Corporate Scope 1 and 3 calculations. The most up-to-date thechange. Accounting and Reporting Standard as guidance Emissions and Generation Resource Integrated to support our approach to reporting. Our If a business or facility has closed between Database (eGRID) factors published by the US reporting boundary for Streamlined Energy quarter 4 of the previous year and quarter 3 Environmental Protection Agency (EPA) are used andCarbon Reporting (SECR) is the same as ofthe current year, it will not be included within for US electricity. For the 2022 reporting cycle, ourreporting boundary for the purposes of the reporting boundary. Any locations which the most recent electricity US factors are from ourfinancial statements. close in quarter 4 of the reporting year will be theyear 2020. The US EPA is due to release removed from reporting boundary in the next Data covers a 12-month period between theupdated figures in quarter one of this year, fullreporting year after the change. Emissions 1 November 2021 and 31 October 2022. however they have not been released in time to from joint ventures are included in the data set be used for the current calculations. Country- The GHG protocol allows participants to arrange ifBAE Systems has operational control at the site. specific emission factors for electricity and their organisational boundaries using two different naturalgas have been used where available. Trading of emissions are not taken into account methodologies: one using the equity share for the purposes of reporting, for example where approach and one using the control approach. The principal record of the Group’s worldwide the business has a requirement to maintain The business has chosen to use the control facilities is its legal department’s Global Property compliance with trading schemes, e.g. UK ETS, approach. Furthermore, the control approach Database. The database holds records of all the total energy consumed is reported regardless selected allows for two further methodologies locations which are either wholly-owned, leased of emissions trading. tobe applied to define control using either a or licensed sites. financial approach or an operational approach. The Scope 2 Greenhouse Gas Emissions Greenhouse gas emissions are primarily calculated | The business uses the latter. | | associated with the GHG Protocol ‘Market-Based’ | | | | --- | --- | --- | --- | --- | | | from energy consumption records, e.g. invoiced | | 1 | | | | | method have been calculated as 264,374 | tCO | 2 e. | | As a business we utilise a tool called the Global | data or meter reads reported via the Group’s | | | | In line with the GHG Protocol Guidance, this Property Database (GPD) to record and monitor global environmental database (CR Desktop). figure has been calculated using residual-mix locations which we either own or lease. Every Where consumption records are not available emission factors where available for our UK, US location listed on the GPD for the purpose of estimates may be used and these will be and Swedish operations. In our other significant GHG emissions reporting falls within our highlighted in the database. operating regions, residual mix emission factors organisational boundary, however we may Where actual usage data is not available for are either unavailable or the resulting absolute notreport emissions from all these locations facilities and residences within the Global emissions at Group level are within the margin aswe may not have operational control. Property Database, an estimated consumption oferror and therefore country-specific emissions Emission factors for fuels and UK electricity isused based on the type of building. factors have been used in line with the GHG arepublished at www.gov.uk/government/ Protocol Guidance. If sites consume grid Greenhouse gas emissions related to business collections/government-conversion-factors-for- electricity backed by Renewable Energy travel include air travel data for the majority of company-reporting. Emission factors for Guarantees of Origin (REGOs), this has been the global business, rail data for business units USelectricity and natural gas are published taken into consideration within the calculations. operating in the UK and US, and vehicle athttps://www.epa.gov/climateleadership/ (including hire car, company car and personal Fugitive emissions have been calculated for a ghg-emission-factors-hub. Emissions factors car)data for business units operating in the sample of several locations using Fluorinated forAustralia (AUS) electricity and natural gas UK,US and Australia. These data sets are taken Greenhouse records. The results have been scaled arepublished at https://www.dcceew.gov.au/ from suppliers’ procurement records. up using number of employees. The total losses climate-change/publications/national- amount to less than 5% of Scope 1 emissions greenhouse-accounts-factors-2021. Natural Emissions from pension scheme properties andare considered to be immaterial, and are gasemission factors for Sweden’s (SWE) notoccupied by the Group are not included. therefore not disclosed. operations are published at https://unfccc.int/ The property database details are taken documents/224123. Electricity emission factors inquarter 3 of the financial reporting year for SWE, Kingdom of Saudi Arabia (KSA), and (Jan-Dec), this means any properties acquired Rest of World (RoW) are published at between quarter 4 of the previous year and https://www.iea.org/data-and-statistics/ quarter 3 of the reporting year are included data-product/emissions-factors-2022. ### Our top ten largest sites accounted for 42% Overall Group-wide greenhouse gas Our priorities for theyear ahead of our total energy consumption. By these emissions have increased by 5%, which Net zero Scopes 1 and 2 | sites setting energy reduction targets, they | ismainly due to an increase in Scope 3 | | | --- | --- | --- | | have the biggest influence in reducing our | business travel, largely caused by flights. | • Progress decarbonisation of own | | energy use and, in turn, our direct and | Whilst travel has increased (post COVID | operations (Scope 1 and 2) in line with | | indirect greenhouse gas emissions. Please | recovery), business travel emissions are | science-based pathway of 1.5°C. | | see page 75 on environmental management | stillwell below the levels seen prior to | | Environmental stewardship 2 systems certified to ISO 14001. theCOVID-19 pandemic. • Mature water and waste management; During the reporting year, we have seen To see our Basis of Reporting 2022 visit improve disclosures and set targets areduction in Scope 1 emissions. This is baesystems.com/annual-report for2024. duemainly to a reduction in natural gas consumption in the US and the UK. Scope 2 emissions have increased by 5%, however this was largely a result of an update to the electricity benchmarks for locations that 1. Deloitte have provided independent limited assurance in accordance with the International Standard for need to be estimated, in order to improve Assurance Engagements 3000 (ISAE3000) and Assurance Engagements on Greenhouse Gas Statements the accuracy of those estimations. (ISAE3410) issued bythe International Auditing and Assurance Standards Board (IAASB) over the selected 1 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 2. International Organization for Standardization. BAE Systems plc Annual Report 2022 53 Strategic report / Sustainability / Our sustainability agenda / Our key pillars ## We are committed to ## Ideas, ## usingourworld-class ## innovation ## engineeringcapabilities and ## cutting-edge technologies ## and ## toaddress climatechange ## technology ## andprogress the decarbonisation ## of our portfolio ofproducts ## andservices. ### Our aims ## Why is this important Emissions baseline and governance ## to BAE Systems? • We have set ourselves the target of working towards a net zero value chain We know that innovation is key to by 2050 (see page 42). To help us achieve deliveringa sustainable future and to this target we need to mature our progress the decarbonisation of our approach to understanding the Scope 3 products and services by 2050. Technology emissions of our products’ lifecycle to is at thecore of our business (see page 26) drive efficiencies across our current andwe will leverage this to progress our portfolio. Our sustainable supply chain decarbonisation strategy (see page 40) efforts are detailed in the Foundations andsupport our customers in transitioning section on page 78. to a low carbon economy. It is also important that we recognise andunderstand the challenges thatclimate change will bring so that we continue to design defence and security systems fit foroperation in these future environments. Decarbonisation of our products and services will be achieved by making our current products and services more efficient where practicable and by introducing lower or zero emissions products and technology fornew and future requirements. The Group has already established some low carbon products and invested in simulation technologies. Although the continued progression to lower and zero emissions products and technologies for the defence sector will require a significant transition itisanticipated it may lead to revenue opportunities for the Group over the longterm. Our contribution to the UN Sustainable Development Goals (SDGs) 54 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Sustainable ground power for UKTyphoons Typhoon jets in the UK will be powered upby 40 new electric The TyTAN enterprise estimates that over 40% of the CO 2 footprint battery ground power units following a trial conducted in 2022 from Typhoon ground operations comes from the previous diesel byBAE Systems and the Royal Air Force. The Electric Ground Power units so this transition will help to reduce those emissions. Units (eGPUs) are replacing diesel-powered systems, and studies Based on a trial delivered by the TyTAN enterprise, the new across the Typhoon Total Availability Enterprise (TyTAN) estimate groundpower units only require an eight-hour charge to power that the use of eGPUs in the fleet could reduce running costs by aTyphoon aircraft for an entire week. This is the equivalent of 80%. Studies in civil aviation also estimate that eGPU units reduce 16aircraft turnarounds. The MoD estimates that this could save harmful fumes by 95% and CO 2 emissions by 90%, against their them energy costs of more than £13m across the fleet over the diesel equivalents. next decade, based onthe 40 units that have been purchased. Based on supplier data, the battery-powered units will deliver The new units also require less maintenance and spares. sustainable ground power to Typhoon jets at RAF Lossiemouth Data from the supplier demonstrates that the electric batteries and RAF Coningsby and it is estimated that the units will save produce less than 60 decibels of noise which is equivalent to more than three million kgs of CO 2 emissions based on five thesound of a dishwasher or electric shower. Along with the andahalf hour usagea day over a one-year period. airquality improvements, this will significantly reduce hazards andimprove conditions for ground crew and pilots. BAE Systems plc Annual Report 2022 55 Strategic report / Sustainability / Our sustainability agenda / Our key pillars / Ideas, innovation and technology ### Emissions baseline and governance Wewill work closely and collaboratively we will accelerate our sustainable product ontheir future requirements to help pipeline by developing electric aircraft The decarbonisation pathway for our informand shape lower-emission product capability and expanding our hybrid clean products and services will be achieved by innovation and development. energy technology into the commercial advancing the efficiency of our products maritime sector. | and services in the short term, and | Sustainable fuels will be part of our | | | --- | --- | --- | | transitioning, where possible, to lower | customers’ product and service | Transitioning to low and zero emissions | | orzero emissions products and technology | decarbonisation pathway over the | products and technology represents | | in the longer term. | longterm. We will work with our UK | arevenue opportunity for the Group over | | | customers to understand their future | the long term (see page 51). | We will seek to use our knowledge of in-life fueltransition requirements, including emissions of existing products to deliver ### Collaboration and engagement theeconomics of when best to transfer to lower emission solutions as we maintain sustainable fuels, whilst continuing to work To support the decarbonisation of our existing products through-life. We recognise to understand the scalability of sustainable product portfolio we are investing in this will be challenging given the operational fuels and interdependencies on new theskills and capability of our employees environments in which our products are product development. In the UK, the RAF todrive innovation (see page 62) and used. We are already working on a range has committed to moving to sustainable collaborating with suppliers and partners oftechnologies to help drive efficiencies and synthetic fuels for aircraft by 2040. todevelop a low carbon supply chain incurrent products and services during Weare working to support our customers’ (seepage 70). product build, upgrades and maintenance ambitions in this area. including low-emission propulsion, energy Collaborating with others is key to driving storage, augmented and virtual reality, innovation and accelerating our position on ### Sustainable innovation pipeline artificial intelligence and automation. sustainable products. For example, we are We are investing in the research and progressing technologies that will enable We are also introducing new manufacturing development (see page 54) of sustainable lighter-weight, cost-competitive energy techniques to reduce the energy used to products and building an innovation storage solutions for hybrid aircraft engines support our decarbonisation strategy, by pipeline. such as our collaborative work with Jaunt developing industry 4.0 technologies to Part of the investment portfolio advances Air Mobility and others. We areworking make manufacturing more sustainable research and development to improve with Malloy Aeronautics, a UK-based SME (seepage 54). ourexisting products and support our specialising in electric uncrewed air vehicles, ### Supporting our customers customers in their decarbonisation plans. to create a new all-electric heavy lift For example, we have been developing Uncrewed Aerial System (UAS) quadcopter. ### intheirtransition novel waste-heat-to-power technology This hasthe potential to deliver cost- In the UK, we have engaged with inthe Maritime sector for future warship effective, sustainable, rapid response ourcustomers to understand their energy efficiencies. In the Air sector, we are capability to military, security and civilian decarbonisation pathways and their working with industry partners to optimise customers, without putting human pilots challenges in ensuring operational the energy usage for future aircraft. atrisk when used in hazardous locations. effectiveness and availability. Many | customers are setting targets and looking | Additionally, we have skills and technology | We have signed a Memorandum of | | --- | --- | --- | | for lower-carbon, sustainable products. | that can be transferred to new markets, and | Understanding with Embraer Defense | | | we are investing to support new customers | &Security. This confirmed an intent to | | | in their low carbon transition. During 2023, | create a joint venture to develop a defence | variant of the Eve electrical Vertical Take-Off and Landing (eVTOL) vehicle for the defence and security market. Teams from both companies will work together toexplore Electrification of aircraft how the aircraft, designed for theurban Through our work with Pipistrel mobility market, can provide cost-effective, Aircraft we are exploring the development of lightweight, sustainable and adaptable capability as a sustainable aircraft. defence variant. We also plan to collaborate with Pipistrel Aircraft on the development of solutions for the defence and security market, including the application of electricaircraft. ### Our priorities for the year ahead • Understand how and when we can reduce the emissions of our current portfolio of products. • Continue to develop opportunities to collaborate and engage with partners, suppliers and the wider industry to decarbonise our product portfolio. 56 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Electrifying the combat vehicle forceof the future Under a US Army Rapid Capabilities platform family to increase capabilities andCritical Technologies Office contract, inacceleration, range, and on-board we have delivered two Bradleys with an power. During a late summer Bradley integrated hybrid electric drive (HED) HED demonstration, Army personnel system. The programme demonstrates commented on how “amazingly quiet” that HEDs are not only viable, but the vehicle was and emphasised how essential for a modernised combat “powerful” it is to have the ability vehicle fleet that can respond to evolving towatch silently for hours at a time, threats and be capable of conducting ormove quietly into position to achieve Multi-Domain Operations. amission. Working with QinetiQ, our designs HED architecture offers these and havecompleted digital engineering numerous other military capability andextensive lab tests, and the project andoperational benefits, as well as isdemonstrating that this innovative supporting the US government to technology has matured to a point reachits net zero objectives. wherewe can modify an existing BAE Systems plc Annual Report 2022 57 Strategic report / Sustainability / Our sustainability agenda / Our key pillars / Ideas, innovation and technology ### Synthetic training for tomorrow’s ### armed forces Our training teams are using their insight into operational training, while leveraging innovations from the gaming industry, to create a military metaverse that will train the armed forces of tomorrow. We are working with companies such asHadean, as well as virtual reality andartificial intelligence specialists VRAI,to deliver a synthetic environment alternative to large-scale military exercises. Our collaboration will help us work alongside military forces across the world to deliver more secure, affordable and sustainable ways to equipthem with the skills they need onthe frontline. This work builds on our prior experience of virtual training in the UK. In 2022, wesupported the Typhoon Force flying 6,336 synthetic missions, which would have burned 34,380 tonnes of fuel, releasing 107,600 tonnes of CO 2 , had themissions been flown live. 58 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Factory of the Future In Lancashire, UK, we continue to drive efficiencies and cost savings through our industry 4.0 Factory of the Future. Last year, we manufactured a representative fast jet fuselage to demonstrate how we could potentially halve the time it takes to deliver Tempest, in comparison to previous programmes. More than 50 partners – from SMEs specialising in data management to university research centres – collaborated on the project. They brought unparalleled pace and new technologies to the process, helping to deliver the level of accuracy needed in combat air production whilst at the same time reducing waste. Advances in digital manufacturing delivered through Factory of the Future remove the need for fixed, bespoke tooling and jigs. Instead, robots can be reconfigured as required to switch from the production of a large-scale fighter aircraft to a smaller-scale UAV, for example. This removes the need to produce bespoke facilities and fittings for every production requirement and therefore the materials that this would require. Advanced manufacturing technologies such as additive manufacturing alsomean that we are creating less waste as a by-product compared to traditional subtractive methods. ### Filtering on the move | BAE Systems fitted both HMS Tamar | the exhaust temperature and engine | | --- | --- | | and HMS Spey with Selective Catalytic | load. Exhaust soot discharge is also | | Reduction exhaust systems when we | reduced by up to 40%, making the | | built the vessels on the River Clyde in | Royal Navy’s Offshore Patrol Vessels | | Glasgow. This made us compliant | more environmentally friendly while | | withthe latest Nitrogen Oxides (NOx) | outon operations. | emission limits across Emission Control HMS Tamar and HMS Spey can be Areas, which cover North America, usedto perform a variety of roles by theBaltic Sea and beyond. theRoyal Navy such as intercepting The innovative systems, supplied and drugtraffickers, protecting UK territorial supported by Blunox Technology, waters, and providing humanitarian reduce the vessels’ overall NOx assistance in the wake of a disaster. emissions by 90–95%, depending on BAE Systems plc Annual Report 2022 59 Strategic report / Sustainability / Our sustainability agenda / Our key pillars ## We are focused on ## Creating ## inspiringand developing ## opportunity ## adiverse workforce and ## making a positive social ## for people and ## andeconomic contribution ## communities ## toour communities. ### Our aims ## Why is this important Inclusive attractive workplaces ## to BAE Systems? • Diversity, equity and inclusion are key enablers to recruiting and retaining Our people are the core of our ability to thebest talent, driving innovation and deliver for our customers – today and in creating a workplace environment thefuture. We must retain, attract and whereemployees are valued. develop the very best talent and, in order todo that, we continue to build a culture • We have set an ambition to be recognised that is inclusive and supportive. We want all as a leading employer in defence and of our employees to reach their full potential security for valuing diversity, equity and and feel valued for their contribution. We inclusion and we also aim to be are focused on maintaining our position representative of gender and ethnicity asa leading employer of choice, particularly inthe localities in which we operate. in the areas essential to our business Career-long learning ofengineering, manufacturing, science • We have award-winning early career andtechnology. andskills programmes in markets such The work done by our people helps to asthe UK and Australia. We are now buildstronger nations and enables growth developing and expanding our approach in economies and local communities, to career-long learning, through which through employment and national and local we will continue to invest in our supply chains. We play a vital role in many employees throughout their careers. of the communities where we operate, a Weintend to create a culture of learning significant responsibility in which we take and development at all career stages. great pride. Support for our communities • We aim to build and nurture mutually beneficial relationships between our business, our people and stakeholders todeliver a positive social impact in thecommunities where we operate. Engaging with our communities as wellassupporting and caring for them isan essential part of our business. Our contribution to the UN Sustainable Development Goals (SDGs) 60 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Protecting our environment where we work Platforms & Services employees at the York, Pennsylvania facility planted over 700 trees and shrubs on site to create a new riparian buffer. The volunteer event was organised to celebrate Earth Day in collaboration with Alliance for the Chesapeake Bay – a non-profit organisation dedicated to protecting the Chesapeake Bay and itstributaries. While supporting the Group’s goal of achieving net zero greenhouse gas emissions (Scope 1 and 2) by 2030, the nearly three-acre riparian buffer provides several additional benefits: protecting local waterways from runoff pollution, streambank erosion, and flooding; offering a new habitat to native plants andanimals; and, once the trees mature, the shade will provide acooler environment to local aquatic wildlife. BAE Systems plc Annual Report 2022 61 Strategic report / Sustainability / Our sustainability agenda / Our key pillars / Creating opportunity for people and communities ### Investing in our people In the UK, our award-winning early career inbuilding a network of sustainability and skills programmes supported around champions across the Group who will help to Progress in 2022 4,500 young people in training in 2022: drive progress on our sustainability agenda. Maintaining a diverse pipeline of talent | andcritical skills is key to fulfilling our | • 1,073 new apprentices started at | In Australia, 75 apprentices and 101 | | --- | --- | --- | | futurecustomer requirements. Our people | BAESystems in 2022 and 1,460 are | graduates are in training (2021/22 cohorts), | | strategy is designed to support our aim to | forecast for 2023; | and in the Kingdom of Saudi Arabia, | | retain, attract and develop the very best | | 94trainees, students and graduates | • 706 graduates and undergraduates talent and is delivered through: joinedour early years careers programmes started in 2022 and 1,276 are forecast during 2022. • robust succession planning; for2023; • around 77 young people completed As we build Hunter Class frigates in Australia, • targeted recruitment; placements at BAE Systems as part of the our award-winning digital diploma for our • focused talent management; Movement to Work initiative and the UK naval shipbuilding workforce continues. • a culture of inclusivity, learning In2022, we launched an initiative to increase Government’s Kickstart programme; and anddevelopment; and the number of women participating in the • our 2022 partnership with Code First Girls • competitive employee value proposition. digital diploma course delivered in partnership led to 15 of the participants joining the with Flinders University. We also invested in Company as junior software engineers. This is underpinned by our People policies, a number of new Science, Technology, guidance and support tools focused on We also launched a new Sustainability Engineering, and Mathematics (STEM) enabling our leaders and enhancing the Apprenticeship scheme with Cranfield initiatives to influence diversity outcomes employee experience. Our People policies University. The first cohort of nine started throughout the education pipeline. lay the foundations and our people the apprenticeship in March 2022, and a manager expectations highlight the Our degree apprenticeship model has second cohort of up to eight apprentices responsibilities ofour leaders, which beensupported at federal level and in will follow in March 2023. The new and includes to lead with authenticity, foster several Australian states. We are currently unique programme will play a key role asafe and inclusive culture, develop our people and reward them accordingly, enable teams to perform, and establish and share direction and our long-term vision. This commitment is embedded through ourgovernance structure. The Group Human Resources (HR) Director reports directly to the Chief Executive and chairs aGlobal HR Council, ensuring alignment between our strategy, policy and delivery. Our dedicated employee communications team systematically provides employees with information on all matters that impact them. We 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. We also encourage employees’ involvement in company performance through an employee share scheme. Recruitment and skills In 2022, we focused our efforts on recruiting and retaining a diverse workforce set against a backdrop of growth in demand across our business and a buoyant employment market. In the UK, we identified the need for more than 5,000 experienced ### Code First Girls partnership 15 female students to develop the skills hires as well as just under 1,800 early they need to start a career in software In May 2022, Digital Intelligence careers hires. We focused on attracting engineering. announced its partnership with Code First people with the skills that are required Girls, one of the largest providers of free The CFGdegree training was delivered tosupport our key programmes including coding courses for women in the UK, to byCode First Girls, with mentoring engineering, project management and sponsor its CFGdegree programme. support and guest lectures provided operations roles. byBAE Systems. When the students The 13-week, industry-approved course Our ability to retain and recruit people with graduated, they were offered the option offers career pathways into a variety of appropriate talent and skills is a principal ofbeing fast-tracked into a BAE Systems technology roles to help encourage more risk (see page 123) and we continue to take graduate recruitment scheme, which in women into STEM careers. BAE Systems arange of actions to mitigate the risk. 2022 resulted in 15 of them joining us sponsored a CFGdegree course between asjunior software engineers. May and September 2022 which enabled 62 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### indiscussion with Australian universities BAE Systems wins Employer Since becoming a founding member andare hopeful that in the next few years oftheMtW programme in partnership ### oftheYear we will be able to offer systems engineering with the Prince’s Trust, we have had BAE Systems has focused on helping apprenticeships in partnership with a local around 700young people complete young people to launch their careers with Australian university. placements, with 1 in 3.5 of those us, including programmes for those not beingoffered further employment at This year we have also started work on currently in education, employment or BAESystems. Out ofthe 60+ cohorts anew software engineering degree training (NEETs). Our contribution in this we’ve welcomed so far in England and apprenticeship with the University of area was recognised at the Movement Scotland, there has been a 91% retention SouthAustralia and a group of ten toWork (MtW) Social Mobility Awards rate on our programmes. otheremployers. in2022, where we were proud to be awarded ‘Employer of the Year’. At the awards ceremony, three of our In the Kingdom of Saudi Arabia, we offer people were shortlisted as ‘Rising Stars’ aircraft maintenance apprenticeships and formaking a positive impact on their have builta very successful skills partnership MtWplacements. withSaudi Development Training atastate- of-the-art facility near Riyadh. Wehave alsocreated a project management curriculum in partnership withthe Alfaisal University, the Saudi National Advanced Apprenticeship Programme. Despite the evolving demands in the job market, the Inc. business had a strong year in terms of staffing. In total we filled approximately 8,150 jobs, which reflects pre-pandemic hiring levels. We saw a 26% increase in the number of early career hires and an 8% increase in the number of former employees returning to the Group. All of this activity resulted in a net headcount increase. Part of the success in the early career hiring is attributable to the enterprise LEAP intern programme, which also grew in 2022. Thisprogramme is in its fourth year and continues to draw students from around | theUS to participate in primarily technical | Our HR organisation has evolved with the | and retaining a diverse workforce. In | | --- | --- | --- | | internships, while also being offered a | establishment of an ‘Employee Experience’ | addition, we launched Employer of Choice | | variety of networking and development | team, responsible for analysing insights | initiatives that include more family-friendly | | opportunities. Additionally, our Platforms | from employee feedback and translating | employee health and wellness benefits for | | &Services sector leveraged a successful | these into actions for our HR teams and | implementation in 2023. | | welder apprenticeship programme to | lineleaders. We have also introduced | | Supporting our employees develop the talent needed to meet aChief Operating Officer role in the HR currentproduction demands. We recognise the strain the economic organisation who is focused on ensuring climate is placing on our workforce and key business priorities are implemented Ways of working have implemented a number of specific consistently across the business. We continued to embed new ways of measures to help address this, in addition During the year, we commenced a process working across the Group in 2022. toour ongoing commitments and existing ofHR policy modernisation which has Thenature of our business requires a support mechanisms. included establishing and agreeing a significant on-site presence in many In the UK, national-level pay negotiations standard approach for developing HR locations but, recognising the change in took place with the Group’s UK recognised policies, provisions, process and guidance. working practices that occurred during Trade Unions during the first half of 2022. This approach is designed to enable our theCOVID-19 pandemic and the need Adeal was reached, in principle, which was HRstrategy and support our desired toremain an attractive employer, we then put to a ballot with the Trade Unions’ employee value proposition and employee havecontinued our strong focus on members who voted overwhelmingly in experience, while ensuring robust controls hybridworking. favour of acceptance. As part of that for our keypeople risks and enabling In our US-based business, we are vigilant two-year deal, those covered by collective greater HRprocess efficiencies. indelivering for our customers and do so bargaining received a6.75% salary increase BAE Systems is currently in the process with more than 15% of our employees for 2022 and we have agreed a 6% salary ofexploring concepts for a new Global working a hybrid work schedule. This allows increase for 2023 which came into effect in Digital Academy, which would offer both the flexibility to meet individual employee January 2023. This pay deal, which has been virtual and face-to-face training. We are needs, while also remaining focused on applied to approximately 27,000 manual startingby identifying the key priority achieving our mission. To ensure our people and professional staff across the UK, will digitalskills needed. managers are equipped to lead others in a help address the increased cost of living, hybrid working environment, a series of whilst respecting affordability for the In response to the changing talent market, hybrid leadership workshops and helpful Groupand our customers. the Inc. business refreshed its employee tools were deployed in 2022. value proposition with a focus on attracting BAE Systems plc Annual Report 2022 63 Strategic report / Sustainability / Our sustainability agenda / Our key pillars / Creating opportunity for people and communities ### We also made two £1,000 payments Disaster relief Supporting our communities toapproximately 34,000 eligible UK Following Russia’s invasion of Ukraine, Progress in 2022 employees to help address the increased alongside a Company donation, we 1 During 2022, we contributed £11,504,152 cost of living. launched a number of internal to local, national and international causes, We have structures in place to work with fundraising campaigns, with a promise working with charities and not-for-profit Trades Union representatives in our local tomatch all employee donations with organisations through ourcommunity markets, where it is appropriate and legally Company funds. With a Company investment programmes. This includes acceptable. donation of £100,000 and a significant charitable sponsorships, donations, amount raised by employees in the employee fundraising and volunteering. We • Of our UK workforce, 72% are covered by USand matched by funds from have key criteria, where measurable impact collective bargaining agreements. BAESystems, Inc., more than $400,000 can be demonstrated, and these are: • Approximately 55% of the UK workforce was provided to the American Red • Armed forces – supporting active service are Trades Union members. CrossUkraine Humanitarian Relief personnel, veterans and their families; • In the US, approximately 12% of the Effortcampaign. A further £100,000 wascontributed to British-Ukrainian • Education and skills – inspiring young workforce is covered by a collective Aidthanks to fundraising efforts by our people to consider STEM subjects and bargaining agreement. UKemployees and Company-matched careers; and • In Australia, approximately 20% of funding. In addition, our Digital • Local community – working to support theworkforce is covered by a collective Intelligence team donated 100 new the communities in which we operate. bargaining agreement. laptops to local charities in Poland, In 2022, the demand for the services of In the UK, BAE Systems received accreditation tohelp children fleeing the conflict many of our charity partners increased as a Real Living Wage employer in 2021 and tostay connected and continue alongside an increase in the resources we continue to uphold our commitments theireducation. theyrequire to deliver those services. inthis regard for our own employees and Last year, colleagues in Australia That’swhy it was important to us to deliver those working on our sites. | | andMalaysia were affected by | on our commitments to our charity partners | | --- | --- | --- | | To address critical talent retention, the | severeflooding, with many of those | and identify new opportunities to support | | Inc.team executed a targeted review | communities losing their homes to rising | important services in the communities in | | ofemployees identified with critical skills | rainfall. BAE Systems gave £10,000 to | which we live and work. | | todeliver off-cycle salary increases that | theMalaysian Red Crescent to support | | Building on the local community initiatives were meaningful and intended to improve flood relief efforts, with our Digital we supported last year, we increased our market position in order to retain these Intelligence employees giving more than support to over 40 foodbanks local to keyemployees. In addition to these £4,000 directly to colleagues affected. oursites in the UK with the aim of helping targetedincreases, the team completed InAustralia, our Company contributed those most in need. We established a new anassessment to extend the eligibility A$25,000 through GIVIT, which partnership with Magic Breakfast in the forshort- and long-term incentive plan distributed funds to where they were UK,to provide a £100,000 donation to participation to align with market practices. needed during the floods. helpmore than 200,000 disadvantaged ### Our priorities for the year ahead In the US, 2022 was marked by wildfires, school children across our communities storms and flooding. To help recover manage the risk of hunger and focus on In 2023 we will focus our work around from these, employees made donations their education. three global strategic priorities: to our US Employee Relief Fund, which In support of our sustainability agenda • Enable business growth through our provides grants to colleagues who weestablished projects focused on people. This will include providing the experience significant financial hardships regenerating the environment, including business with the right people and skills as a result of Presidentially Declared planting 1,400 trees in the UK during 2022. inthe right place and at the right time. Disasters. In late September, we also We will operationalise an employee activated the Immediate Response The impact of our support to local experience that retains and attracts the Program to provide assistance to communities was increased through the best people and improve the enablers to employees and their families in the efforts of our employees, with large-scale support the movement of our people extensive wake of Hurricane Ian. fundraising activities returning to our sites. across the organisation seamlessly. Initiatives such as the ‘runway’ mile took The generous contributions from our • Foster an inclusive environment where place at our Warton and Samlesbury sites in employees, combined with Company- people thrive. We will create a continuous Lancashire, UK, with hundreds of employees matched funding, are making a positive learning and performance culture that helping to raise funds for the Trussell difference. From assisting the people of enables our people to develop at every Trust,which provides emergency food Ukraine who were forced to flee their life and career stage. We will advance andsupport to people locked in poverty. homes with very little, to supporting diversity and our culture of belonging. Company-matched funding continued recovery efforts in the aftermath of tobeoffered in support of a number of • Drive HR operational excellence by extreme weather crises, we’re committed fundraising projects, encouraging further optimising HR technology to drive process to supporting our communities. donations from our employees. efficiency and enhance user experience, as well as investing in HR capability, engagement and functional excellence. 1. Deloitte have provided independent limited assurance in accordance with the International Standard for Assurance Engagements 3000 (ISAE 3000) issued by the International Auditing and Assurance Standards 1 To see our Basis of Reporting 2022 visit 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 baesystems.com/annual-report 64 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance | Community investment by type | We increased our levels of in-kind support | Our focus on supporting armed forces, | | --- | --- | --- | | | through more skills-based volunteering from | veterans and their family units is extremely | | | our employees. An example is the strategic | important to us. In support of this, in 2022, | E partnership between our Digital Intelligence we became a Foundation Partner of Legacy A | | business and Child Exploitation and Online | Australia. This provides support to the | | --- | --- | --- | | | Protection Command to provide pro-bono | Legacy Australia Grants Fund, which helps | | D | support through the knowledge and | the partners, children and widows of | | | expertise of our employees in online | current and former serving personnel. We | | | protection. Mentoring and coaching | also saw our own veterans’ networks and | | | services were also delivered by our | Employee Resource Groups in our markets | | | employees to Recruit for Spouses, with our | play an integral part in armed forces | | | involvement helping the organisation to | focused fundraising, such asduring the | | | deliver a 608% increase in military spouses | annual remembrance period. | finding gainful employment. To see our Basis of Reporting 2022 visit baesystems.com/annual-report B A Armed forces 25% B Education 42% C Community 12% D Heritage 4% E Other 17% ### Innovating for impact for Adaptive Adventures and America’s aveteran with PTSD by developing a VetDogs, to include nearly 50 BAE Systems wearable device prototype that senses ### USveterans mentors and more than 80 undergraduate biometrics and sends a vibration signal Our Electronic Systems Tech Power: students from top USuniversity tothe veteran’s service dog, who can Innovating for Impact Program brings engineeringprogrammes. then alert the veteran to the early signs together university engineering students, of a PTSD episode. employee mentors, and veteran-serving On one project, a US Army veteran non-profit organisations in the US to neededhelp managing her battle with BAE Systems is proud to support non- design and create meaningful, adaptive post-traumatic stress disorder (PTSD). profit organisations that assist military technology solutions that support TheInnovating for Impact Program team members and their families, aswell as veterans with routine, recreational ofBinghamton University engineering those that encourage the advancement andwork activities. students in New York, BAE Systems of Science, Technology, Engineering, and engineers, and America’s VetDogs Mathematics (STEM). The Innovating for This programme leverages undergraduate representatives worked together to create Impact Program illustrates the intersection engineering students’ and BAE Systems anightlight that her service dog can activate of these pillars, harnessing the passion mentors’ expertise to apply their skills that allows the veteran to sleep better at and expertise of students and Company towards human-centred, real-world night. In another project, Prairie View mentors to help solve real-world, projects that benefit veterans. A&MUniversity engineering students impact-driven assignments forveterans. BAESystems is collaborating with two inTexas and BAE Systems mentors helped national non-profit organisations, C BAE Systems plc Annual Report 2022 65 Strategic report / Sustainability / Our sustainability agenda / Our key pillars / Creating opportunity for people and communities Recognising the importance of delivering ### apositive social impact in our local Unclaimed asset programme communities, we continued our varied and In 2020, the Board approved a proposal Overview of projects funded in 2022 comprehensive programme of education- foran unclaimed asset programme with Opportunities for Indigenous girls focused activities to drive engagement thenet proceeds (£3.6m) from shares andyoung women (Australia) inyoung people around STEM subjects soldto be used to support the local andcareers. Hundreds of our employees As part of our work with Stars Foundation, communities in which we operate. This volunteered thousands of hours in support we help Indigenous girls and young funding was in addition to our regular of STEM ambassador programmes in our women to stay in school and move into Community Investment funding. different markets. paid work or further study. As well In 2021, a number of potential projects asfinancial support, we have provided In the Kingdom of SaudiArabia, we suitable for the funding were identified work experience and site tours to continued our support foreducation andapproved via the Company showcase the exciting STEM careers programmes. We reached afive-year Community Investment process. available to students. milestone for our University Collaboration Throughout 2022, several further Programme which provided an opportunity STEM and virtual reality in schools projectswere identified andapproved, to engage with thousands of students (Australia) meaning that the majority of the around the Kingdom through lectures and We collaborated with the City of Playford’s £3.6mfunds have now been allocated. seminars, as well as presenting graduate Northern Sound System on a programme project awards, in partnership with six Governance process and management called ‘CnVRG’. The programme involves universities around the Kingdom ofSaudi of the funds primary and secondary schools co- | Arabia. In 2022, we also restarted our STEM | To ensure the appropriate allocation of | designing a virtual reality experience to | | --- | --- | --- | | Ambassador programme after a COVID | funds, it was agreed that projects would | bring STEM learning to life. The challenge | | hiatus, delivering two STEM workshops to | beapproved using the Group’s current | develops problem-solving skills through | | two schools in the Kingdom of Saudi Arabia. | Community Investment governance | teamwork and helps to prepare them for | | | process. All unclaimed asset-funded | the jobs that may arise from future | In addition to our regular community proposals have also been reviewed and technological advances. investment funding, we worked with approved by the Global Community organisations in a number of our markets RBLI Centenary Village (UK) Investment Committee. toidentify community-based projects We donated £100,000 to the Royal eligible for the share forfeiture funding, How projects have been identified BritishLegion Industries’ Centenary Village made available following the unclaimed Businesses were asked to identify project through the unclaimed asset assets programme in 2020. projectsand initiatives to support and to programme. Our donation is set to benefit apply for approval. In addition to current hundreds ofdisadvantaged veterans every ### Our priorities for the year ahead Community Investment governance year for thenext 100 years, providing • In 2023, we will continue to support our rules,the following additional criteria homes and welfare support to former partners in the communities in which we wereapplied: military women and men and their live and work, collaborating to deliver families. Last year, we also pledged our sustainable, long-term benefits. • focus on addressing an identified support to the charity’s ‘move on’ care socialneed and/or contribute to social • We also aim to identify new partners and pathway model, which helpsprogress causes linked to our core business; opportunities that have the potential to homeless veterans from thecharity’s deliver greater social impact. • funding at a level that will make a emergency accommodation into its significant impact; and moreindependent housing. • Our focus on the delivery of skills and education initiatives acrossour markets • have a measurable impact. will continue, as we provide funding as well as the support of our employees tohigh-quality STEM-focused projects. • We aim to increase skills-based volunteering and our level of in-kind support, including to projects which help maintain theenvironment in which our communities are based. • We will continue to deliver a varied programme of support to the armed forces, veterans and their families. 66 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance BAE Systems plc Annual Report 2022 67 Strategic report / Sustainability / Our sustainability agenda / Our key pillars ## Collaborating and ## Success ## workingwith our suppliers ## through ## and strategic partners is ## keyto our success and ## partnering ## delivering against our ## sustainability aspirations. ### Our aims ## Why is this important Sustainable supply chain ## to BAE Systems? • Build long-term relationships with supply Our success as a business relies on the chain partners to deliver mutual benefit. resilience of our supply chain. It is vital that Shared values we collaborate and partner with suppliers • Engage supply chain partners in our todeliver the capability our customers need sustainability ambitions to collaborate and to support our suppliers in addressing onissues and accelerate progress. challenges including in respect of the products and services they supply to us. Social value By working together with our supply • Continue to develop a diverse supply chainwe can accelerate our sustainability chain that supports innovation and agility. programmes which benefits us, our Decarbonising Scope 3 customers and wider society. • Engage with our suppliers to support We have communicated our sustainability ourdecarbonisation strategy. ambitions for suppliers, including within ourSupplier Principles, and will be engagingwith them to understand their own sustainability ambitions. Our Supplier Principles cover supplier workplace/ employee business practices and wider sustainability issues. We value diversity across our supply chain, as it brings creativity of thought, innovation and agility which helps us to create the best-in-class products and services. Our suppliers face different drivers, priorities and challenges across the markets in which they operate. Our relationships with suppliers 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 and our approach to sustainable business. By effectively partnering with our suppliers we are also able to leverage opportunities to deliver a positive social impact in the communities where our suppliers operate. Our contribution to the UN Sustainable Development Goals (SDGs) 68 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Getting leaner and greener Our Supply Chain team ran a sustainable project with colleagues These changes resulted in a c.34% reduction in total CO 2 who build major units for the F-35 programme. One of theiraims emissions associatedwith the production and transport of was to reduce and control the wastage produced during the temporary fasteners between2021 and 2022 (from 1,017kg complex manufacturing process. toless than 350kg one year later). The emissions saved are theequivalent of driving an articulated truck 504 miles, or17 trips An area they tackled is the use of temporary fasteners, which between our two largest Lancashire sites. In addition, by recycling secure parts ofthe aircraft in a non-permanent way and are more temporary fasteners, we use around 75% fewer single-use integral to the build process. Working collaboratively, they were plastic delivery bagsand we help to reduce the requirement for able tostem the loss of temporary fasteners and improve available virgin raw material. volumes of them, suitable for re-use. By working closely withthe customer, they were also able todeploy a more resilient process that enabled recycling of the fasteners back through the supply chain and into our assembly site. BAE Systems plc Annual Report 2022 69 Strategic report / Sustainability / Our sustainability agenda / Our key pillars / Success through partnering ### Sustainable supply chain We have also been asked by the UK Defence Suppliers Forum Executive Group Partnering is key to our success. We aim to be the industry co-chair of the new tobuild long-term relationships with our DSFSME Champions Working Group supply chain partners, building on trust thatwill bring together the industry’s andcollaboration to drive strategic mutual SMEChampions to collaborate on delivery benefit. By working together we can of the UK Government’s SME Action Plan. collectively respond to business challenges and deliver innovative products and services. ### Decarbonising Scope 3 This shared approach not only benefits our We have set a decarbonisation ambition customers, but makes a positive contribution that will drive efficiency, innovation and to wider industry and communities in which collaboration across our value chain. We we operate. recognise that our supply chain emissions | We are developing our Sustainable | are many times those of our Scope 1 and 2 | | --- | --- | | Procurement Strategy. This strategy will set | emissions (see page 52) and it is critical that | | out our long-term sustainable procurement | we partner and collaborate with our | | ambitions, including a roadmap detailing | suppliers to reduce supply chain emissions | | how we will achieve them. Supplier | by 2050 (Scope 3 emissions). To that end, | | engagement is central to this strategy, as | we look forward to working with suppliers | | weneed to understand our supply chain | to understand where they are on their own | ### Partner 2 Win for success partners’ ambitions and commitments and decarbonisation journey. Achieving our mission to protect those how we can move forwards together. ### who protect us depends on the extended Supporting small to medium ### enterprise of our supply chain, from large Shared values enterprises corporations to small businesses. We are This year we updated our Supplier Principles As a prime defence contractor, we stronger when we leverage the power to better align with our sustainability volunteered to lead the Defence Supplier ofcollaboration with our suppliers to ambitions. This strengthened set of Supplier Forum working group in the UK to create successfully deliver enhanced value for Principles demonstrates our commitment the Hellios SME Portal – a new, free our customers while also providing towards building a more robust and platform offering SMEs greater opportunity products that meet their needs and sustainable supply chain. By engaging with to promote their capabilities and access support their missions. supply chain partners on our sustainability thedefence market. ambitions, many of whom already have Launched in 2017, the Partner 2 Win We did this because we recognise the their own sustainability strategy in place, we programme is designed to achieve importance of having SMEs in our supply can collaborate on key sustainability issues operational excellence and eliminate chain; they often bring agility, diverse and accelerate progress. defects in the supply chain by raising thinking and creative innovation that can thebar of performance expectations We have engaged suppliers on our updated grow our defence capabilities. This enables tomeet the demands of current and Principles and undertaken assurance activity, us to help protect what really matters – our future customers with utmost covering more than 30% of global spend. nation’s security – and it can also support integrityand an unwavering focus new jobs in regional clusters across the UK. ### oncontinuous improvement. Social value Our work towards the digital portal directly We value a diverse supply chain, as Since the programme’s inception, supports the ambitions of the Ministry of itdrivesinnovation and agility, whilst theElectronic Systems and Platforms Defence’s SME Action Plan published in positively impacting the communities &Services sectors have recognised early 2022. The plan focuses on how best inwhich our suppliers operate. best-in-class performance among their tosupport smaller businesses in the defence suppliers for achieving on-time delivery In the UK, we have been supporting the supply chain. and quality standards to meet customer Government’s SME Action Plan, which sets ### requirements during an annual Supplier out how we can improve the engagement Small business subcontracting Symposium and Awards event. we have with SMEs and focuses on In the US, we are committed to small procurement models that are easier to The programme has resulted in business utilisation, with approximately navigate. Our commitments include: | strengthened relationships with suppliers | | 40% of our supply chain spending placed | | --- | --- | --- | | and improved collective performance in | • increasing SME spend at tier 1 | with small businesses. We recognise that | | delivering the highest quality products | andlowertiers; | our small business partners contribute to | | and advancing breakthrough technologies. | | our innovation, support our customers, | • widening engagement with and In 2022, Electronic Systems honoured createjobs, and improve the overall championing on behalf of SMEs; 12Suppliers of the Year and 106 gold, healthof the US economy. We work • paying SMEs promptly and on time; and silver and bronze Partner 2 Win diligently to identify and collaborate with • supporting smaller businesses in the small businesses that bring value to our medallists; and the Platforms & Services defence supply chain through the customers – small, disadvantaged, woman- Combat Mission Systems business implementation of the industry-wide owned, HUBZone, veteran, and service- awarded a total of 25 Supplier of the Hellios SME Portal (launched with UK disabled veteran-owned small businesses. Year awards and 34 Partner 2 Win Ministry of Defence atthe Farnborough Additionally, we collaborate with medals for their performance over International Airshow in 2022). AbilityOnecompanies and historically theprevious year. We’re proud of the progress we’ve made to establish a blackcolleges and universities/minority strong supply base, recognising that institutes whenever possible. when we partner effectively, we all win. 70 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance Employees at Barrow-in-Furness, Cumbria, UK. ### Our future Brightstars One of the key programmes delivered is The companies involved not only get the Brightstars, a local initiative that provides opportunity to inspire future talent and Our Submarines site at Barrow-in-Furness, anopportunity for young people from network with other local businesses, but UK, offers fantastic career opportunities around eight primary schools to work also to give their employees a chance to for hundreds of young people growing withlocal businesses, to help them develop develop their skills further and gain a upin and around the area. To enable them key skills such as creativity, innovation much greater understanding of the to take those opportunities, we deliver a andproblem solving. We fund up to seven communities in which they work. range of programmes and initiatives that of our suppliers to take part, and we also help them to develop their employability encourage local SMEs and our own skills, confidence and aspirations. employees – ranging from apprentices to management – to participate in the project. ### Our commitment to compliance with our moderate workshops to encourage Our priorities for the year ahead BAE Systems, Inc. Small Business Policy and smallbusiness development and provide • Develop our supply chain sector subcontracting plans is underscored funding for minority business development decarbonisationstrategy. by the sponsorship and oversight provided programmes. Additionally, we regularly • Progress our supply chain by the BAESystems, Inc. Procurement sponsor, exhibit, and participate in engagementprogramme. Council. Our culture of inclusion and matchmaking events to identify qualified historyof small business utilisation small businesses that can provide supportslong-term relationships with capabilities and innovation to support diverse businesses in all socio-economic ourcustomers’ needs. Our commitment categories. We are active in the small tomeeting our small business goals and business community at the national, supporting small businesses is a constant regional, and local levels. BAE Systems inour overall business practice. SmallBusiness Professionals also serve oncommittees and in leadership positions in several organisations that advocate fordiverse suppliers. We serve on panels, BAE Systems plc Annual Report 2022 71 Strategic report / Sustainability # Our foundations ## Safety, health & wellbeing The safety, health and wellbeing of our employees is an enduring priority. Our strong safety culture has many different facets, and a dominant one is the commitment of our leadership to keeping our people safe. We strive continually to improve the safety of our people. The importance of mental health and wellbeing was put into sharp focus during the pandemic, and we are continuing to strengthen our efforts in supporting our employees in these areas. ### Our approach to safety We operate a number of industrial sites and our manufacturing activities present a range of risks. These include work in confined spaces, machinery operation, working at height, and slips, trips and falls among others. Our 2022 safety performance showed a small improvement in recordable and major injuries from 2021. We monitor and aim to eliminate, mitigate and manage workplace safety risks. Our approach to identifying and assessing safety risks is embedded within our approach to risk management (see page 116). We are focused on continually improving standards and this aim is embedded in our Safety Policy. We have a number of programmes focused on improving the safety of our employees and we ensure those employees exposed to identified or known hazards have the appropriate protective equipment. We continually monitor our operations to ensure our safety efforts are aligned to the working environment. To demonstrate our commitment to safety and drive performance, the Board continued to prioritise safety through the inclusion of a safety objective in executive remuneration. Safety is set as a qualifier to the overall non-financial element of the executive bonus (see page 180). Line managers are incentivised to achieve the desired safety culture and additional personal objectives are identified through the Performance Development Review process. We use a Recordable Accident Rate¹ process as a key performance indicator to assess workplace safety improvements and this is used to determine an element of executive bonus. ### Progress in 2022 During 2022, we focused on employee safety training. In the UK and Australia, this included deploying our Managing Safety, Health and Environment (SHE) training, aimed at first-line managers to allow them to understand their role in SHE and piloting our Leading SHE training aimed at more senior leaders. The training will be deployed in the Kingdom of Saudi Arabia in 2023. We also undertook a pilot of our new SHE data platform that will improve our analytics capabilities and enhance our safety processes, such as incident investigation, to reduce risks. With the pilot phase complete, the platform will be rolled out across the business in 2023. Our training programme was supported by the launch of high-profile employee engagement campaigns on safety including one entitled 'Shift of the Day' which takes a fresh approach designed to capture attention. These campaigns aim to deliver critical safety messages to employees. In 2022, improvements in safety and diversity were underpins to the non-financial element of the executive bonus. The requirements for safety and diversity improvements were met and progress continues to be made. ### Employee health and wellbeing The importance of our employees' health and wellbeing rose to the fore during the COVID-19 pandemic and remains a priority. We anticipate that it will continue to be important through 2023, as the cost of living crisis and its potential wide range of impacts continue. Our wellbeing programmes support employees in both their work and personal responsibilities. We continue to promote mental health awareness programmes across the organisation and have worked diligently this year to increase our communications and engagement channels along with introducing training for employees to raise awareness of the importance of mental wellbeing. We have also raised wellbeing and mental health with our middle management, highlighting its importance to the business and providing our managers with guidance on how to support themselves and colleagues. ### Recordable Accident Rate (per 100,000 employees)² ![img-5.jpeg](img-5.jpeg) ### Major injuries recorded² ![img-6.jpeg](img-6.jpeg) #### BONUS The award of the executive directors' bonuses is dependent upon achievement of improvements in both safety and diversity (see page 181). 2. BAE Systems Internal Audit has reviewed and confirmed effective systems, processes, and controls are 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. We promote discussion and awareness on some challenging topics including family loss, stress and depression. Our Employee Resource Groups (ERGs) and employee communications programmes highlight these topics and help direct employees to sources of support and assistance. Through our Employee Assistance Programmes, our employees can access physical and mental health advice and support for themselves and family members. This support is available via phone, website and specialist apps and is available 24 hours a day, 365 days of the year. We have also continued to provide a digital platform to empower employees to take a proactive and preventative approach to mental health and wellbeing. We continue to train Mental Health First Aiders and this year were proud to be accredited as a Menopause Friendly Employer for the first time. Our Reward & Benefit arrangements available to employees also include Private Medical Insurance, Healthcare Cash Plans, discounts to gyms and other health improvement activities. We have partnered with Cancer Research UK to deliver a range of information and live webinars on cancer, focusing on the risk factors related to our employee demographics and location such as smoking, obesity and alcohol. We have also offered free flu vaccinations to all UK employees. 1. We define recordable injuries in line with the US Occupational Health and Safety Administration reporting standard. To see our Basis of Reporting 2022 visit baesystems.com/annual-report 72 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Our occupational health provision delivers Help from Henpicked anumber of services that contribute to We are committed to supporting employeeswhen it comes to menopause. With three in themanagement of health risks in the fourwomen experiencing a wide range of symptoms, most of our employees are touched workplace. Occupational hygiene and bymenopause – if not directly themselves, then as partners, sons and daughters, friends, health hazard risk assessments inform colleagues or line managers. health surveillance programmes that are anessential part of our health and safety That is why, in the UK, we partnered with menopause experts, Henpicked, to raise awareness management system. Services are of it and provide support. Lastyear, more than 1,000 of our people attended one of accredited to the appropriate level, based theirwebinars to find outmore and 300+ employees voluntarily completed further e-learning on the geographic location. Employees also provided by Henpicked. Thiswas in addition to resources, articles and blogs that we access these services through referral shared on our Employee App, which have been read by around 5,000 colleagues. systems or as part of a cyclical approach. Last year we were shortlisted as finalists forthree menopause-related awards. Wewon the Reporting back to the business then informs ‘Best Diversity Campaign’ award inrecognition of how we are supporting our employees risk management processes. experiencing themenopause from a physical, mental health and wellbeing perspective, and BAE Systems, Inc. continued its forour openness and training at work. Wewere also successfully accredited as a‘Menopause implementation of the Safety Maturity Friendly Employer’. Matrix (SMM) process – an audit process tohelp sites manage risk and drive culture. This SMM process resulted in 53 self- assessments, 11 verification audits and Our commitment to disability inclusion ## Diversity, equity & inclusion | fourtraining events during the year. In | | andaccessibility in the workplace is | | --- | --- | --- | | addition, Inc. leveraged the Serious Injury/ | Diversity, equity and inclusion are key | illustrated by our pledge to support | | Fatality risk identification process todrive | enablers to recruiting the best talent, | TheValuable 500 campaign and in 2022 | | increased focus on proactively managing | drivinginnovation and creating a | webecame one of the founding members | | and eliminating risks with higher potential | workplaceenvironment where employees | of Neurodiversity in Business. | | for significant injury. | are enabled to bring their whole selves | | Our ambitions are supported by a range towork every day. In support of employee mental health, the oftargets: Inc. Resilience Hub website created during Globally, we have set an ambition to be • Globally – 50% of Executive Committee the pandemic continues to be maintained to recognised as a leading employer in defence members to be women by 2030. | offer employees help with managing stress, | and security for valuing diversity, equity and | | | --- | --- | --- | | building time into their days for self-care, | inclusion. We also want to be representative | • UK – 30% of the organisation’s workforce | | locating resources for child care and setting | of gender and ethnicity in the localities in | to be women by 2030 at the latest. | | physical, financial, and wellbeing goals as | which we operate. | • BAE Systems, Inc. – progress towards | | well as working towards them. In addition, | | greater gender and racial diversity at all | We recognise the challenges of increasing the Employee Assistance Programme was levels of the organisation. diversity in the engineering sector but, enhanced to include more behavioural through our schools and early careers • Other countries – targeted ambitions health resources and access to concierge programme, we are proactively increasing forother countries in which we operate. support for finding and scheduling mental diversity in our pipeline and seeking ### health provider appointments, with new Progress in 2022 opportunities to bring in talent from a programmes and digital resources added widersegment of society. Resourcing talent From May 2023, we are on track to tohelp employees build resilience and development and succession planning meetthe new Financial Conduct Authority improve their mental outlook. remain key for us across all markets. We are (FCA) Board diversity targets including making steady progress on gender diversity afemale chair and a 40% gender ### Our priorities for the year ahead and our Executive Committee now includes mixwithone member from an ethnic • Full deployment of our SHE reporting an increased number of women and ethnic minority background. environment. minority representation. Our ERGs play an important role in • Continued focus on safety training Throughout 2022, we prioritised initiatives promoting an inclusive and attractive intheUK, Kingdom of Saudi Arabia around recruitment and retention of diverse workplace. They provide visible leadership andAustralia. talent, ensuring they are embedded into our and direct engagement with arange of • Promoting leadership and employee processes. This work will continue through affinity groups, to ensure employees engagement in safety activities to raise 2023 as we look to create a more inclusive feelthat their differences are valued awareness anddrive a learning working environment, where everyone feels andrepresented. Our ERGs are also vital in organisation. a sense of belonging. raising awareness and educating those who • Proactively identify and mitigate more may not directly relate to their focus area, The Group is committed to giving open, substantial risks through the Serious but wish to support as an ally. fulland fair consideration to applications Injury/Fatality risk potential identification foremployment from disabled people In the UK, this is supported by 18 different process. andpeople with health conditions or pledges and commitments to external • Continuing to put in place ways impairments who meet the requirements charters, including veterans, LGBTQ+, tosupport the general wellbeing for roles. We also ensure training mental health, disability and social mobility. ofouremployees. opportunities and appropriate accessibility Also in the UK, we have sixcore ERGs: are available to all. We firmly believe that Enabled (disability); GEN (gender); Mindset the inclusion of all of our people is vital to (wellbeing); VetNet (veterans); Embrace the success of our business. (cultural diversity) and OutLink UK (LGBTQ+). BAE Systems plc Annual Report 2022 73 Strategic report / Sustainability / Our foundations ### Gender diversity Gender pay gap We have published our sixth annual | | Male | | Female | | | | --- | --- | --- | --- | --- | --- | | | | 9 | | 5 | genderpay gap report in line with | | Board 64% 36% | | | | | UKregulations. For 2022, the average | gender pay gap for our UK workforce 237 81 was8.6% (2021 8.7%) which is 6.3 Senior managers 1,2 75% 25% percentage points lowerthan the current 65,000 19,000 UK national averageof 14.9%. We rely on Total employees 3,4 77% 23% employing large numbers of employees with STEMqualifications and we, like other companies, face challenges recruiting 3,4,5 Age diversity women with these qualifications because there are significantly fewer women who A Under 30 years 16,000 19% study and work in these fields. As a result, A | | B 30–50 years 38,000 45% | agreater proportion of our workforce and | | --- | --- | --- | | | C Over 50 years 30,000 36% | our senior leadership population are men | | C | | 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. B 1. 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. Excluding share of equity accounted investments and rounded to the nearest thousand employees. 4. BAE Systems Internal Audit has reviewed and confirmed effective systems, processes, and controls are 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. The age diversity split has been amended this year to align with external reporting requirements. ### InBAE Systems, Inc. we have continued our • Achieving Menopause Friendly Our priorities for the year ahead support through the broader Multicultural Employeraccreditation. As we move into 2023, we will increase our Network and its eight US ERGs. In addition, Across BAE Systems, Inc., accountability focus on inclusion and belonging which will an executive-level Diversity, Equity and fordiversity, equity and inclusion continues in turn contribute to a more diverse Inclusion (DEI) Council was formed to drive to be driven through the Inclusive Leader workforce. Our Accelerating Our Inclusion execution of Inc.-wide actions. | | Goal assigned to all people managers across | action plan describes targeted activity to | | --- | --- | --- | | Stand-out UK initiatives delivered in 2022 | the organisation. Building on the prior | drive this. | | haveincluded: | success, the 2022 goal included | | • Mandated Inclusion training will be requirements for leaders to check in on the • A nationwide engineering roadshow for assigned to managers and leaders with wellbeing of their employees, demonstrate schools with themes specifically for girls. in-depth topic area knowledge, as well inclusive behaviours to enable a safe and This is supported by 800 employee asleadership content on meaningful productive team environment, conduct STEMLearning Ambassadors. conversations and creating inclusive team team dialogues about DEI themes, and cultures and Leadership toolkits. • An engineering badge partnership with discuss career aspirations and development Girl Guiding North West which has been • Inclusion training will be assigned to all opportunities with all of their employees. completed by more than 23,000 girls. UKemployees and a refreshed approach Asa result, employees’ sense of belonging to employee engagement though • Career sponsorship programmes for improved – as reported through the recognisable content across all of our women at all levels. Inc.-wide Inclusion Index survey – and sitesand digital platforms. representation of women andpeople of • Leadership development opportunities colour in leadership roles continued to • We will continue to empower our ininclusive recruitment guidelines and increase in2022 as well. ERGsand expand the awareness of them, senior leadership specific inclusion and the role theyplay, in our Inclusion workshops. workstreams, through targeted, • Making free sanitary products available measurable and impactful activity. across the majority of sites, with the • We will look to gain a deeper understanding remaining being actioned in 2023. of employee sentiment through various methods – enhancing our qualitative and quantitative data to drive our agenda for To see our Basis of Reporting 2022 visit 2023 and beyond. baesystems.com/annual-report 74 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance We continually check and test the ## Product trading, quality Environmental impact effectiveness of our programme receiving ## &safety management both internal and external oversight and assurance, including encouraging feedback ### Product trading We are committed to high standards of internally from our employees and externally environmental management, including The defence industry is subject to strict from independent third parties. Risk-based addressing our climate-related impacts. regulatory controls. We maintain stringent due diligence procedures have been Ourglobal Environment Policy outlines internal controls that govern what we sell implemented to address bribery, corruption theprocesses to achieve this. Allsites and to whom. To identify responsible and other financial and non-financial risk, operate an environmental management trading risks our Product Trading Policy and our policies include processes for system (EMS) and the ten largest sites requires an evaluation on all products and risk-based internal and external approvals, (accounting for 54% of our emissions) services and trading activities. The process ongoing monitoring and repeat due diligence. 1 operate an EMS certified to ISO 14001, ensures that in addition to a commercial with the aim of reducing their energy We drive improvements in the programme assessment, consideration is always given consumption and, in turn, direct and annually to ensure it continues to meet best towider ESG concerns. | | indirect greenhouse gas emissions. | practice. Our anti-corruption programme | | --- | --- | --- | | Our Product Trading Policy and Responsible | Seepage 40 for information on how | also includes our Code of Conduct and | | Trading Principles help us to make informed | wearemanaging our environmental | ethics training. | | decisions about the business opportunities | impacts and addressing climate change. | | Our anti-corruption programme is we pursue in accordance with our values. embedded in our Operational Framework, ## Accountability & Export of controlled goods and technology through the key policies and processes must be authorised in advance by below: ## transparency and Robust governments. Failure to comply with all • Code of Conduct – which explicitly ## applicable laws and regulations could result ethics & governance prohibits the giving or receiving of bribes in serious penalties for BAE Systems and ### Ethics and compliance by BAE Systems employees; theindividuals concerned, and could Robust governance remains at the core • Advisers Policy – which governs the harmnational security and foreign policy ofour business and is a foundation of our appointment, management and payment interests. Our Export Control Policy and sustainability agenda. We are committed of third parties who are engaged to assist Procedures are designed to comply with toethical and responsible behaviour in all with our sales and marketing activities or applicable laws and regulations, including aspects of what we do. Our industry is the strategic development of the Group; sanctions and trade embargoes, as well astodetect and provide timely responses amongst the most highly regulated of • Gifts and Hospitality Policy – which toactual or potential violations, including anysector, and we always strive to comply governs the offering, giving or receiving toprompt investigations, disclosures and with and often exceed the requirements of gifts or hospitality; appropriate remedial actions. ofapplicable laws and regulations. • Conflict of Interest Policy – designed Product safety and quality Our Operational Framework sets out our toensure that personal conflicts of approach as well as the policies, processes interest do not impair employees’ We are responsible for ensuring that and standards to which we adhere, which judgement and damage the Group’s theproducts we deliver both conform to apply everywhere we operate. Our Code of integrity and interests; and theirdesign and achieve a certain level of Conduct and ‘Supplier Principles – Guidance • Facilitation Payments Policy – designed safety and quality, each as agreed with our for Responsible Business’ outline expectations to ensure that facilitation payments are customer. Wedo this by complying with our for all our employees and partners. not paid and that the Group and its product safety and quality policies and processes. Aproduct is any goods or employees seek to eliminate the practice Anti-corruption programme services, including intellectual property, of facilitation payments. We support our employees in understanding developed or traded by BAE Systems. This the vital role they have to play in ensuring Other relevant policies include: Community could be physical such as a platform or that we maintain the high standards of Investment Policy; Finance Policy; Fraud sub-system, non-physical such as software ethical conduct that our customers, Prevention Policy; Export Control Policy; or a design licence, or a service, such as shareholders, partners and colleagues Pursuit of Export Opportunities Policy; maintenance or support. Our policies and expect. We have a zero tolerance policy Lobbying, Political Donations and Other practices apply throughout a product’s regarding corruption in all its forms. Political Activity Policy; Offset Policy; and lifecycle, and may extend beyond the formal Procurement Policy, which include measures end of a project or programme. Our anti-corruption programme is designed to address bribery and corruption risks. to ensure adherence to all relevant legal andregulatory requirements recognising The anti-corruption programme guides thebribery and corruption risks that are andsupports our employees in making faced by the Company (see the Laws and responsible decisions. regulations principal risk on page 125). Theprogramme also provides our employees with practical guidance, helps them to understand what is expected ofthem andcreates an environment in which they feel they can confidently, and confidentially if needed, ask questions andraise issues and concerns. 1. International Organization for Standardization. BAE Systems plc Annual Report 2022 75 Strategic report / Sustainability / Our foundations Employee ethics programme 14 ethics enquiries were received about for guidance compared to reports requiring oursuppliers. Seven enquiries required investigation, anonymity rate and contacts Our global Code of Conduct lays out the investigation, six were substantiated. made directly to one of our 311 Ethics standards and behaviours that are expected Officers (one for every 349 employees) of all employees. It guides them in acting 60% of ethics enquiries came from the across our business. In 2022, our anonymity responsibly and ethically in everything US.The number of ethics reports varies rate was 26% compared to 35% from 2021, theydo and outlines the ways in which byregion. Factors influencing this include 1 | | | well below the benchmark rate of 50% | . | | --- | --- | --- | --- | | theycan seek help and guidance. Our Code | the number of individuals working in | | | | is supported by a training and engagement | thatregion and the cultural propensity | 43% of reports were made directly to Ethics | | | programme to empower them to make | ofindividuals from that region to utilise | Officers in 2022 – we encourage this route | | | ethical decisions. All employees are | Speak Up mechanisms. | for making reports, as it allows for an | | | requiredto complete ethics training | | immediate response by someone familiar | | We value openness, and strive to create a annually alongside e-learning programmes with the local situation. However, we are culture where people feel they can speak of role-specific training, for example, pleased that employees are using the upfreely. Our main metric is the number exportcontrols. options available to report issues or obtain ofenquiries made, and more specifically the guidance, whether they choose to do so In 2022, 98.4% of our employees number of enquiries per 1,000 employees. anonymously or otherwise. completed our ethics training, with the We also measure the proportion of requests majority of those who did not complete it being employees on secondment, maternity 2,3 leave,sick leave or other long-term absence. Total ethics enquiries 2022 ethics enquiries by region These employees will complete their training 2022 1,196 C D on their return to the business. 1,1892021 We engage employees throughout the A yearon ethics and responsible business. Inthe US, we produce monthly ‘Ethics Anonymity rate Minute’ messages to communicate directlywith employees on a range of topics, including workplace respect, creating ## a culture that speaks up to address issues, 26% reinforcing anti-retaliation, and handling (2021 35%) gifts and hospitality, among others. In theUK, we produce regular ethics and Dismissals for reasons relating compliance communications to spotlight 2 particular areas including gifts and tounethical behaviour hospitality, security and export controls. 2022 243 A US 717 Wealso actively promote our Ethics | Officersand Ethics Helpline, to help ensure | 2812021 | B UK 415 | | --- | --- | --- | | employees feel they can raise issues and | | C Kingdom of Saudi Arabia 44 | | seek guidance in person and in confidence. | | D Australia 20 | 2 Raising an ethics concern 2022 ethics enquiries by type Employees can raise a concern either 1 583 1 Enquiries that led to guidance and advice personally or confidentially across four 2 140 Enquiries that led to investigations primary channels: via our Ethics Officers; by 2 Accounting charge practices email; on the telephone; and online reporting 3 11 3 Anti-corruption to our externally-run Ethics Helpline service. 4 18 4 Data, technology and trade controls Our Ethics Officers receive regular role- 5 223 5 Employee conduct specific training to ensure that they are 1036 6 Employee relations equipped with the skills to give guidance 27 7 Financial misconduct toemployees seeking to raise an issue. 8 Management practices 658 During 2022, we received 1,196 enquiries, 9 Policy, process and trading anincrease of 0.6% compared to 2021. 129 10 Safety, health and environment 1910 11 Sales, manufacturing and delivery Of the 1,196 enquiries received, 613 (51%) 1011 12 Security and misuse of assets required investigation, 42% of which weresubstantiated. The top five categories 13 Supplier and procurement 912 for investigation were: employee conduct, 113 accounting charge practices, employee relations, management practices, and 1. Navex 2022 anonymity benchmark. safety, health and environment. Of the 2. BAE Systems Internal Audit has reviewed and confirmed effective systems, processes, and controls are in 613investigations for 2022, 522 were placeto collate, validate and report this data. Based on the procedures and the evidence obtained, nothing closed and91 remain open. These will hascome to its attention that indicates the disclosures have not been properly prepared in accordance with beclosed out during 2023. 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 B 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. 2021 reports data has been restated to reflect To see our Basis of Reporting 2022 visit theremoval of those cases in our US businesses which were the formal declarations of conflicts of interest, baesystems.com/annual-report bringing our US business in line with the Group. 76 BAE Systems plc Annual Report 2022 Strategic report Governance Financial statements # How our Ethics Helpline has been used ![img-7.jpeg](img-7.jpeg) In 2022, 243 employees were dismissed due to misconduct, which may include breaches of the Code. The majority of the 14% decrease from 2021 occurred in our US business, and whilst there is no specific event or circumstance that primarily contributed to this decrease, it shows that employees are complying with the Code and related policies on proper workplace conduct. # Improving industry standards We continue to play our part in supporting others by setting an example for business partners and seeking to help improve 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 Ethics & Compliance Institute, and are proactive members of both the Aerospace and Defence Industries of Europe and the Aerospace, Defence, Security and Space trade associations. # Community investment Our community investment programme is governed by an overarching global strategy, and supported by market-level programmes. This approach allows markets to ensure their programme is relevant to their sector, charitable needs, culture and local communities, while being aligned to the overall Group approach. Our policy does not allow payments to third-party fundraisers or individuals, and is focused on ensuring the charitable organisation receives funding directly. To avoid the risk of conflicts of interest, any community investment activity is tested against the principle that it does not place, or does not appear to place, actual or potential customers, suppliers or government officials under any obligations. We have a Global Community Investment Committee, chaired by our Chief Executive, which governs our approach, and there is a robust process (through our Operational Framework) in place to approve requests for community investment spend. This Committee reports to the Executive Committee on all community investment activities, including employee fundraising activities. We use the Business for Societal Impact Framework methodology to define the value of our support and its impact on our community partners, in comparison with our peers and other organisations. The total value of our community investment programme donations is externally assured every year. All community investment-related expenditure and any associated employee fundraising is reported through an online system which is subject to annual validation checks. # Human rights We are committed to respecting and upholding human rights wherever we operate, in respect of activities 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 to 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 approach to human rights constitutes: - maintaining high ethical standards and acting in a socially responsible manner in accordance with applicable laws; - respecting and supporting the communities in which our business is located; - maintaining and improving global policies and processes which relate to human rights with a particular focus on locations where we operate and on activities under the full, direct control of the Company; - respecting the labour and workplace rights of our employees in accordance with national laws; - responsible product trading; and - appointing and working with suppliers and business partners who are expected to adopt high standards of ethical behaviour and business conduct, consistent with our own, in accordance with applicable national laws. 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 78). In 2022, we published updated Supplier Principles. 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 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 116). # Cyber security Cyberspace is an increasingly contested environment with criminals, hacktivists and sub-threshold activity from nation BAE Systems plc Annual Report 2022 77 Strategic report / Sustainability / Our foundations states being a significant threat. As a major ofphishing exercises for all email users category, cyber security, political and ethical defence, aerospace and security company, across the enterprise. There is a global information that may affect our business. itis critical that our Group networks, aswell shortage ofskills in cyber security and we Weekly global supply chain disruption as the products and services we sell,are actively work with a variety of groups meetings are held with senior procurement cyber resilient and the intellectual property including theNational Cyber Security leaders to ensure the latest risk data is and confidential information heldand Centre’s Cyber First programme for young appropriately shared. Proactively managing processed on them is appropriatelysecured. people in the UKto increase the size and suppliers andsharing appropriate data diversity of the cyber workforce. allows procurement to develop risk- Our governance model and organisational mitigating strategies, helping to reduce structure (through the Chief Technology Responsible supply chain therisk of supplychain disruptions. and Information Officer) is designed to Our ambition is to be responsible and facilitate close alignment between the We conduct supply chain risk assessments sustainable (see page 70) across our global Group’s strategy and the resulting and work with suppliers to address any business. We cannot achieve this alone, engineering, technology, and digital and identified key risks to their businesses and therefore it is important that we collaborate cyber security strategies. Our digital and supply to our programmes which would and partner with suppliers to make a positive cyber security strategies identify trust in our include risk associated with the supply of business impact over the long term. We business and our products as afundamental critical materials. Therefore, critical materials spent £11.5bn with more than 21,000 enabler to meeting our Group strategy. are considered as part of a broader directly contracted suppliers worldwide. corporate approach to monitoring supply The cyber security risk is constantly Our supply chain management starts chain risk. The challenge of limited or sole reviewed and an agile, proactive, approach withour Global Procurement Policy source supplies of raw materials remains, to mitigating the risk is taken. We do this whichdefines the requirements to be due to the nature of some of the products byefficiently leveraging our core internal implemented by each of our sectors manufactured by the Group, which are capabilities in cyber security, including our fortheestablishment of procurement often of a unique specification, and specialist threat intelligence service, to control and the management of supplier- frequently supplied at low volumes. To maintain a managed risk position as we related risk. Our Global Procurement Policy address this, wehave a multi-faceted risk digitally transform and the threat requires our sectors to communicate management programme that seeks to: landscapeevolves. our‘Supplier Principles – Guidance for aggregate risk across the enterprise using Our internal Cyber Security Standards Responsible Business’ to our suppliers proactive intelligence; manage continuity of forCompany networks are aligned to (seepage 70). During the second half supply; and illuminate lower-level supply theNational Institute of Standards and oftheyear, we commenced an annual chain tiers to help us to understand the Technology framework and controls risk-based assurance activity to test relationships within our supply chain. andaformal, three layers of defence, oursuppliers’ adoption of these principles assurance programme is operated to We pay specific attention to single- and and to identify any risk areas that required checkadherenceto Group standards and sole-source critical goods and services investigation and/or mitigation. We customer requirements, which is reviewed procured through the supply chain, to completed this assurance activity with both internally and externally. Additionally, ensure that therisk is fully understood and suppliers representing more than 30% many of our networks are formally adequate contingency and risk mitigation ofour globalspend. accredited by our government customers. plans are inplace and can be enacted if Additionally, our standard terms and required to manage programme delivery. To further increase our cyber resilience, conditions require suppliers to comply with For example, after identifying a category ourSecurity Operations Centres in the all applicable laws and regulations, including risk associated with semiconductor chip UKand the US perform continual those related to human rights, anti-slavery shortages and increasing semiconductor protectivemonitoring of our core networks. and the environment. chip demands, wedeveloped and In the event of a cyber incident, wehave a implemented a risk mitigation plan that has Supplier due diligence Cyber Incident Response plan which feeds reduced the supply chain risk across our into the Group’s crisis management plan if Risk-based due diligence and audit activity is Group programmes. required. Regular exercises are conducted undertaken for all third parties with whom across the business to test the Cyber we engage, whether supplier, adviser, The external supply chain environment Incident Response plan including up potential joint venture partner, acquisition isvery dynamic, with both lead-time and totheExecutive Committee. opportunity or other third party. Where availability challenges, but also pricing required, this may include establishing pressures, including from inflationary Education and awareness to embed a theidentity of the third party in terms increases in labour, energy and other key strong cyber security culture across the ofbeneficial ownership and gathering of materials. We continue to monitor these Group is another vital part of our activities. sufficient information to assess relevant risks. In many cases, the Group benefits We take a holistic approach providing bribery and corruption risks. At the from long-term programme positions and training coupled with events and activities contracting stage, we stipulate our incumbencies with more stable forward to drive better engagement and learning expectation that suppliers embrace our visibility for long-lead items allowing us to outcomes. We strive for the training to standards on ethical behaviour, including continue to actively manage supplier lead berelatable, both on a professional and those set out in our Supplier Principles. times against demand requirements. personal level, so that hybrid working employees maintain a strong sense of Once a supplier has been approved and a Conflict minerals cyberawareness whether at home or in the contract has been executed we continue to We expect our suppliers to provide office. Employees are subject to mandatory actively manage and monitor that supplier. productsmade from materials, including training which, depending on their role, This includes managing any significant constituent minerals that are sourced covers cyber security, physical security, changes in our relationship with the responsibly, and to support efforts to document marking, security of export- supplier. A global Supply Chain Central Risk eradicate the use of any minerals which controlled information, and personal Intelligence hub has been established to directly or indirectly finance or benefit dataprotection. As many cyber attacks collect and share new risk intelligence armed groups that are perpetrators of stillinvolve email, we run a programme associated with suppliers, as well as serious human rights abuses. 78 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Reporting, disclosure and assurance Our approach to UN Sustainable Deloitte statement Development Goals | We report on progress of our sustainability | | Deloitte has provided independent | | --- | --- | --- | | agenda within our Annual Report and | We continue to support the UN Sustainable | limitedassurance in accordance with | | online: baesystems.com/sustainability | Development Goals (SDGs) and remain | theInternational Standard for Assurance | | | committed to driving progress on specific | Engagements 3000 (ISAE 3000) and | Materiality | | goals that are aligned to our sustainability | Assurance Engagements on Greenhouse | | --- | --- | --- | | During 2022, we continued to address | agenda. Specific goals are highlighted on | Gas Statements (ISAE 3410) issued by | | thematerial ESG issues that were identified | pages 40 to 68. The SDGs provide a | theInternational Auditing and Assurance | | during our 2021 materiality assessment | framework for development and address | Standards Board (IAASB) over the selected | | where we engaged with internal and | the challenges that the global population | metrics identified on pages 52 and 64. | | external stakeholders regarding material | faces from tackling climate change and | Deloitte’s full unqualified assurance opinion, | | sustainable issues for the Group. This | environmental risks through to managing | which includes details ofthe selected | | materiality process confirmed that the | societal needs and building economic | metrics assured, can be found | | Group is addressing and managing, via | growth. For more information on SDGs | atbaesystems.com/annual-report | | itssustainability agenda, the material | please go to: baesystems.com/sustainability | | ESGissues. We will review re-running Assurance of data thisassessment during 2023. External assurance of greenhouse gas We also continued our work toidentify emissions (page 52), energy (page 52) andunderstand material climate-related andcommunity (page 64) data is provided risks and opportunities. by Deloitte LLP. ### Non-financial and sustainability information statement The above ‘Sustainability’ section (pages 38 to 79) constitutes the Non-Financial and Sustainability Information Statement as required by the Companies Act 2006 as amended, together with the ‘Our Stakeholders’, ‘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 – Environmental policy Page 40 Sustainability – Addressing climate risks (TCFD) climate-related disclosures – Carbon Reduction plan Page 72 Sustainability – Our foundations Employees – Our People policy Page 32 Our stakeholders – Health and Safety policy Page 34 – Communications policy The work of the Board – Code of Conduct Page 72 – Personal Data Protection policy Sustainability – Our foundations Respect for human rights – Code of Conduct Page 72 Sustainability – Our foundations – Human Rights Statement Social matters – Community Investment policy Page 32 Our stakeholders – Commercial policy Page 34 – Lobbying, Political Donations and other PoliticalActivity policy The work of the Board – Dignity and Respect Standards, in support ofourglobal Page 72 diversity&inclusion vision Sustainability – Our foundations – Supplier Principles – Guidance for ResponsibleBusiness Page 151 Environmental, Social and Governance Committee report Anti-bribery and corruption – Gift and hospitality policy Page 72 Sustainability – Our foundations – Finance policy – Conflicts of Interest policy – Facilitation payments policy Description of principal risks – Risk Management policy Page 116 Risk – How we manage risk relating to topics mentioned above Description of business model Page 18 Our business model Non-financial key Page 72 Recordable Accident Rate performanceindicators All our policy summaries can be found on our website: baesystems.com/en/sustainability/governance/oversight/policy-summaries BAE Systems plc Annual Report 2022 79 Strategic report / Financial review ## Our financial review ## We have delivered strong financial performance ## withtop-line growth, margin expansion and high ## cash conversion. Our record order intake of £37bn ## increases our order backlog to £59bn, positioning ## uswell for the future. ## Our financial ## andoperational ## performance has ## strengthened, our ## diverse portfolio ## isdelivering and ## wecarry this ## momentum into ## 2023 and beyond. ### Brad Greve ### Group Finance Director 80 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ## 2022 financial highlights | Full-year performance | 2023 guidance | 2022 full-year performance | | --- | --- | --- | | Operationally, the business delivered a | While the Group is subject to geopolitical | against guidance | | strong performance enabling us to report | and other uncertainties, the following | | | growth in sales, underlying earnings per | guidance is provided on current expected | | | share (EPS) and free cash flow. | operational performance. | | Sales growth The reported results benefited from a With a strong year behind us, we look significant foreign exchange tailwind as forward to another year of good top-line 4.4% | | | 2% | 4% | | --- | --- | --- | --- | | theUS dollar rate averaged $1.24:£1 | growth with increased return on sales | | | | compared to$1.38:£1 last year. | andgood delivery against our rolling | | | cashtargets. Ourguidance uses the same It was a significant year for orders, with exchange rate we averaged in 2022 of strong demand delivering a record order $1.24:£1. intake of £37bn and order backlog increased to £59bn. Sales for the Group are expected to 0% 6% increasebetween 3% to 5%, with growth On a constant currency basis, we delivered across all sectors. sales growth of 4.4% and, while there | weresupply chain disruptions and inflation | Underlying EBIT is expected to improve | | --- | --- | | headwinds, the quality of programme | by4% to 6%, as we see scope for increased | | execution drove strong returns, resulting | return on sales. | in5.5% underlying EBIT growth and a We expect underlying EPS to increase 5% Underlying EBIT 20basis point expansion in return on sales to7%, as the underlying EBIT improvements which reached 10.7%. Underlying EPS and benefit of a lower sharecount from of55.5p was up 9.5%,reflecting the thebuyback programme, will be offset by 4% 6% underlying EBIT growth and the impact ahigher expected tax rate of 21%, driven ofthe share buyback programme. by the UK corporation tax rateincrease. Free cash flow exceeded expectations Free cash flow in 2023 is expected to at£1,950m, driven by strong programme begreater than £1.2bn. As mentioned, delivery across our operations and a number cashadvances received in 2022 will start of orders providing higher than expected tounwind as we build out programmes. advance cash payments. Three-year free 1 Wewill also have higher capital cash flow (2020–2022) totalled £5.2bn , expenditureto fund the improving outperforming the guidance of ‘in excess long-term growth outlook. of£4bn’. In respect of our three-year free cash flow In support of our growth outlook, we guides, we have increased our 2021–2023 increased our capital expenditure and Underlying earnings per share and 2022–2024 guides by £0.5bn, and set self-funded R&D. our new three-year guide for 2023–2025 4% 6% We also increased cash returns to our atbetween £4bn and £5bn. shareholders through the dividend and Group guidance can be found on pages buyback programmes. Reflecting the in-year 90to 91. performance and the outlook for the 9.5% business we have proposed a 7.6% increase in our full-year dividend. 0% 10% The pension position improved in the year.The International Accounting Standard (IAS) 19 balance sheet position is insurplus compared with a deficit last year driven predominantly by the move in corporate bond rates. We completed the UKtriennial pension review in the first half of the year Free cash flow and I am pleased to report that on a technical provisions basis, the UK schemes £1,000m are fully funded. Return on sales has increased 20 basis 2022 10.7% points (on a constant currency basis) £1,950m This has been delivered by focusing on: • strong operational performance £2,000m 2021 10.3% allowing for risk retirement; • closer supply chain focus and supplier relationships; 2022 guidance range 5.5% • proactive portfolio actions; and Compared to guidance provided 2020 9.8% • business efficiency initiatives. atan exchange rate of $1.38:£1 1. This is before a £1bn UK pension scheme contribution in 2020. BAE Systems plc Annual Report 2022 81 £nil 2% 8% Strategic report / Financial review ## Financial performance metrics KPI ## We monitor the underlying financial performance of the Group References to Key Performance Indicators ## using the alternative performance measures defined below. These (KPIs) throughout the Annual Report. ## measures are not defined in IFRS and, therefore, are considered to BONUS ## be non-GAAP measures. Accordingly, the relevant IFRS measures 75% of the UK executive directors’ annual bonuses are based on the achievement of ## are also presented where appropriate. financial KPIs (see page 179). ### Financial performance measures defined by the Group Financial performance measures derived from IFRS Sales KPI Revenue 1 | £23,256m 4% growth | | | £21,258m 9% growth | | | | --- | --- | --- | --- | --- | --- | | 2022 | | 23,256 | 2022 | | 21,258 | | 2021 | 21,310 | | 2021 | 19,521 | | | Definition | | | Definition | | | | Revenue plus the Group’s share of revenue of equity accounted investments, | | | Income derived from the provision of goods and services by the Company | | | | excluding subsidiaries’ revenue from equity accounted investments. | | | andits subsidiary undertakings. | | | Purpose Enables management to monitor the revenue of both the Group’s ownsubsidiaries as well as its strategically important equity accounted investments, to ensure programme performance is understood and inlinewith expectations. Underlying EBIT KPI Operating profit 1 ## £2,479m 5% growth £2,384m Stable 2022 2,479 2022 2,384 2021 2,205 2021 2,389 Definition Definition Operating profit excluding amortisation of programme, customer-related Profit for the year before finance costs and taxation expense. This measure andother intangible assets (see note 8), impairment of intangible assets, includes finance costs and taxation expense of equity accounted investments. finance costs and taxation expense of equity accounted investments (EBIT) 2 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. 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. 3 BONUS KPI Underlying earnings per share Basic earnings per share 1 | 55.5p 9% growth | | | 51.1p 7% decrease | | | | --- | --- | --- | --- | --- | --- | | 2022 | | 55.5 | 2022 | 51.1 | | | 2021 | 47.8 50.7 | | 2021 | | 55.2 | | Definition | | | Definition | | | | Profit for the year attributable to shareholders, excluding post-tax impact | | | Basic earnings per share in accordance with IAS 33 Earnings per Share. | | | ofamortisation of programme, customer-related and other intangible assets, impairment of intangible assets, non-cash finance movements on pension, 2 other investments 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. 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. 82 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Financial performance measures defined by the Group Financial performance measures derived from IFRS Free cash flow KPI Net cash flow from operating activities | £1,950m £86m higher | | | £2,839m £392m higher | | | | --- | --- | --- | --- | --- | --- | | 2022 | | 1,950 | 2022 | | 2,839 | | 2021 | 1,864 | | 2021 | 2,447 | | | Definition | | | Definition | | | | Operating business cash flow less net interest paid and taxation. | | | Net cash flow from operating activities in accordance with IAS 7 | | | | Purpose | | | StatementofCash Flows. | | | 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. Order backlog Order book ## £58.9bn £14.9bn increase £48.9bn £13.4bn increase 2022 58.9 2022 48.9 2021 44.0 2021 35.5 Definition Definition Funded and unfunded unexecuted customer orders including the Group’s The transaction price allocated to unsatisfied and partially satisfied share of order backlog of equity accounted investments. Unfunded orders performance obligations as defined by IFRS 15 Revenue from Contracts include the elements of US multi-year contracts for which funding has not withCustomers. been authorised by the customer. Purpose Supports future years’ sales performance of subsidiaries and equity accountedinvestments. Order intake BONUS KPI Group’s share of net post-employment benefits surplus/(deficit) | £37,093m £15,635m increase | | | £0.6bn £2.7bn improvement | | | --- | --- | --- | --- | --- | | 2022 | | 37,093 | 2022 0.6 | | | 2021 | 21,458 | | 2021 | ( 2.1 ) | | Definition | | | Definition | | | Funded orders received from customers including the Group’s share | | | Net IAS 19 Employee Benefits surplus/(deficit), excluding amounts allocated | | | oforderintake of equity accounted investments. | | | toequity accounted investments. | | 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. Net debt (excluding lease liabilities) BONUS KPI Dividend per share | £ ( | 2,023 | ) m £137m decrease | | | | 27.0p 7.6% growth | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | 2022 | | | ( 2,023 | ) | | 2022 | | 27.0 | | 2021 | | | | ( 2,160 | ) | 2021 | 25.1 | | | Definition | | | | | | Definition | | | | Cash and cash equivalents, less loans and overdrafts (including debt-related | | | | | | Interim dividends paid and final dividend proposed per share. | | | derivative financial instruments). Net debt does not include 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. 1. 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). All other growth rates and year-on-year movements are ona reported currency basis. 2. 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 were referred to as non-recurring items in the prior year. No change has been made tothe definition of these items, but the name has been changed to reflect that some categories of items could be considered recurring in nature. The Group’s definition ofadjusting items includes 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. Note 1 to the Group accounts includes more information on those items reported as adjusting in the year. 3. Growth rate disclosed excludes the impact of the 2021 one-off tax benefit of £94m in respect of 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 (see note 6). For 2021, Underlying EPS of47.8p is shown excluding the one-off tax benefit and of 50.7p including the one-off tax benefit. BAE Systems plc Annual Report 2022 83 Strategic report / Financial review / Financial performance metrics | Income statement | Income statement | | | | | --- | --- | --- | --- | --- | | | | | 2022 | 2021 | | Sales increased by £2.0bn to £23.3bn | | 2 | | | | | Financial performance measures as defined by the Group | | £m | £m | (2021 £21.3bn), a 4% increase on a constant Sales KPI 23,256 21,310 1 currency basis or 9% on a reported basis. Underlying EBIT KPI 2,479 2,205 Revenue increased by £1.7bn, 9%, Return on sales 10.7% 10.3% to£21.3bn (2021 £19.5bn). Financial performance measures derived from IFRS £m £m Underlying EBIT increased to £2,479m (2021 £2,205m), giving a return onsales Revenue 21,258 19,521 of10.7% (2021 10.3%). Excluding the Operating profit 2,384 2,389 impactof exchange translation, the Return on revenue 11.2% 12.2% increasewas 5%. On a reported basis thiswas 12%. Reconciliation of sales to revenue £m £m Sales KPI 23,256 21,310 Operating profit remained stable at£2,384m (2021 £2,389m) with the Deduct Group’s share of revenue of equity accounted investments (3,342) (2,979) one-offgains in 2021 on the sale of Add Subsidiaries’ revenue from equity accounted investments 1,344 1,190 Advanced Electronics Company (£132m) Revenue 21,258 19,521 and the Filton and Broughton sites (£182m) offset by the gain on sale of the financial Reconciliation of underlying EBIT to operating profit £m £m crime detection business (£94m) and Underlying EBIT KPI 2,479 2,205 underlying growth in 2022. Adjusting items 91 350 Adjusting items in 2022 reflect a gain Amortisation of programme, customer-related of£91m, comprising a £94m gain on the and other intangible assets (110) (86) disposal of the financial crime detection Impairment of intangible assets (1) (15) business in Digital Intelligence and a £13m gain related to past service cost on the Financial expense of equity accounted investments (25) (27) pension scheme, offset by £16m of costs Taxation expense of equity accounted investments (50) (38) related to current and historical business Operating profit 2,384 2,389 transactions. The credit of £350m in 2021 Net finance costs (395) (279) comprised a £182m gain in HQ on the sale Taxation expense (315) (198) of the Filton and Broughton sites, a £132m gain on disposal of the Advanced Profit for the year 1,674 1,912 Electronics Company and £26m on disposal ### of a business in our Electronic Systems Exchange rates segment, and a net £10m gain relating to Average 2022 2021 historical acquisitions. £/$ 1.236 1.376 Amortisation of programme, customer- £/€ 1.173 1.163 related and other intangible assets £/A$ 1.778 1.832 was£110m (2021 £86m), the increase beingdriven by amortisation charges from Sensitivity analysis businesses acquired during 2022 and a full Estimated impact on sales of a five cent movement in the average exchange rate £m year of cost from those acquired in 2021. $ 400 Impairment of intangible assets € 55 in2022was £1m (2021 £15m). A$ 25 Net finance costs were £395m (2021£279m). The underlying interest 2 expense including share of equity accounted investments, and excluding pension accounting andfair value and foreign exchange adjustments on financial instruments and investments, was £246m(2021 £241m). Net interest expense on the Group’s pension surplus/(deficit), including equity accounted investments, was£38m (2021£67m). 1. Current year compared with prior year translated at current year exchange rates. 2. The purpose and definitions of non-GAAP measures are provided in the Financial glossary on page 302. 84 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance | Taxation expense, including equity | Earnings per share | | | | --- | --- | --- | --- | | accounted investments, of £365m reflects | | 1 | | | | Financial performance measures as defined by the Group | | 2022 2021 | theGroup’s underlying effective tax rate Underlying earnings (excluding the 2021 one-off tax benefit) £1,728m £1,523m forthe year of 19% adjusted for the impact of the UKtax rate adjustment. The 2021 Underlying earnings per share (excluding the 2021 one-off taxbenefit) KPI 55.5p 47.8p charge of £236m reflected the Group’s underlying effective tax rate for theyear Underlying earnings (including the 2021 one-off tax benefit) £1,728m £1,617m of18%, plus the tax charge on adjusting Underlying earnings per share (including the 2021 one-off items, less the impact of a one-off tax taxbenefit) 55.5p 50.7p benefit of £94m in respect of agreements reached regarding the exposure arising Financial performance measures derived from IFRS fromthe April 2019 European Commission Profit for the year attributable to equity shareholders £1,591m £1,758m decision regarding the UK’s Controlled Basic earnings per share 51.1p 55.2p Foreign Company regime and the impact ofthe UK tax rate adjustment (see note 6). Reconciliation of underlying earnings to profit for the year The calculation of the underlying effective attributableto equity shareholders £m £m tax rate is shown in note 6 to the Group Underlying earnings (excluding the 2021 one-off tax benefit) 1,728 1,523 accounts on page 240. Adjusting items, post tax 94 279 Amortisation of programme, customer-related and other ### Earnings per share intangible assets, and impairment of intangibles, post tax (90) (84) Underlying earnings per share for the Net interest expense on post-employment benefit obligations, year increased by 9%, excluding the impact posttax (31) (55) of exchange translation, to 55.5p (2021 47.8p excluding the one-off tax benefit). Fair value and foreign exchange adjustments on financial instruments andinvestments, post tax (110) 1 Basic earnings per share was 51.1p One-off tax benefit (2021) – 94 (202155.2p). The decrease being due | tothelower gains on the adjusting items | Profit for the year attributable toequityshareholders 1,591 1,758 | | --- | --- | | in2022, and the one-off tax benefit in | Non-controlling interests 83 154 | | 2021, partially offset by the benefit of | Profit for the year 1,674 1,912 | theshare buybacks. ### Orders ### Orders 1 | | 2 | Financial performance measures as defined by the Group | | | | 2022 2021 | | --- | --- | --- | --- | --- | --- | --- | | Order intake | increased by £15,635m | | | | | | | | | | 2 | KPI | | | | to£37,093m (2021 £21,458m). Our | | Order intake | | | £37,093m £21,458m | | | US-managed businesses had a book- | | | 2 | | | | | | | Order backlog | | | £58.9bn £44.0bn | | 3 to-bill ratio of more than one. Financial performance measures derived from IFRS 2 Order backlog increased by £14.9bn 4 Order book £48.9bn £35.5bn to£58.9bn (2021 £44.0bn). 4 Order book increased by £13.4bn to£48.9bn (2021 £35.5bn). 1. The purpose and definitions of non-GAAP measures are provided in the Financial glossary on page 302. 2. Including share of equity accounted investments. 3. Ratio of Order intake to Sales. 4. Order book represents the transaction price allocated to unsatisfied and partially satisfied performance obligations as defined by IFRS 15 Revenue from Contracts with Customers. BAE Systems plc Annual Report 2022 85 Strategic report / Financial review / Financial performance metrics | Cash flow | | Cash flow | | | | --- | --- | --- | --- | --- | | | 1 | | 2022 | 2021 | | Free cash flow | was £1,950m (2021 | | | | | | | Financial performance measures as defined by the Group | £m | £m | £1,864m), after shareholder returns of Free cash flow KPI 1,950 1,864 £1,590m (2021 £1,145m). The strong performance this year was driven by Financial performance measures derived from IFRS £m £m continued good operational performance and working capital management. Net cash flow from operating activities 2,839 2,447 Net cash inflow from operating Reconciliation from free cash flow activities was £2,839m (2021 £2,447m). to net cash flow from operating activities £m £m The inflow reflects operational business Free cash flow KPI 1,950 1,864 performance, and working capital Add back Interest paid, net of interest received 237 224 management. Add back Taxation 365 234 Taxation payments were £365m 1 KPI Operating business cash flow 2,552 2,322 (2021£234m). Add back Net capital expenditure andfinancialinvestment 519 209 Net capital expenditure and financial Add back Principal element of lease payments and receipts 227 207 investment was £519m (2021 £209m), increasing mainly as a result of the Deduct Dividends received from equity accountedinvestments (94) (57) proceedsfrom theFilton and Broughton Deduct Taxation (365) (234) sites offsetting the expenditure in 2021. Net cash flow from operating activities 2,839 2,447 Dividends received from equity Net capital expenditure andfinancialinvestment (519) (209) accounted investments amounted Principal element of finance lease receipts 9 10 to£94m (2021£57m). Dividends received from equity accountedinvestments 94 57 Cash flows in respect of acquisitions Interest received 32 23 and disposals comprises a net outflow Acquisitions and disposals (38) 185 of£38m. This was primarily due to the Net cash flow from investing activities (422) 66 cashoutflow on the acquisition of Bohemia Interest paid (269) (247) Interactive Simulations of £146m, being offset by the cash received on the sale of Equity dividends paid (802) (777) the Financial Services business of £101m. Purchase of own shares (788) (368) Thecash inflow in 2021 in respect of Partial disposal of shareholding in subsidiary undertaking – 28 acquisitions and disposals of £185m was Dividends paid to non-controlling interests (166) (202) primarily in relation to the divestment of the Principal element of lease payments (236) (217) Advanced Electronics Company. Cash inflow from derivative financialinstruments Equity dividends paid in 2022 represents (excludingcashflow hedges) 533 61 the 2021 final dividend (£480m) and the Cash outflow from derivative financialinstruments 2022 interim dividend (£322m). (excludingcashflow hedges) (205) (149) Share buybacks saw an outflow of£788m Movement in cash collateral – (18) in the year. The full 2021 programme of Net cash flow from loans (400) (367) £500m completed in February 2022, of Net cash flow from financing activities (2,333) (2,256) which £130m was spent in 2022. In July, afurther three-year, £1.5bn share buyback Net increase in cash and cash equivalents 84 257 programme was announced. During the Add back Net cash flow from loans 400 367 year, payments of £658m were made Foreign exchange translation (478) (50) towards share buybacks in relation tothis Other non-cash movements 131 (16) three-year programme. Decrease in net debt (excluding lease liabilities) 137 558 Dividends paid to non-controlling Opening net debt (excluding lease liabilities) (2,160) (2,718) interests were £166m (2021 £202m), Net debt (excluding lease liabilities) KPI (2,023) (2,160) primarily reflecting payments made byourpartially-owned subsidiaries in Pages 282 and 284 theKingdom of SaudiArabia. Notes 28 and 30 to the Group accounts There was a net cash inflow from derivative financial instruments of £328m (2021 £88m net outflow), arising from rolling hedgesrelating to balances within theGroup’s subsidiaries and equity accountedinvestments. Foreign exchange translation primarily arises in respect of the Group’s US dollar- denominated borrowing. 1. The purpose and definitions of non-GAAP measures are provided in the Financial glossary on page 302. 86 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Balance sheet Balance sheet 2022 2021 Intangible assets of £12.6bn is an Summarised balance sheet £m £m increaseof £0.9bn on the prior year, driven Intangible assets 12,644 11,716 by the impact of the Group’s US dollar- Property, plant and equipment, right-of-use assets and denominated goodwill. 1 investmentproperty 4,723 4,010 Property, plant and equipment, Equity accounted investments and otherinvestments 886 630 right-of-use assets and investment 1 Working capital (4,119) (3,740) property is £4.7bn (2021 £4.0bn), an increase of £0.7bn, driven by the Group’s Lease liabilities (1,582) (1,252) US dollar-denominated assets. Group’s share of net IAS 19 post-employment benefits surplus/(deficit) 646 (2,124) Equity accounted investments Net tax assets and liabilities 363 589 andother investments is £886m (2021£630m). Net other financial assets and liabilities (138) (1) Net debt (excluding lease liabilities) KPI (2,023) (2,160) The Group’s share of the net IAS 19 post-employment benefits surplus was Net assets 11,400 7,668 £0.6bn (2021 £2.1bn deficit), net of a 35% Components of net debt (excluding lease liabilities) £m £m withholding tax of £0.7bn. The shift to a pension surplus was driven by changes in Cash and cash equivalents 3,107 2,917 discount rate and inflation assumptions Debt-related derivative financial instruments(net) 112 (16) following completion of the triennial review. Loans – non-current (5,189) (4,604) The major movements in the net surplus are Loans and overdrafts – current (53) (457) shown inthe bridge chart on this page. Net debt (excluding lease liabilities) KPI (2,023) (2,160) Details of the Group’s post-employment benefits schemes are provided in note 25 tothe Group accounts on page267. ### Exchange rates In aggregate, there was a £0.4bn decrease Year end 2022 2021 inworking capital. £/$ 1.203 1.354 Lease liabilities are £1.6bn (2021 £1.3bn). £/€ 1.127 1.191 £/A$ 1.773 1.863 The Group’s net debt (excluding lease liabilities) at 31 December 2022 was £2,023m, anet decrease of £137m from theposition at the start of the year. This is primarily aresult of strong Free cash flow Accounting net pension surplus – bridge (£bn) Maturity of the Group’s borrowings (£bn) performance, partially offset by increased shareholder returns through dividends 2021 ( 2.1 ) 2022 ( 5.2 ) andshare buybacks. The maturity ofthe Add back 2021 allocation 2 ( 0.2 ) 2023 ( 5.2 ) Group’sborrowings is shown in thechart on this page. Interest on liabilities ( 0.7 ) 2024 ( 4.5 ) Return on assets ( 5.6 ) 2025 ( 3.9 ) Cash and cash equivalents of £3,107m (2021£2,917m) are held primarily for 11.8Real discount rate 2026 ( 3.9 ) therepayment of debt securities, pension Experience losses ( 1.7 ) 2027 ( 3.4 ) funding when required, payment ofthe Withholding tax on surpluses ( 0.7 ) 2028 ( 3.4 ) 2022 final dividend, funding of further Other ( 0.1 ) 2029 ( 3.4 ) share buybacks under the £1.5bn Deduct 2022 allocation 2 ( 0.1 ) 2030 ( 2.4 ) programme announced in July 2022, | andmanagement of working capital. | | 0.62022 | | | ( | ) 3 | | --- | --- | --- | --- | --- | --- | --- | | | | | 2031+ | | 1.6 | | | | Page 267 | | | Page 265 | | | | | Note 25 to the Group accounts | | | Note 22 to the Group accounts | | | 1. Funding received from the UK government for property, plant and equipment at Barrow-in-Furness, UK, was previously reported against the associated assets in property, plant and equipment, right-of-use assets and investment property. Within the current year, these have been re-presented to match the presentation in the consolidated balance sheet to be presented in working capital. The prior year funding of £806m has been re-presented to reflect this change. 2. Amounts allocated to equity accounted investments. 3. Repayable in 2041 (£0.3bn), 2044 (£0.5bn) and 2050 (£0.8bn). BAE Systems plc Annual Report 2022 87 Strategic report / Financial review / Financial performance metrics ### Accounting policies Capital Dividends and share buyback Key sources of estimation uncertainty Objectives As part of the Group’s capital allocation policy, the Group plans to pay dividends The preparation of financial statements in Maintain the Group’s investment inline with its policy of long-term accordance with IFRS requires the use of gradecredit rating and ensure operating sustainable cover of around two times certain critical accounting estimates. It also flexibility, whilst: underlying earnings. requires management to exercise their – meeting its pension obligations; judgement in the process of applying the The Board has recommended a final – investing in research and technology Group’s accounting policies. The Group dividend of 16.6p per share making a total andpursuing other organic therefore needs to consider arange of of27.0p per share in respect of the year investmentopportunities; estimates and assumptions in the ended 31 December 2022. At this level, the – paying dividends in line with the Group’s application of its accounting policies and annual dividend is covered approximately policy of long-term sustainable cover of management’s assessment of the carrying two times by underlying earnings. Subject around two times underlying earnings; values of assets and liabilities. In the event to shareholder approval at the 2023 Annual that these estimates or assumptions prove – making accelerated returns of capital General Meeting, the dividend will be paid to be incorrect, there may be an adjustment toshareholders when the balance sheet on 1 June 2023 to holders of ordinary shares to the carrying values of assets and liabilities allows and when the return from doing registered on 21 April 2023. Theex-dividend within the next year. Potential areas of the so is in excess of the Group’s Weighted date is 20 April 2023. Group’s financial statements which could Average Cost of Capital; and At 31 December 2022, the Company had bematerially impacted may include, but – investing in value-enhancing acquisitions, retained earnings of £3.2bn (2021 £2.8bn), arenot limited to: where market conditions areright, where the non-distributable portion of which they deliver on the Group’s strategy and Revenue and profit recognition is£955m (2021 £875m) (see page 294). where they offer long-term value. | Revenue £21,258m (year ended 31 December 2022) | | Totalexternal dividends relating to the | | --- | --- | --- | | See note 1 to the Group accounts | Policies | yearended 31 December 2022 are£833m | | Post-employment benefit obligations | | (2021£797m). The 2022 dividends consist | The Group funds its operations through Group’s share of the net IAS 19 post-employment of the interim dividend paid during the amixture of equity funding and debt scheme surplus, net of withholding tax, £0.6bn yearinrespect of the first half of2022of financing, including bank and capital (at 31 December 2022) £322m(2021 £316m) and the finaldividend marketborrowings. See note 25 to the Group accounts proposed of approximately £511m (2021 The capital structure of the Group reflects Page 222 £481m), although the final payment is Key sources of estimation uncertainty the judgement of the directors of an likelyto be lower as a result of the impact appropriate balance of funding required. ofshare buybacks. On an annual basis, Changes in accounting policies Three credit rating agencies publish credit theCompany receives dividends from ratings for the Group: No new or amended standards which itssubsidiaries toincrease its distributable became applicable for the year ended reserves and, accordingly, the Company Rating Outlook Category 31 December 2022 had a material impact expects to have sufficient distributable Moody’s Investors Service on the Group or required the Group to reserves to support its dividend policy. Baa2 Positive Investment grade change its accounting policies. Standard & Poor’s Ratings Services The Group’s dividend policy is underpinned BBB+ Stable Investment grade From 1 January 2023, IFRS 17 Insurance by its viability and going concern statements Fitch Ratings (see page 127). Contracts becomes effective for the BBB+ Stable Investment grade Group.This is not expected to have amaterial impact. Page 281 Note 27 to the Group accounts 88 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Treasury Currency Whilst the Group aims to maximise the taxefficiency of its business transactions, The Group’s treasury activities are overseen Reduce the Group’s exposure to itdoes not use structures in its tax planning by the Treasury Review Management transactional volatility in earnings and cash that are contrary to the intentions of the Committee (TRMC). Two executive directors flows from movements in foreign currency relevant legislature. The Group interprets are members of the TRMC, including the exchange rates. relevant tax laws in a reasonable way and Group Finance Director who chairs the – All material firm transactional exposures ensures that transactions are structured in Committee. The TRMC also has are hedged. away that is consistent with a relationship representatives with legal and tax expertise. – The Group does not hedge the translation of co-operative compliance with tax The Group operates a centralised treasury effect of exchange rate movements on: authorities. It also actively considers the department that is accountable to the (a) the income statements or balance implications of any planning for the Group’s TRMC for managing treasury activities in sheets of foreign subsidiaries; and wider corporate reputation. accordance with the treasury policies (b) equity accounted investments it approved by the Board. The Group is open and transparent with regards as long-term investments. regard to decision-making, governance Objectives/policies Page 255 andtax planning in its business, keeping Net debt (excluding lease liabilities) Note 15 to the Group accounts taxauthorities informed of who has Maintain a balance between the continuity, responsibility, how decisions are reached, ### flexibility and cost of debt funding through Tax strategy how the business is structured and where the use of borrowings from a range of The Group’s tax strategy is to: different parts of the business are located. markets with a range of maturities, – ensure compliance with all applicable BAE Systems operates internationally currencies and interest rates, reflecting the taxlaws and regulations; and andissubject to tax in many different Group’s risk profile. – manage the Group’s tax expense in jurisdictions. The Group employs – Material borrowings are arranged by the awaythat is consistent with its values professional tax managers and takes central treasury department and funds and its legal obligations in all relevant appropriate advice from reputable raised are lent onward to operating jurisdictions. professional firms. The Group is routinely subsidiaries as required. subject to tax audits and reviews which The Group does not tolerate activities Interest rates cantake a considerable period of time designed to facilitate tax evasion offences. toconclude. Provision is made in the Manage the exposure to interest rate The Group promotes collaborative Group’s Financial Statements for known fluctuations on borrowings through professional working with tax authorities issues based on management’s interpretation varyingthe proportion of fixed rate debt inorder to build open, transparent and of country-specific legislation and the likely relative to floating rate debt with derivative trusted relationships. As part of this, the outcome of a dispute. The assessment and instruments, including interest rate and Group engages in open and early dialogue management of tax risks are regularly cross-currency swaps. to discuss tax planning, strategy, risks and reviewed by the Audit Committee, as is – A minimum of 50% and a maximum significant transactions, and discloses any theGroup’s tax strategy. of90% of gross debt is maintained significant uncertainties in relation to tax atfixed interest rates. Arm’s-length principles are applied in the matters. Queries and information requests pricing of all intra-group transactions of Liquidity by tax authorities are responded to in a goods and services in accordance with timely fashion and the Group ensures that Maintain adequate undrawn committed Organisation for Economic Co-operation tax authorities are kept informed about borrowing facilities. and Development guidelines. Where howissues are progressing. | – An undrawn committed Revolving Credit | | appropriate, the Group engages with | | | --- | --- | --- | --- | | Facility of £2bn contracted to April 2025 | The Group seeks to resolve issues in real | governments in relation to proposed | | | is available to meet general corporate | time and before returns are filed where | legislation and tax policy. | | | funding requirements. | possible. Fair, accurate and timely | | Page 239 | | | disclosures are made in tax returns, | | Note 6 to the Group accounts | Monitor and control counterparty credit risk reportsand documents that the Group and credit limit utilisation. fileswith, or submits to, tax authorities. – The Group adopts a conservative Where disagreements over tax arise, the approach to the investment of its Group works proactively to seek to resolve surpluscash. It is deposited with financial all issues by agreement (where possible) institutions with strong credit ratings andreach reasonable solutions. In the forshort periods. UK,the Group is subject to an annual risk assessment by HM Revenue & Customs andstrives to achieve as low a risk rating as can be achieved by a group of BAE Systems’ size and complexity. BAE Systems plc Annual Report 2022 89 Strategic report / Financial review ## Guidance for 2023 ## 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. Reconciliations from thesemeasuresto the financial performance measures defined in International Financial Reporting Standards for 2022 are provided inourfinancial review on pages 84 to 89. ### Group guidance With a strong year behind us, 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 $1.24:£1, which is in line withthe actual 2022 exchange rate, therefore guidance is the same for both reported and constant exchange rates. ## Sales ### expected to increase in the range of ## 3% to 5% 2022: £23,256m | Underlying EBIT | Underlying EPS | | --- | --- | | expected to increase in the range of | expected to increase in the range of | | 4% to 6% | 5% to 7% | | 2022: £2,479m | 2022: 55.5p | ## Free cash flow target for 2023 ## >£1.2bn 2022: £1,950m ## Underlying finance costs Effective tax rate Non-controlling interests ### c.£260m c.21% c.£70m Sensitivity to foreign exchange rates: the Group operates in a number of currencies, the most significant of which is the US dollar. As a guide, a5 cent movement inthe £/$exchange rate will impact Sales by c.£400m, Underlying EBIT by c.£55m and Underlying EPS by c.1p. 90 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Segmental guidance The following table provides guidance by segment, aligned to the Group guidance. 1 Year ended 31 December 2023 Expected sales Expected Return on sales Electronic Systems Up 4% to 6% 16% to 17% Platforms & Services Up 2% to 4% 9% to 10% Air Up 1% to 3% 11% to 12% Maritime Up 3% to 5% 8% to 9% Cyber & Intelligence Up 2% to 4% 8% to 9% 1. Underlying EBIT as percentage of Sales. In 2023, HQ underlying EBIT is expected to be broadly similar to 2022 (expense of £122m). ### Three-year free cash flow guidance Actual Forecast 2021 2022 2023 2024 2025 ## 2021–2023 in excess of £5bn ## £1,864m £1,950m >£1.2bn previously in excess of £4.5bn ## 2022–2024 in excess of £4.5bn ## £1,950m >£1.2bn previously in excess of £4bn ## 2023–2025 range of £4bn–£5bn ## >£1.2bn (New guidance) New guidance for the three-year period from 2023–2025 has been issued, with free cash flow for the period expected to be between £4bn and £5bn. Existing guidance, in place for both the 2021–2023 and 2022–2024 periods, has also been upgraded. BAE Systems plc Annual Report 2022 91 Strategic report Next-generation fighter aircraft The UK, Italy and Japan will work together with a shared ambition to develop a next-generation fighter aircraft under a new Global Combat AirProgramme (GCAP). This is an artist’s impression of how the Tempestaircraftcould look. 92 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ## Segmental review ## The Group reports its performance through six reporting segments. ### Financial performance measures As defined by the Group Derived from IFRS Net cash | | | | | | | Operating | | | | | | | | | | | | | flow from | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | Underlying | | Return | | business | | Order | | Order | | | | Operating | | | Return | | operating | | Order | | | | | | | | | | | 1 | | 1 | | | | | | | | | | | | | Sales | | EBIT | on sales | | cash flow | | intake | | backlog | | Revenue | | | profit | on revenue | | | activities | | book | | Year ended 31 December 2022 | £m | | £m | | % | | £m | £m | | £bn | | | £m | | £m | | | % | | £m | £bn | KPI KPI KPI KPI ### Electronic Systems Page 94 5,057 838 16.6 650 5,444 8.1 5,057 747 14.8 860 6.7 ### Platforms & Services Page 98 3,688 326 8.8 525 5,719 8.1 3,598 322 8.9 633 7.7 ### Air Page 102 7,698 849 11.0 1,140 14,042 24.4 6,286 809 12.9 1,202 17.4 ### Maritime Page 106 4,598 356 7.7 235 9,716 17.2 4,484 352 7.9 418 16.6 ### Cyber & Intelligence Page 110 2,205 232 10.5 154 2,443 2.1 2,205 291 13.2 191 1.4 2 HQ 420 (122) (152) 426 – 10 (137) (100) – Deduct Intra-group (410) (697) (1.0) (382) (0.9) 3 Deduct Taxation (365) 4 Total 23,256 2,479 10.7 2,552 37,093 58.9 21,258 2,384 11.2 2,839 48.9 We use financial performance measures as defined by the Group to monitor the underlying financial performance of the Group’s reporting segments, and the definitions and purposes of these alternative performance measures are provided in Financial performance metrics on pages 82 to 83. Reconciliations from these measures to the financial performance measures derived from IFRS are provided in Ourfinancial review on pages 84 to 89. 1. Including share of equity accounted investments. 2. HQ comprises the Group’s head office activities, together with a 49% interest in Air Astana. 3. Taxation is managed on a Group-wide basis. 4. At a Group level, the key cash flow metric is Free cash flow (see Financial performance metrics on page 83). In2022, Free cash flow was £1,950m (2021 £1,864m). BAE Systems plc Annual Report 2022 93 Strategic report / Segmental review ## Electronic Systems Sales by domain (%) ## Electronic Systems comprises the US- and UK- C ## based electronics activities, including electronic B A ## 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. A Air 89% B Maritime 3% C Land 8% 1 Sales by line of business (%) Electronic Combat Solutions designs, Employees builds and supports integrated electronic | warfare systems for platform prime and | | | F | | | --- | --- | --- | --- | --- | | government customers, and is a trusted | | E | | | | | 16,900 | | | A | mission systems provider forallthree electronic warfare missions: electronic attack; electronic protection; andelectronicsupport. Sales D Countermeasure & Electromagnetic Attack Solutions provides next-generation ## threat detection, countermeasure, and £5,057m attack solutions that deliver full-spectrum electronic warfare capabilities to enhance mission survivability. C B Precision Strike & Sensing Solutions | designs and manufactures state-of-the-art | A Electronic Combat 30% | | --- | --- | | systems and technology that enable | B C4ISR Systems 23% | | ourcustomers to execute their precision | C Precision Strike & Sensing 17% | | strikemissions. | D Countermeasure & | ElectromagneticAttack 14% C4ISR Systems provides actionable E Controls & Avionics 13% intelligence through innovative technical F Power & Propulsion 3% solutions for airborne persistent surveillance, secure communications, identification systems, signals intelligence, underwater and surface warfare solutions, and space Sales analysis: Defence and commercial (%) resiliency. Controls & Avionics Solutions develops B and produces electronics for military and A 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. A Defence 87% B Commercial 13% 94 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Operational and strategic key points Financial performance – Opened state-of-the-art facilities in Financial performance measures – Results reflect the impact of the global Manchester, New Hampshire; Cedar asdefined by the Group shortage of microelectronics, as well Rapids, Iowa; and Austin, Texas. aslabour and staffing shortages within 2022 2021 the operations and supply chain. – Cumulatively more than 1,200 | | Sales | KPI | £5,057m £4,491m | | | | --- | --- | --- | --- | --- | --- | | electronicwarfare systems delivered | | | | – Despite these challenges, sales grew | | | | Underlying EBIT | KPI | £838m £766m | | 2 | | onF-35 programme. | | | | by2% | , driven by growth in the | | | Return on sales 16.6% 17.1% | | | Electronic Combat Solutions business. | | – Deliveries continue of next-generation EW Operating business KPI £650m £774m Eagle Passive Active Warning Survivability – Return on sales of 16.6% was in line cash flow | System to support upgrade of US Air | | | | | with 2022 guidance, and steady on | | --- | --- | --- | --- | --- | --- | | | | 1 | KPI | | | | Force F-15 platform and testing on F-15E | Order intake | | | £5,444m £4,923m | aconstant currency basis. | 1 and F-15EX test aircraft. Order backlog £8.1bn £7.2bn – Operating business cash flow has – Selected to design, test and supply energy decreased due to the timing of Financial performance management components for GE Aviation’s programme executions. megawatt class hybrid electric propulsion measuresderivedfrom IFRS – Key orders secured on C4ISR, system supporting NASA’s Electrified 2022 2021 ElectronicCombat and Precision Powertrain Flight Demonstration project. Strike& Sensing Solutions. Revenue £5,057m £4,491m – The Long-Range Precision Guidance Kit Operating profit £747m £715m – Expect supply chain pressures to programme reached a critical benchmark continue to ease in the near term, Return on revenue 14.8% 15.9% with the successful completion of its toallow enhanced growth and Cash flow from £860m £951m structural survivability test in the US marginperformance. operating activities Army’s Extended Range Cannon Artillery. Order book £6.7bn £5.7bn – Delivered the 3,000th Multi-functional Information Distribution System Joint Tactical Radio System through our DataLink Solutions joint venture with 1. Including share of equity accounted investments. Collins Aerospace. 2. Constant currency basis. BAE Systems plc Annual Report 2022 95 Strategic report / Segmental review / Electronic Systems ### Countermeasure & Electromagnetic The Terminal High Altitude Area Defense ### Operational performance (THAAD) seeker programme provides the ### Attack Solutions ### Electronic Combat Solutions THAAD interceptor with critical targeting Our Limited Interim Missile Warning System The F-35 Lightning II programme is capability to defeat ballistic missile threats programme received $62m (£52m) in delivering on Lot 15 electronic warfare against the US and our allies. The USArmy funding for the fourth production (EW)systems and has delivered a cumulative programme is currently in full-rate lot order, bringing production lot order total of over 1,200 EW systems. We are also production, with a follow-on order worth totals to $250m (£208m). | supporting the Block 4 modernisation | | $209m (£174m). To keep pace with the | | --- | --- | --- | | efforts under multiple contracts worth over | The Compass Call programme is executing | evolving threat, BAE Systems has an | | $957m (£796m), and operating on our next | contracts valued at more than $1bn | ongoing effort valued at $150m (£125m) to | | Performance-Based Logistics contract worth | (£0.8bn), focused on the cross-decking | design and prototype the next-generation | | $290m (£241m) to provide critical | ofprime mission equipment to the new | THAAD infrared seekers. | | sustainment support for the F-35 EW | EC-37B aircraft while sustaining and | | We continue to execute a contract with system. upgrading theexisting EC-130H fleet. We Space Systems Command to develop an successfully tested third-party applications Under a contract from Boeing, we continue M-Code Increment II Miniature Serial on Compass Call’s Small Adaptive Bank of todeliver our next-generation EW Eagle Interface GPS receiver for ground-embedded Electronic Resources (SABER) technology, Passive Active Warning Survivability System applications with next-generation Application enabling fielding of SABER on the EC-130H. (EPAWSS) to support the upgrade of the Specific Integrated Circuit technology We delivered key components for the US Air USAir Force F-15 platform and testing on valued at more than $278m (£231m). Force’s first EC-37B Compass Call aircraft, F-15E and F-15EX test aircraft. In July, ### which is targeted to initially field in 2024, C4ISR Systems EPAWSS modifications began on two and have started sustainment preparation. | operational US Air Force F-15Es and work | | | We are executing key programmes that | | --- | --- | --- | --- | | began on the $36m (£30m) low-rate initial | We received approximately $14m (£12m) | | provide full spectrum communications | | production phase two contract. | | ™ | tomeet customer needs for information | | | forthe SmartD2 | technology as part of | | | | theUS Navy’s ALE-47 Common Carriage | | sharing to support joint all-domain | We continue to collaborate with Boeing programme, representing the first purchase command and control. We have completed inthe pursuit of all F-15 EW upgrade of the technology by the Department of a system requirements review for the opportunities, both domestic and ™ Airborne High Frequency Radio Defense. Smart D2 technology increases international. | | expendable payload capacity, incorporates | Modernization programme awarded in early | | --- | --- | --- | | We are also under contract to supply | asmart stores communication interface | 2022, and we have delivered the 3,000th | | theDigital Electronic Warfare System on | andenables the future replacement of key | Multi-functional Information Distribution | | new and existing F-15 aircraft for multiple | elements without replacing an aircraft’s entire | System Joint Tactical Radio System through | | international customers with a value of | ALE-47 system to support real-time updates | our Data Link Solutions Joint Venture with | | $91m (£76m). | to next-generation countermeasures. | Collins Aerospace. | | On Long Range Anti-Ship Missile (LRASM) | | To bring our disruptive technology to | ### Precision Strike & Sensing Solutions we began delivering on Lot 4 in November. thespace domain, we are performing on ® The APKWS guidance kit programme This marked the first delivery of the new the agreement to launch an experimental continues to execute production under LRASM 1.1 configuration developed under satellite. We continue to deliver radiation- anIndefinite Delivery, Indefinite Quantity the completed Diminishing Material hardened electronics to support space contract, with awards worth over $48m Sourcescontracts. programmes of national importance, such (£40m) received in the year. Multiple test as the James Webb Space Telescope, and Due to the sensitive nature of electronic events in 2022 demonstrated new are developing the next generation of combat systems and technology, many capabilities, proving enhanced capabilities radiation-hardened Application Specific ofour programmes are classified. These insupport of US and allied forces’ precision Integrated Circuit libraries. include ourwork as a world leader in strike missions. electronic warfare providing next- We transitioned our Mobility Air Forces The Long-Range Precision Guidance Kit generation defencetechnology. Automated Flight Planning Service operations programme reached a critical benchmark to Cloud One to align with the US Air with the successful completion of its Force’s transformation objectives, providing structural survivability test in the US Army’s increased storage, computing, processing Extended Range Cannon Artillery, securing flexibility and faster software upgrades. funding for further development and bringing the total contract value to $99m(£82m). 96 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Controls & Avionics Solutions Power & Propulsion Solutions ### Looking forward Airline traffic and business travel continue to As the global transit industry accelerates Forward-looking information for the improve, resulting in returning demand for efforts to decarbonise, interest grows for Electronic Systems reporting segment Original Equipment Manufacturer deliveries our low and zero emission propulsion isprovided later in this report. and aftermarket services. solutions. This year, US-based bus manufacturers Hometown Manufacturing The business remains focused on supporting Page 114 and ElDorado National both chose our latest Looking forward by segment Boeing’s aircraft deliveries and developing Gen3 electric drive technology to power the integrated flight control electronics and their zero emission vehicles. Hometown remote electronic units for the new Boeing Manufacturing will power their battery 777X aircraft, with the 777X flight control electric trolley buses and ElDorado National system performing as expected during will power both hydrogen fuel cell electric flighttesting. buses and battery electric buses with Gen3 | Our full-authority digital engine controls, | products. Also using our Gen3 electric drive | | --- | --- | | offered through the FADEC International | system, Nova Bus continues to win battery | | and FADEC Alliance (joint ventures), | electric bus bids in cities such as New York | | continue to perform well across our | and Houston in the US, as well as Halifax, | | portfolio. The business, through FADEC | Nova Scotia in Canada. | Alliance, is supporting CFM International’s Our new Gen3 power electronics Revolutionary Innovation forSustainable incorporate advanced materials enabling Engines programme by maturing new smaller, lighter, more efficient systems technologies that will enable a reduction in withmodular and scalable components. both fuel consumption and emissions. On The flexibility of our systems increases the military side, GE achieved a successful ourability to address a broader range of First Engine to Test milestone inJune, with markets, such as heavy-duty vocational our T901 FADEC. vehicles and maritime vessels. Global fast | We are engaged in developing the energy | ferry manufacturer, Green City Ferries, | | --- | --- | | storage systems and controls for all-electric | selected our Gen3 electric drive systems | | aircraft, particularly in the emerging air | topower both their zero emission hydrogen | | mobility segment. Specifically, we are | fuel cell and battery electric ferries and | | executing the design, test and supply of | GlasOcean Electric chose our systems | | advanced battery packs for GE Aviation’s | topower fishing fleets in North America | | megawatt class hybrid electric propulsion | and the Caribbean. | system in support of NASA’s Electrified Powertrain Flight Demonstration project. InOctober, Supernal selected BAESystems to define the architecture ofalightweight, fly-by-wire system for itsautonomous- capable aircraft. Deliveries of F-35 vehicle management computers and active inceptor systems have successfully ramped up, and we supported the first US Depot stand-up. We continue toadvance our autonomous control technologies through successful crewed– uncrewed teaming flight tests under a USDepartment of Defense programme. Separately, our development of an advanced vehicle control system for the UK’s Dreadnought submarine programme remains on plan. BAE Systems plc Annual Report 2022 97 Strategic report / Segmental review ## Platforms & Services Sales by domain (%) ## Platforms & Services, with operations in A ## theUS,UK and Sweden, manufactures ## andupgradescombat vehicles, weapons B ## andmunitions, and delivers services and ## sustainment activities, including naval ship ## repair,and the management and operation C ## ofgovernment-owned munitions facilities. A Air 1% B Maritime 29% C Land 70% 1 Sales by line of business (%) Combat Mission Systems focuses on Employees aportfolio oftracked combat vehicles, F G amphibious vehicles, naval weapons, E artillery systems, advanced weapons and ## 12,200 D A precision munitions for the USmilitary andinternational customers. Ordnance Systems is the operator Sales oftheUS Army’s Holston and Radford C facilitiesunder government-owned, contractor-operated agreements, and ## focuses on explosives, propellants £3, 688m andfacility modernisation. US Ship Repair is a major provider of non-nuclear ship repair, modernisation, B overhaul and conversions to the US Navy | and other government and commercial | A Combat Mission Systems 52% | | --- | --- | | maritime customers across three US sites | B Ordnance Systems 16% | | onthe Atlantic and Pacificcoasts. | C US Ship Repair 17% | D BAE Systems Hägglunds 7% BAE Systems Hägglunds focuses on E BAE Systems Bofors 4% thetracked vehicle market for Swedish F Weapon Systems UK 2% andinternational customers. G FNSS 2% BAE Systems Bofors provides advancedland and maritime weapons andprecision-guided munitions. Sales analysis: Platforms and services (%) Weapon Systems UK is a provider ofland-based artillery systems, sustainment and services, primarily for the M777 towedultra-lightweight howitzer. AB 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. A Platforms 55% B Services 45% 98 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Operational and strategic key points Financial performance – Significant increase in order intake, largely Financial performance measures – Sales remained steady on a driven by the Hägglunds business. asdefined by the Group constantcurrency basis, as guided forthe year. – US Army selected the BAE Systems 2022 2021 | Beowulf for its Cold Weather All-Terrain | | | | – Return on sales increased to 8.8%, | | --- | --- | --- | --- | --- | | | Sales | KPI | £3,688m £3,395m | | | Vehicle (CATV) programme to replace | | | | asthe impacts from the COVID-19 | | | Underlying EBIT | KPI | £326m £259m | | | theSmall Unit Support Vehicles, with | | | | pandemic began to abate in 2022. | | acontract estimated to be worth up | Return on sales 8.8% 7.6% | | | | – The increase in operating business to$278m (£231m) for 110 vehicles. Operating business KPI £525m £287m cashreflects timing of customer cash flow | – Submitted a proposal for the design | | | | | advances, primarily from orders in | | --- | --- | --- | --- | --- | --- | | | | 1 | KPI | | | | concept phase for the US Army’s | Order intake | | | £5,719m £3,236m | theHägglunds business. | 1 Optionally Manned Fighting Vehicle Order backlog £8.1bn £5.6bn programme. Financial performance – Our US shipyards marked continued performance improvements and secured measuresderivedfrom IFRS $1.2bn (£1.0bn) in ship modernisation 2022 2021 and repair orders. Revenue £3,598m £3,318m – Received a five-year contract extension Operating profit £322m £252m for Ordnance Systems Radford operations Return on revenue 8.9% 7.6% through to 2026 and a one-year Cash flow from £633m £351m extension through to 2024 for the operating activities Holston facility and supply contracts. Order book £7.7bn £5.3bn – Contract received worth $1.4bn (£1.2bn) tosupply 152 CV9035 infantry fighting vehicles to replace the Slovakian Army’s infantry fighting vehicle fleet. – Czech government selected CV90 to replace its infantry fighting vehicle fleet. Contract expected in first half of 2023. 1. Including share of equity accounted investments. BAE Systems plc Annual Report 2022 99 Strategic report / Segmental review / Platforms & Services ### Work on the Bradley family of vehicles US Ship Repair ### Operational performance continues, and we received a five-year During the year, we received contracts with ### Combat Mission Systems $383m (£318m) contract from the US Army a cumulative value of $1.2bn (£1.0bn) for Combat Mission Systems is achieving to perform technical and sustainment maintenance and modernisation across our consistent production throughput, at support services for its fleet of Bradley Jacksonville, Florida; Norfolk, Virginia; and heightened volumes, across multiple Fighting Vehicles and M993 Multiple Launch San Diego, California shipyards. | programmes. Investments in facilities and | Rocket System carriers. We continue the | | | --- | --- | --- | | new manufacturing technologies, including | contract to upgrade Bradley vehicles to the | The US Ship Repair business continues to | | automation and robotic welding, are | A4 configuration valued at $809m (£673m) | conduct modernisation and maintenance | | delivering positive returns as the business | for 459 vehicles and spares. We are working | activities for the US Navy’s non-nuclear | | moves to full-rate production across a | on a five-year follow-on production | fleet. Our shipyards were impacted by | | number of platforms. | contract to add about $258m (£215m) | delayed starts to ship repair contracts due | | | for80vehicles through 2023, with | to operational naval tasking, coupled with | We delivered Amphibious Combat Vehicles quantities to be determined for the delays to pending contract awards and (ACVs) to the US Marine Corps under remaining four years. higher than usual levels of customer-added low-rate initial production (LRIP) contracts work to existing contracts. Our investments totalling approximately $600m (£499m) We are executing on a $32m (£27m) in operational excellence and additional for116 vehicles. This completed the LRIP prototype contract received in 2020 resources are delivering benefits as we phase, and we transitioned to delivery on fromthe US Army’s Rapid Capabilities and address several challenged ship three full-rate production contracts for an Critical Technologies Office to integrate modernisation programmes. additional 185 vehicles at a value of $973m ahybrid electric drive system onto Bradley ### (£809m). We received a $35m (£29m) Fighting Vehicles. BAE Systems Hägglunds contract for the design and development We continue to produce and sustain the To accommodate significant new orders ofa new ACV recovery variant inMarch, USArmy’s M88 recovery vehicles under received over the past 24 months, the an$88m (£73m) contract in August to build previously awarded contracts, and develop business continues to expand its workforce three ACV-30 Production Representative next-generation M88A3 prototypes under and facilities. Test Vehicles (PRTVs) and areworking on a$336m (£279m) contract. | additional variants. The newamphibious | | The US Army selected our Beowulf | | --- | --- | --- | | swim facility at York is nowoperational. | In November 2022, we submitted a | unarmoured all-terrain vehicle and we | | Inaddition, we deliveredan advanced | competitive proposal for the design and | received a contract worth up to $278m | | Command, Control, Communication and | prototype phase for the US Army’s Optionally | (£231m) for 110 Cold Weather All-Terrain | | Computers/Uncrewed Aerial Systems | Manned Fighting Vehicle programme. | Vehicles. The Beowulf will replace the | | (ACVC4/UAS) variant of the ACV to the | | original BV206 Small Unit Support Vehicles. | We are producing Mk 41 Vertical Launching USMarine Corps, which will evaluate it as System (VLS) missile canisters for the The team is executing on a contract acapable, cost-effective Government-Off- USNavy under awards totalling $433m toupgrade and extend the life of the The-Shelf solution for theAdvanced (£360m), with a total potential value of Netherlands CV9035 fleet, including the Reconnaissance Vehicle programme. | | more than $624m (£519m). We are also | integration of an Active Protection System, | | --- | --- | --- | | On the US Army’s Armored Multi-Purpose | working on a $164m (£136m), five-year | anti-tank guided-missile system, and the | | Vehicle (AMPV) programme, we have | contract as the Navy’s design agent for | addition of rubber band tracks to increase | | received LRIP contracts worth $1.3bn | missile canisters and the mechanical portion | effectiveness. In addition, we continue to | | (£1.1bn). Deliveries of the five variants | of the VLS. | conduct mid-life upgrades on the Dutch | | continued in 2022 in accordance with the | | CV90 fleet under a contract worth more | | | Ordnance Systems | than $500m (£416m), which includes the | December 2021 schedule. We are also | working under a July 2021 contract worth | We continue to operate and modernise | development and testing of a new turret. | | --- | --- | --- | | up to $600m (£499m) for AMPV System | theUS Army’s Radford and Holston | The first newly upgraded CV90 was | | Technical Support. We expect to receive | ammunition plants under a total of | unveiled in October 2022, at our facility | | afull-rate production contract forthe | $1.5bn(£1.2bn) in modernisation contracts. | innorthern Sweden. | | AMPV programme in the first half | The Army awarded a five-year contract | | In March 2022, we received a new contract of2023.Insupport of this production extension, through December 2026, for to equip 20 CV90s with the Mjölner mortar award, theUSDepartment of Defense Radford operations; and a one-year contract system for Sweden, following the delivery hasindicated itsintention to procure over extension, through December 2024, for the of the first 40 systems on time, at cost and 100additionalAMPV vehicles to replace current Holston Army Ammunition Plant to quality. We have secured a $90m (£75m) the200 in-service M113 armoured facility and supply contracts. contract to develop two new CV90 variants personnel carriers provided to Ukraine. | | At Holston, modernisation activities | for the Swedish Army as part of the | | --- | --- | --- | | On the M109A7 programme contracts | continue, including the construction of a | ongoing RENO programme. | | worth atotal of $1.5bn (£1.2bn), all | Weak Acetic Acid Recovery Plant,and the | | While our work continues to extend the life 133LRIP vehicles and over 300 full-rate design, construction and commissioning of of 186 Swiss Army CV90s to 2040, the first production vehicles have been delivered. new production facilities. Contracts totalling four of 20 CV90 vehicles for Norway were We are now executing on fiscal year $211m (£175m) were awarded in the year delivered on time and at cost in May under 2020and 2021 full-rate production for energetics facilities at Holston. a contract exceeding $50m (£42m). We also contracts totalling $750m (£624m) for At Radford, construction of a modern received a seven-year contract in January 176vehicles, including a $299m (£249m) nitrocellulose facility has been completed, forsupport, sustainment and readiness of contract received inJune. We have also and the facility is in the commissioning 144 Norwegian CV90s. We also continue received early order material awards andproduct qualification phase. toupgrade and extend the life of CV90s totalling $24m (£20m) forfiscal year inthe Finnish Army fleet under an 2022full-rate production. ongoingcontract. 100 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Slovakia and the Czech Republic selected BAE Systems Bofors FNSS CV90 in separate evaluations to replace The 24 additional ARCHER systems for FNSS, our land systems joint venture their legacy infantry fighting vehicle fleets. Sweden have been delivered, and we basedin Turkey, continues to produce Both contracts are supported by overarching continue a number of ARCHER pursuits 8x8wheeled armoured vehicles for the government-to-government agreements inour home and export markets. ARCHER Royal Malaysian Army. Production continues with the Swedish government. Contract was selected as one of two systems under on medium-weight tanks for delivery to negotiations with the Government of consideration by the Swiss government Indonesia, and work has begun for specialist Slovakia have completed and a contract forits future artillery system. engineering vehicles for the Philippines. wassigned on 12 December at a value of | $1.4bn (£1.2bn) for 152 CV9035 infantry | We are under multiple export contracts | Multiple contracts for the Turkish Armed | | --- | --- | --- | | fighting vehicles. We expect the contract | todeliver 40Mk4 and 57Mk3 naval gun | Forces worth in excess of €700m (£621m) | | negotiations with the Czech Republic | systems, including five 57Mk3s and ten | areprogressing. These include contracts | | toculminate in the first half of 2023. | 40Mk4s for the UK Royal Navy’s Type 31 | forassault amphibious vehicles, weapons | | | frigates, as well as 12 40Mk4s to the | carriers and special purpose 8x8 and | The business is also working under Belgianand Dutch navies, and new 57mm 6x6vehicles. In December 2022, a follow- contractfrom Sweden for 127 BvS10s (Mk110) gun systems to the US Navy and oncontract was signed to modernise a worthapproximately $200m (£166m), Coast Guard. further 52 armoured combat vehicles for aswell as sustaining and maintaining the Turkish Armed Forces, in addition to ### readiness to various customers of the Weapon Systems UK the133 armoured combat vehicles already BvS10and CV90 fleets. | | Production of 145 M777s for the Indian | delivered or in production. | | --- | --- | --- | | In December, Sweden, Germany, and the | Army was completed in December, with | | | United Kingdom announced they have | allguns delivered to India under a $542m | | | signed an agreement with BAE Systems | (£451m) Foreign Military Sales contract. | | ### Looking forward topurchase 436 BvS10 all-terrain vehicles Inlight of recent global events, we have received a number of inquiries about the Forward-looking information for the under a joint procurement in support of availability of future M777 systems, as well Platforms & Services reporting segment Arctic operations for the Collaborative as spare parts and support. In conjunction isprovided later in this report. All-Terrain Vehicle (CATV) programme, which could grow to a total of more with the US Government, we are evaluating Page 114 than10,000 all-terrain vehicles in the potential options to restart production. Looking forward by segment next10 years. Sweden is procuring an additional 40 BvS10s in a separate contract, valued at approximately $50m (£42m). BAE Systems plc Annual Report 2022 101 Strategic report / Segmental review ## Air Sales by domain (%) ## Air comprises the Group’s UK‑based air C B ## activitiesfor European and International A ## Markets,US Programmes, and development ## ofFuture Combat Air Systems, alongside its ## business intheKingdom of Saudi Arabia, ## togetherwithits37.5% interest in the European ## MBDA jointventure. A Air 93% B Maritime 3% B Land 4% 1 Sales by line of business (%) Our UK-based business includes Employees UKandinternational programmes for E theproduction of Typhoon combat D aircraft,support, training and upgrades ## 24,400 A forTyphoonand Hawk, support and upgradesfor Tornado, and development ofnext-generation combat air technologies and defence information systems, as Sales wellasthe UK-based F-35 Lightning II manufacture, engineering development andsupport activity. ## £7,698m In the Kingdom of Saudi Arabia, the business provides operational capability C support to the country’sair and naval B forcesthrough UK/Saudi government-to- government programmes. The Saudi A European and International Markets 34% BritishDefence Co-operation Programme B US Programmes 14% and Salam Typhoon project provide C Kingdom of Saudi Arabia 33% formulti-year contracts between D MBDA 17% thegovernments. E FCAS 2% MBDA is a leading global prime contractor ofmissiles and missile systems across the air,maritime and land domains. Sales analysis: Platforms and services (%) AB A Platforms 57% B Services 43% 102 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Operational and strategic key points Financial performance 2 | – Excellent progress on Tempest – the | Financial performance measures | – Sales growth of 3% | following delivery of | | --- | --- | --- | --- | | governments of the UK, Japan and Italy | asdefined by the Group | Typhoon fighters for Qatar, Germany and | | | announced a new Global Combat Air | | other customers and delivery of F-35 aft | | 3 2022 2021 Programme (GCAP), which will bring fuselage tail sections during the year. together the Tempest and F-X programmes. Sales KPI £7,698m £7,4 49m – Return on sales of 11.0%, reflects an | | Underlying EBIT | KPI | £849m £772m | | 2 | | --- | --- | --- | --- | --- | --- | | – Qatar Typhoon and Hawk programme | | | | increase in underlying EBIT of 7% | . | | isprogressing well, with all nine Hawk | Return on sales 11.0% 10.4% | | | | | – The increase in operating business cash aircraft accepted by the customer and Operating business KPI £1,140m £548m flow reflects timing of customer advances eight Typhoon aircraft now delivered and cash flow and down payments. in service with the Qatar Emiri Air Force. 1 KPI Order intake £14,042m £5,695m – Order intake secured in the year includes 1 – Work continues on the Typhoon Order backlog £24.4bn £17.8bn the renewal of a major portion of our programme and the production Saudi Support business, as well as programme has been extended following Financial performance multiple export orders in MBDA. the award of 20 further aircraft for Spain measuresderivedfrom IFRS during the year, for which BAESystems 3 2022 2021 supplies major units. Revenue £6,286m £6,041m – 11-year contract signed to continue to Operating profit £809m £849m support the Royal Air Force’s fleet of Return on revenue 12.9% 14.1% Hawk fast jet trainer and Royal Air Force Aerobatic Team aircraft. Cash flow from £1,202m £638m operating activities – F-35 rear fuselage production continued Order book £17.4bn £12.2bn at full-rate levels, with 150 assemblies completed in the year. – During the year, the Saudi British Defence 1. Including share of equity accounted investments. 2. Constant currency basis. Co-operation Programme was renewed 3. From 1 January 2022, the BAE Systems Australia for another five-year term. Business transitioned from the Air sector to the | – All 22 Hawk aircraft have now been | Maritime sector. Comparative segmental financial | | --- | --- | | completed and have entered into service | information for 2021 has been re-presented to | | with the Royal Saudi Air Force. | reflect the new business structure. | BAE Systems plc Annual Report 2022 103 Strategic report / Segmental review / Air ### Future Combat Air System The previous five-year contract to provide ### Operational performance Salam Typhoon support services to the The Tempest technology maturation ### European and International Markets Royal Saudi Air Force (RSAF) completed at programme is progressing well, and work Activity on the 24 Typhoon and nine Hawk the end of 2022. An interim agreement for continues to plan on the contract received aircraft and associated support and training the continuation of this service has been in 2021 for the Future Combat Air System contract for the State of Qatar continues to reached with the RSAF, and discussions are Concept & Assessment Phase. Working with progress in accordance with our contractual ongoing for us to continue to support the national and international industry partners milestones. All nine Hawk aircraft have been RSAF Typhoon fleet for a further five years. and the UK Ministry of Defence, this accepted by the customer and delivered to A full contract is expected to be agreed contract enables the development of a RAF Leeming, in line with the agreement during 2023. range of digital concepts, embedding new tobase the Qatari Hawk aircraft in the UK. tools and techniques to design, evaluate Under the Saudi British Defence Co-operation Deliveries of Typhoon aircraft commenced and shape the final design and capability Programme (SBDCP) agreement, the Group in the second half of the year, with eight requirements of Tempest. During the discharges a number of contracts, including Typhoon aircraft delivered ahead of the second half of the year, the UK government support to the Tornado fleet, provision of 2022 FIFA World Cup and in service with confirmed plans for the UK to lead the Officer and Aircrew training and Technician the Qatar Emiri Air Force. development of anew flying combat air training for the RSAF, as well as technical The final five major units were delivered demonstrator, setto fly within the next five training, engineering and logistics services during the year under the Kuwait Typhoon years, and hasconfirmed its commitment for the Royal Saudi Naval Forces. contract, secured by Italian Eurofighter toan international coalition with Japan Following the completion of the previous partner Leonardo. andItaly, under the Global Combat five-year SBDCP funding arrangement on AirProgramme. | During the year, BAE Systems received an | | 31 December 2021, agreement has been | | --- | --- | --- | | order for our workshare valued at in excess | US Programmes | reached with the Saudi Arabian government | | of £0.5bn for an additional 20 aircraft for | | for the Group to continue to provide these | F-35 rear fuselage manufacturing continued the Spanish Air Force. Our Major Unit services for a further five years through to at full-rate production through 2022 with 150 production on this contract has been 31 December 2026, and contracts to this rear fuselage assemblies completed during combined with the £1.3bn order received effect were entered into during the second the year, in line with the programmes for in2020 for 38 aircraft to replace Germany’s half of 2022. Lot14, 15 and 16 contracts. This production original Typhoon Tranche 1 fleet. The first rate is expected to continue into 2023. All 22 Hawk aircraft assembled in-Kingdom three front fuselage units are contracted have now been completed and have tocomplete in 2023, and in total 22 major Following the award in 2021 of a five-year entered into service with the RSAF. units have now commenced assembly. contract for F-35 sustainment services to December 2025, we continue to provide We continue to review our portfolio During the year, the Group secured an services for both the UK and US customers ofinterests in a number of industrial 11-year follow-on contract valued at £0.6bn in support of key F-35 sustainment activities. companies in the Kingdom of Saudi to continue support to the Royal Air Force’s Arabia,whilst exploring new business ### fleet of Hawk fast jet trainer and Royal Air Kingdom of Saudi Arabia opportunities in the marketplace and Force Aerobatic Team aircraft. | | In the Kingdom of Saudi Arabia, the | through our Kingdom Partner Companies | | --- | --- | --- | | Alongside this, the ten-year partnership | In-Kingdom Industrial Participation | tocollaborate with key local partners | | arrangement for support to the Royal Air | programme continues to make good | anddeliver further In-Kingdom Industrial | | Force’s Typhoon fleet continues to deliver | progress consistent with our long-term | Participation. We remain aligned to the | | the contracted flying hours. | strategy, while satisfying and supporting | Kingdom’s National Transformation Plan | | | theSaudi Arabian government’s National | and Vision 2030 requirements. | Following initial entry into service of the Transformation Plan and Vision 2030. export standard electronically scanned Ourin-Kingdom Saudi employee base European Common Radar in late 2021 shows 78% Saudisation, and 90% of further deliveries were made through ourin-Kingdom female employees are 2022.Development continues on the radar Saudinationals. We also continue the variants for the UK, German, Italian and development of our footprint across the Spanish Air Forces. During the year, the Kingdom, with demonstrable contributions Group received further funding of £684m to our local communities. for development of the Typhoon weapon system and sensors, as part of the Partner The Group is reliant on the continued Nations’ commitment to the continual approval of export licences by a number advancement of the Typhoon platform. ofgovernments in order to continue to support programme operations in the Kingdom of Saudi Arabia. We are working closely with industry partners and the UKgovernment to continue to fulfil our contractual support arrangements in theKingdom. 104 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Future programmes MBDA ### Looking forward The Group continues to invest in promising After winning a number of key domestic Forward-looking information for the new technologies, including through a and export orders in 2021, MBDA has had Airreporting segment isprovided later number of industry collaborations related continued success in 2022 and is well placed inthis report. tothe exploration and development of to benefit from increased defence spending AirElectric Products. BAE Systems is one in a number of European countries along Page 115 ofaconsortium of investors in the Eve with further International opportunities. Looking forward by segment Urban Air Mobility electric vertical take-off Domestic market orders have been and landing (eVTOL) company, aimed at receivedin 2022. Italy has awarded a developing zero emission Air Vehicles. This GBADcontract for Launchers and Common investment led to further cooperation with Anti-Air Modular Missiles Extended Range Embraer S.A., resulting in the signing of a and a Development contract amendment memorandum of understanding setting out forTeseo Mk2 Evolved. an intent to create a commercial partnership to develop a defence variant of the Eve Significant export market orders have been eVTOL aircraft. received in 2022. Aligned with the Rafale platform sales, MBDA has been awarded Beyond Eve, BAE Systems has also an air weapons package from the UAE and established collaborative relationships in a further air weapons package for Greece. respect of Electric Products with UK-based Following the Naval Group Intervention Malloy Aeronautics, aiming to develop the Frigate platform sale in Greece, MBDA T-650 Uncrewed Air Vehicle, and with hasbeen awarded a Naval Based Air Pipistrel Aircraft who have the first Defence weapons package for the frigates. European Union Aviation Safety Agency A number of International customers have certified light aircraft, Velis Electro. also awarded customer support contracts on their asset inventories. With European countries recognising the importance of sovereign capabilities in the missile sector and re-evaluating their needs, Poland has accelerated its ground-based air defence campaign, awarding MBDA an order for GBAD Launchers and Common Anti-Air Modular Missiles. Despite supply chain pressure in the aftermath of the pandemic, and as aresultof the Ukraine crisis, MBDA is maintaining production across its product range. Progress continues across a number of assessment and development phase programmes including Future Cruise and Anti-Ship Weapon; MICA Next Generation, Spear Capability 3 and Aster Block 1 NewTechnology. BAE Systems plc Annual Report 2022 105 Strategic report / Segmental review ## Maritime Sales by domain (%) ## Maritime comprises the Group’s UK‑based C A ## maritime and land activities, as well as the ## Group’s Australian business. A Air 6% B Maritime 85% C Land 9% 1 Sales by line of business (%) Maritime programmes include the Employees construction of seven Astute Class submarines for the Royal Navy, as well A asthe design and production of the D ## 24,200 RoyalNavy’s four Dreadnought Class submarines and eight Type 26 frigates. Additionally, the Maritime portfolio includes in-service support, including the delivery Sales C oftraining services and supporting the operation of HMNaval Base Portsmouth onbehalf of the UK Ministry of Defence ## £4,598m andthe design and manufacture of combatsystems, torpedoes and radars. Land UK’s munitions business designs, develops and manufactures a comprehensive B range of munitions products serving a A Naval Ships 33% number of customers including its main B Submarines 41% customer, the UK Ministry of Defence. C Land UK 7% Rheinmetall BAE Systems Land (RBSL) – D Australia 19% BAESystems’ joint venture with Rheinmetall – is a UK-based business specialising 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 its CTA International Sales analysis: Platforms and services (%) jointventure. In Australia, the business primarily delivers upgrade and support programmes for AB 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 nine-ship Future Frigate programme. Services contracts include the provision of sustainment, training solutions and upgrades. A Platforms 68% B Services 32% 106 BAE Systems plc Annual Report 2022 B Strategic report Financial statementsGovernance ### Operational and strategic key points Financial performance 3 | – The UK Ministry of Defence awarded | Financial performance measures | – Sales grew by 10% | , driven by | | --- | --- | --- | --- | | a£4.2bn contract to BAE Systems to | asdefined by the Group | significant milestones being achieved | | | manufacture the next five City Class Type | | on major submarine and ship | | 2 2022 2021 | 26 frigates for the Royal Navy in Glasgow. | | | | programmes during the year. | | --- | --- | --- | --- | --- | | | Sales | KPI | £4,598m £4,169m | | | – First City Class Type 26 Frigate entered | | | | – Margin reflects highvolume of | | | Underlying EBIT | KPI | £356m £351m | | | the water and is being outfitted at | | | | Dreadnought sales, andincreased | | Scotstoun shipyard in Glasgow. | Return on sales 7.7% 8.4% | | | Company-funded R&Dexpenditure. | | | Operating business | KPI | £235m £374m | | | – £3.4bn of further contract funding | | | | – Operating cash flow reflects the | cash flow | awarded as part of Delivery Phase 3 | | | | | unwind of customer advances in | | --- | --- | --- | --- | --- | --- | | | | 1 | KPI | | | | forthe Dreadnought programme. | Order intake | | | £9,716m £5,688m | UKMunitions. | 1 | | Order backlog | £17. 2bn £12.1bn | | | --- | --- | --- | --- | | – The fifth Astute Class submarine, | | | – Significant orders were secured in the | | HMSAnson, exited our Barrow shipyard | | | year, including further contract funding | Financial performance | to commence sea trials in February | | | for the next phase of Dreadnought | | --- | --- | --- | --- | | 2023.The remaining two submarines, | measuresderivedfrom IFRS | | andthe build of five further City Class | | Agamemnon and Agincourt, are at | | 2 | Type 26 frigates for the Royal Navy. | 2022 2021 advanced stages of construction. Revenue £4,484m £4,093m – Construction of the first two Operating profit £352m £347m Dreadnought Class submarines is well Return on revenue 7.9% 8.5% advanced and, in September 2022, build Cash flow from £418m £534m activities commenced on the third of class operating activities submarine. A formal steel cut ceremony Order book £16.6bn £11.6bn for the third boat was held in Barrow on9 February 2023. – RBSL’s multi-million pound investment inits Telford manufacturing site 1. Including share of equity accounted investments. completed in 2022, with manufacturing 2. On 1 January 2022, our BAE Systems Australia activities due to commence in 2023. business transitioned from the Air sector to | – A$1.5bn (£0.8bn) extended ‘In Service | theMaritime sector. Comparative segmental | | --- | --- | | Support’ contract for the Hawk aircraft | financial information has been re-presented | | commenced in 2022 for the Royal | toreflect the new business structure. | | Australian Air Force. | 3. Constant currency basis. | BAE Systems plc Annual Report 2022 107 Strategic report / Segmental review / Maritime ### Submarines The Type 45 Power Improvement Project ### Operational performance (PIP) is progressing and the first ship, Our Submarines business is a member ### Naval Ships HMSDauntless, successfully completed ofthe Dreadnought Alliance and continues The Type 26 programme continues to herprogramme during the year. PIP to work alongside the Submarine Delivery progress with construction underway on embodiment work onHMS Daring in Agency and Rolls-Royce to deliver the the first three City Class Type 26 frigates. Birkenhead was also completed in the replacement for the Royal Navy’s Vanguard The first City Class Type 26, HMS Glasgow, year,and HMS Dragon’s upgrade is being Class, which carries the UK’s nuclear entered the water for the first time in conducted alongside a deep maintenance deterrent. Four Dreadnought Class December 2022 and has transitioned to upkeep in Portsmouth. submarines will be built at our site in ourScotstoun shipyard where further outfit, Barrow, with thefirst of these due to enter In our Underwater Weapons business, the test and commissioning is underway. operational service in the early 2030s. Torpedo Repair and Maintenance contract HMSCardiff progressed through her unit for in-service support to the UK’s Royal erect programme following the installation Construction of the first two Dreadnought Navy continues to perform well. The £270m of her gearbox and propulsion motors in Class submarines is well advanced and, in Spearfish heavyweight torpedo upgrade 2022 in preparation for roll-out and block September 2022, build activities commenced programme, delivered for the UK Ministry integration in 2023. HMS Belfast continues on the third of class submarine. A formal ofDefence and Royal Navy, continues to progress after entering manufacture in steel cut ceremony for the third boat was toproduce modification kits for weapon June 2021. In November, the UK Ministry held in Barrow on 9 February 2023. conversion as part of theproduction phase ofDefence awarded a £4.2bn contract to Thevalue of the programme to the Group which commenced in2021. BAE Systems to manufacture the next five to date is £11.2bn, with additional contract City Class Type 26 frigates for the Royal funding of £3.4bn received in 2022 as part ### Land UK Navy in Glasgow. The steel cut ceremony of Delivery Phase 3 (DP3). DP3 will see the Our munitions business has recently for the first ship from this order is expected first of class submarine, Dreadnought, exit transitioned between munitions supply to take place in the first half of 2023. our Barrow site to begin sea trials. contracts, with the UK Ministry of Defence. | We have committed c.£300m investment | The fifth Astute, HMS Anson, exited our | A number of activities have been | | --- | --- | --- | | tobetter enable us to deliver on our customer | Barrow shipyard to commence sea trials | undertaken to close out the Munitions | | commitments and secure the long-term | inFebruary 2023. The remaining two | Acquisition, the Supply Solution (MASS) | | future for complex warship shipbuilding in | submarines, Agamemnon and Agincourt, | contract and plans enacted for the launch | | Glasgow. Key investments include a new | are at advanced stages of construction | of the Next Generation Munitions Solution | | ship assembly hall in the Govan yard, a | inBarrow. | (NGMS) contract, which superseded the | | newmulti-function panel line and a new | | MASS contract. This contract is effective | Early design and mobilisation activities Applied Shipbuilding Academy in Scotstoun. from 1 January 2023, and details the supply continue on the Submersible Ship Nuclear We are also making significant investments of munitions for thenext 15 years. Replacement (SSNR) programme, which will to digitalise manufacturing operations, deliver areplacement for the Astute class. The £90m NGMS investment programme giving colleagues working across our yards isadvancing at pace, with £20m of this ### dynamic access to data and information. Maritime Services committed to updating and expanding | The Canadian Surface Combatant programme | Our Maritime Services business has | manufacturing equipment and | | --- | --- | --- | | continues to progress under the Definition | successfully delivered continued support to | infrastructure. A new state-of the-art | | Phase Contract where BAE Systems has | the UK Ministry of Defence and the Royal | automated machining line has been | | responsibility for Warship Design, and is | Navy at HM Naval Base Portsmouth. Service | installed at our munitions plant | | nowmoving into the Functional Design | delivery under the Ministry of Defence’s | inWashington, Tyne and Wear and a new | | stage, having held the Preliminary Design | Future Maritime Support Programme (FMSP) | Tube Vent Electrics manufacturing plant | | Review in December 2022. Work is also | came into effect on 1 October 2021, and | atRadway Green in Cheshire launched | | progressing on the Support Services | will continue until at least September 2026. | inthe final quarter of 2022. This secured | | subcontract, which is a four-year framework | | anadditional sovereign capability for this | Under the FMSP Ship Engineering agreement to provide technical assistance to UK Ministry of Defence component, that Management and Delivery contract, Irving Shipbuilding Inc., through intellectual was last produced in the UK ten years ago. wecontinued to maintain, repair, upgrade property licensing, and the provision of Similarly, at Glascoed in Monmouthshire, and prepare the Portsmouth flotilla. This consultancy services to help upskill its anew manufacturing facility for 40mm includes support to the aircraft carriers, workforce ahead of cutting steel on the cased telescoped ammunition was finalised destroyers, frigates and minehunters firstship. in 2022. basedinPortsmouth. Our Combat Systems business continues RBSL’s multi-million pound investment in We continued to support the Royal Navy’s toprovide the combat system capabilities itsTelford manufacturing site completed Batch 2 Offshore Patrol Vessels around across the Carrier Strike Group whilst in2022, with manufacturing activities theglobe with our teams deployed to achieving an average of 99.75% equipment starting in early 2023. The Challenger 3 NorthAmerica, the Caribbean, the South availability for the fleet. Thebusiness has Demonstration Phase is progressing in line Atlantic and the Indo-Pacific regions during now opened a collaboration centre at the with the programme plan, with work on the the period. Maritime Integration and Support Centre first eight prototypes underway. The Boxer (MISC) in Portsmouth which provides programme is progressing with technology space,capability and mentoring for transfer proceeding as planned. Supply SMEs,academia and global technology Chain activities for both programmes are companies to co-develop newsolutions proceeding well with notable focus on forourcustomers, exploiting existing securing UK supply chain resilience. andemerging digital capabilities. 108 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Australia In December, a four-year extension to the BAE Systems Australia’s Research and Warship Management Alliance Agreement Development business, Red Ochre LABS, Australia’s current geopolitical climate has was agreed which will see completion of issupporting the development of bespoke brought about a sharpened focus on the the current capability uplifts on all ANZAC sovereign capabilities for the Australian defence market. BAE Systems Australia is class frigates and preparation for the next customer in autonomous systems, high- well placed to be a strong partner to the programme of upgrade under the Future frequency systems and electronic warfare. Australian Government through focused Maritime Sustainment Model. Emerging and disruptive technologies and disciplined delivery on major arebeing applied todeliver complex programmes such as the Hunter Frigate In the aerospace sector, the A$1.5bn solutions including common autonomous andthe Jindalee Operational Radar Network (£0.8bn)extended ‘In Service Support’ architectures, uncrewed ground vehicles (JORN), and is well positioned to support contract for the Hawk aircraft commenced equipped with an artificial intelligence future needs driven by the AUKUS alliance. in 2022 and will see BAE Systems Australia capability, and market-leading electronic provide this Lead In Fighter training The Hunter Class Frigate programme is support measures. capability until at least 2031. The contract progressing strongly with the fifth and includes software and hardware upgrades finalprototype block being manufactured and new engines for the 33-strong fleet, atthe world-class Osborne digital shipyard ### which will align the aircraft with the Looking forward in South Australia, ahead of cutting steel UKRoyal Air Force’s T2 Hawk. | onthe first schedule protection blocks | | Forward-looking information for the | | --- | --- | --- | | forShip 1 in 2023. | Aircraft sustainment activity continues | Maritime reporting segment isprovided | | | toramp up, aligned to the expansion of | laterin this report. | In the Maritime Sustainment business, theAustralian F-35 Joint Strike Fighter theGroup secured a six-year contract, Page 115 fleet.Australia is committed to a fleet of expected to be worth c.A$155m (£87m), Looking forward by segment 72aircraft and is on track to have received tooptimise the capability of the Hobart all by the end of 2023. Class Destroyers in October 2022. The JORN programme upgrade is being BAE Systems Australia’s participation delivered against a revised schedule. inthesustainment and upgrade of the Technology developed at the Group’s fleetoneight ANZAC class frigates at Edinburgh Parks facility has been successfully ourHenderson facility continued at demonstrated to the customer and is being pacedelivering HMAS Toowoomba integrated to enhance and sustain the totheRoyal Australian Navy for sea network which is a key defence capability trialsin2022. toprotect Australia’s northern approaches. BAE Systems plc Annual Report 2022 109 Strategic report / Segmental review ## Cyber & Intelligence Sales by domain (%) ## Cyber & Intelligence comprises the A ## US‑basedIntelligence & Security business ## andUK‑headquartered Digital Intelligence B ## business, and covers the Group’s cyber ## security,and secure government activities. C D A Air 12% B Maritime 13% C Land 6% D Cyber 69% 1 Sales by business (%) Intelligence & Security comprises Employees thethree US-based businesses. Air & Space Force Solutions focuses D A ## onprovidingthe US Air Force, US Space 10,5 00 Forceand the combatant commands withinnovative systems engineering and integration solutions to help to modernise, Sales maintain, test and cyber-harden aircraft, radars, strategic missile systems, mission applications and information systems C ## thatdetect, deter and dissuade threats £2,205m tonationalsecurity. Integrated Defense Solutions provides the US Army and US Navy with systems B engineering, integration, and sustainment A Digital Intelligence 33% services for critical weapons systems, C5ISR | and cyber security that enhance mission | | Intelligence & Security: | | --- | --- | --- | | effectiveness. Our solutions are deployed | B Intelligence Solutions 30% | | | across platforms and networks in the air, | C Air Force Solutions 16% | | | maritime, land and cyber domains. | D Integrated Defense Solutions 21% | | Intelligence Solutions provides innovative mission-enabling solutions and services to intelligence and federal/civilian agencies, as Sales by line of business (%) well as the provision of cost-effective synthetic training and simulation software D C products and components for global A defence applications. Digital Intelligence provides cyber, B 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. A US government 66% B UK and other governments 28% C Commercial 5% D Other 1% 110 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Operational and strategic key points Financial performance 3 | Intelligence & Security | Financial performance measures | – Sales increased by 7% | on a constant | | --- | --- | --- | --- | | – Won a $699m (£581m) contract for | asdefined by the Group | currency basis, with the US Intelligence | | | operations, maintenance, and management | | & Security business benefitting from the | | 2 2022 2021 | services for the US Army’s Defense | | | | acquisition of BISim during the year. | | --- | --- | --- | --- | --- | | | Sales | KPI | £2,205m £1,923m | | | Supercomputing Resources Center. | | | | – Return on sales increased to 10.5%, | | | Underlying EBIT | KPI | £232m £179m | | | – Awarded one of the prime positions | | | | reflecting better workforce utilisation | | | Return on sales 10.5% 9.3% | | | and efficiencies. | onamulti-award $300m (£249m) Indefinite Delivery, Indefinite Quantity Operating business KPI £154m £201m – Multiple contract awards secured cash flow | contract to support critical mission | | | | | inthe year, across both the Digital | | --- | --- | --- | --- | --- | --- | | | | 1 | KPI | | | | operations for a government customer. | Order intake | | | £2,443m £2,034m | Intelligence business and the US | 1 Order backlog £2.1bn £1.8bn Intelligence and Security business. – Multiple additional contract awards, | including a $143m (£119m) five-year | | | – Digital intelligence ended the year | | | --- | --- | --- | --- | --- | | | Financial performance | | | 4 | | contract from the US Navy to support the | | | witha book-to-bill | ratio of 1.2. | | integration of mission equipment, combat | measuresderivedfrom IFRS | | | | | systems, and computer programmes for | | 2 | | | 2022 2021 the Surface Combat Systems Center. Revenue £2,205m £1,923m – Completed the acquisition of Bohemia Operating profit £291m £177m Interactive Simulations (BISim), which has Return on revenue 13.2% 9.2% been fully integrated into BAE Systems Cash flow from £191m £233m and continues to provide cutting-edge operating activities virtual training for allied militaries, 1. Including share of equity accounted investments. Order book £1.4bn £1.2bn 2. From 1 January 2022, the Group established a including the $9m (£7m) DVS2 contract new Digital Intelligence business, bringing together from the UK Ministry of Defence. our non-US digital and data capabilities for our Digital Intelligence customers. The new Digital Intelligence business is reported within the Cyber & Intelligence – Strong order intake and revenue growth. segment. Comparative segmental financial – Continued integration and growth of information for 2021 has been re-presented theacquired In-Space Missions business. toreflect the new business structure. – In October 2022, the business 3. Constant currency basis. completedthe sale of the financial 4. Ratio of Order intake to Sales. crimedetection business. BAE Systems plc Annual Report 2022 111 Strategic report / Segmental review / Cyber & Intelligence ### Operational performance Integrated Defense Solutions Intelligence Solutions We continue to perform on the five-year, We continue to execute on a $506m ### Intelligence & Security $478m (£397m) sole-source contract to (£421m)contract to provide industry- Air & Space Force Solutions | | support weapon systems on board the | leading and multi-disciplinary analytic | | --- | --- | --- | | On the US Air Force Intercontinental | USOhio and UK Vanguard Class submarines, | support capabilities supporting first | | BallisticMissile Integration Support | as well as the future US Columbia Class | responders, warfighters and policy makers. | | Contractor (ISC 1.0) programme, | andUK Dreadnought Class submarines. | These tailored analytic services span a | | wecontinue to provide programme | | multitude ofmission specifications and | The US Army awarded a $699m management, systems engineering, operating environments. Services include, (£581m),five-year contract for Defense integration and testing, sustainment and but are not limited to: source discovery and Supercomputing Resource Center cyber defence support, with cumulative collection, time-dominant and long-term operations, maintenance, and management funding approaching the previously analytic assessments, cartographic services. Under this contract, we are increased $1.3bn (£1.1bn) contractual production, andmulti-media content providing technical support to advance ceiling. In late June 2022, the Air Force generation. high-performance computer services, awarded the recompete of the programme capabilities, and infrastructure across We were awarded one of the prime to BAE Systems under an 18-year ISC 2.0 fivesites in the US. positions on a multi-award $300m (£249m) contract with a ceiling value of $12bn Indefinite Delivery, Indefinite Quantity (£10bn). The award was protested, and We were awarded a $143m (£119m), contract to support critical mission following the Government Accountability five-year contract from the US Navy to operations for a government customer. | Office (GAO) ISC 2.0 protest sustainment | continue to support the integration of | | | --- | --- | --- | | decision issued in mid-October, all 2.0 | mission equipment, combat systems, and | A government agency awarded us two | | transition activities were put on hold. The | computer programmes for the Surface | contracts to support the customer’s IT | | Air Force intends to take corrective action | Combat Systems Center in Wallops Island, | environment at their site in Washington, | | toaddress the GAO issues and we continue | Virginia. These mission-essential systems | DC. In September 2022, we were awarded | | to support the ISC programme under a | areused across the fleet for all current and | a seven-year, $137m (£114m) contract to | | contract extension received in January 2023. | future cruiser, destroyer, and amphibious | provide 365/24/7 Network Operations | | | ship modernisation initiatives. | support; and in October 2022, we were | We were awarded a $15m (£12m) Indefinite awarded another seven-year, $108m (£90m) Delivery, Indefinite Quantity contract by the contract to continue to support the Naval Air Warfare Aircraft Division integration of commercial off-the-shelf and tointegrate the C-27J into the US Coast government off-the-shelf applications. Guard’s (USCG) Medium Range Surveillance | Aircraft Fleet. The aircraft will help the | In March 2022, we completed the | | --- | --- | | USCG to fulfil its maritime patrol, drug and | acquisition of BISim, a global software | | migrant interdiction, disaster response, and | developer of simulation and training | | search and rescue missions more effectively. | solutions for military organisations around | the world (see note 35 to the Group In the year, the business successfully accounts on page 288 for more details). completed multiple prototype tests of its Multiple Object Tracking Radar, a mobile instrumentation radar, demonstrating itsability to meet critical performance parameters – range, transportability, accuracy, and beacon tracking – that otherradars of comparable cost, size, weight and power cannot. 112 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ### Digital Intelligence Within our Defence & Space business ### unit,we have formed an integrated Looking forward The business performed well in 2022, teambringing together expertise from Forward-looking information for the increasing order backlog and delivering BAESystems and In-Space Missions to Cyber & Intelligence reporting segment revenue and profit growth in line develop Azalea, a cluster of highly resilient isprovided later in this report. withexpectations through a period satellites which are capable of gathering, ofreorganisation. analysing and communicating Synthetic Page 115 Looking forward by segment Programme execution continues to be Aperture Radar, optical and radio strong and well controlled across all areas, frequencysignals. supporting underlying margin growth. Within our Digital Defence Services Operating costs continue to be tightly business, demand for both product and controlled with investment expenditure service solutions remains high. Strong being prioritised to deliver future growth. delivery performance in C5ISR has helped The National Security business has strengthen margins, and investment in continued to grow order backlog and developing space products, in collaboration revenue through investing in skills and with In-Space Missions, remains a key area capability that support long-term customer of focus. The business continues to invest strategic aims. infuture talent through development academies to address national labour and The International Government business has skills shortages. successfully delivered a number of key | programmes to existing customers during | On 28 October 2022, the sale of the | | --- | --- | | the year. Bidding activity in new markets | financial crime detection business was | | isbeginning to pick up, as a result of easing | completed. Further details can be found | | of travel restrictions during the year. | innote 20 to the Group accounts on | page263. The UK Central Government business has renewed various key programmes across the Foreign, Commonwealth and Development Office, UK Border Force and Health sectors. The team also signed a framework contract for £40m, which secures a key Home Office programme for the next three years. BAE Systems plc Annual Report 2022 113 Strategic report / Segmental review ## Looking forward by segment ## BAE Systems’ reporting segments, Electronic Systems, Platforms & Services, Air, ## Maritime and Cyber & Intelligence, align with the strategic direction of the Group. | | 1 | Electronic Systems comprises the | | | --- | --- | --- | --- | | 2022 Sales | | | Platforms & Services, with operations in | | | | US-and UK-based electronics activities, | the US, UK and Sweden, manufactures | E A including electronic warfare systems, and upgrades combat vehicles, weapons navigation systems, electro-optical and munitions, anddelivers services and sensors, military and commercial sustainment activities, including naval digitalengine and flight controls, ship repair, and the management and precision guidance and seeker operation of government-owned B solutions,next-generation military munitions facilities. communications systems and data Combat Mission Systems is underpinned links,persistent surveillance capabilities, C bya strong order backlog and incumbencies space electronics and electric drive on key franchise programmes, to include A Electronic Systems 22% propulsion systems. the US Army’s Armored Multi-Purpose B Platforms & Services 16% Electronic Systems is well positioned for Vehicle, M109A7 self-propelled howitzer, C Air 33% growth in the medium term as it continues Bradley upgrade programmes, M88 D Maritime 20% to address current and evolving US defence HERCULES recovery vehicle, and the E Cyber & Intelligence 9% | priority programmes from its strong | USMarine Corps’ Amphibious Combat | | --- | --- | | franchise positions, which are supported by | Vehicle. This US vehicle portfolio is | | a long-standing programme of research and | augmented by the CV90 and BvS10 | | development. The sector’s focus remains on | domestic and export programmes from | 1 2022 Underlying EBIT | | | | maintaining a diverse portfolio of defence | BAESystems Hägglunds and artillery | | --- | --- | --- | --- | --- | | | E | | and commercial products and capabilities | systems from BAE Systems Bofors, and | | | | | for US and international customers, and it | theFNSS joint venture continues to execute | | D | | A | expects to benefit by applying innovative | on its order book of both Turkish and | | | | | technology solutions to meet defence | international orders. These long-term | | | | | customers’ existing and changing | contracts, franchise positions and the | | | | | requirements, building on its significant | renewed demand environment for land | | | | | roles on F-35 Lightning II, F-15 upgrade, | systems make the combat vehicle and | | C | | B | M-Code GPS upgrades and classified | artillery product lines well placed for | | | | | programmes, as well as a number of | growthin the medium term. | precision weapon products. Over the A Electronic Systems 32% In the maritime domain, the sector has a longerterm, the sector is poised to leverage B Platforms & Services 12% strong position on naval gun and missile its technology strengths in emerging areas C Air 33% launch programmes, as well as US Navy of demand such as precision weaponry, D Maritime 14% shiprepair activities where the business has space resilience, hyper-velocity projectiles invested in capitalised infrastructure and its E Cyber & Intelligence 9% and autonomous platforms. With our facilities in key home ports. The business electric drive propulsion capabilities, we remains well aligned to the US Navy’s continue to address the need for low and operational strategy and fleet projections. zero emission technology across an increasing number of civil platforms, with The Group remains a leading provider of opportunities to migrate these technologies gun systems and precision strike capabilities to the defence arena. and, in the complex ordnance manufacturing business, continues to manage and operate The commercial aviation market was the US Army’s Radford and Holston negatively impacted by the pandemic, munitions facilities. and,whilst a recovery in air travel continuesto develop, it is expected to take several years to reach previous demand levels. With the positive outlook for the sector, we continue to invest in our people, R&D and in new facilities, a number of which opened in 2022. D 1. The purposes and definitions of non-GAAP measures are provided in the Financial glossary onpage 302. 114 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance Page 20 Our markets Page 82 Financial performance metrics Air comprises the Group’s UK-based Maritime comprises the Group’s Cyber & Intelligence comprises the airactivities for European and UK-based maritime and land activities US-based Intelligence & Security International Markets, US Programmes, and the Group’s Australian business. business and UK-headquartered and development of Future Combat DigitalIntelligence business, and Maritime AirSystems, alongside its business in coversthe Group’s cyber security The outlook is positive based on long-term theKingdom of Saudi Arabia, together andsecure government activities. contracted positions and with a number of with its 37.5%interest in the European Intelligence & Security UK, Australian and international MBDAjoint venture. opportunities tofurther this outlook. Within The outlook for the US government services Future Typhoon production and support Submarines, the business is executing on sector is robust with the opportunity for sales are underpinned by existing contracts. two long-term programmes. On the Astute mid-term growth. Market conditions remain Discussions continue in relation to potential Class programme, the fifth of class exited highly competitive and continue to evolve in further contract awards for Typhoon. our Barrow shipyard to commence sea response to shifting government priorities. Production of rear fuselage assemblies trialsin February 2023 and the two The US business remains well positioned forthe F-35 has reached full-rate levels remaining boats are in build. On the and will continue to leverage its established andis expected to be sustained at these Dreadnought programme, manufacturing market positions and reputation for reliable current levels. The business plays a activities continue on the first three boats and adaptable performance to meet significant role in the F-35 sustainment ofa four-boat programme. Investment customer demands for innovative, cost- programme in support of Lockheed Martin continues in the facilities at ourBarrow effective and cyber-hardened solutions to and support volumes should increase as shipyard in order to provide thecapabilities pursue both recompete contracts and new thenumber of jets in service continues to deliver these long-term programmes business across its portfolio of system toincrease. The GCAP agreement with through the decade and beyond. In integration, sustainment and modernisation Japan and Italy is fundamental to meeting shipbuilding, sales are underpinned by solutions for military and intelligence the goals set out in the UK government’s themanufacture of Type26frigates. customers. The addition in 2022 of Combat Air Strategy and represents a Thethrough-life support of UK surface ship BohemiaInteractive Simulations positions significant step forward for the Air sector platforms provides a sustainable business in the business well to enhance and grow inensuring we have a sustainable long-term technical services andmid-life upgrades. itssynthetic training operations to the combat aircraft manufacturing capability. USmilitary and its allies. Land UK Kingdom of Saudi Arabia Digital Intelligence Future work will be underpinned by In the Kingdom of Saudi Arabia, the existingin-service support contracts and the In 2022, we formed a new operating In-Kingdom Industrial Participation contracted workshare on the Mechanised business, BAESystems Digital Intelligence, programme continues to make good Infantry Vehicle (Boxer) and Challenger 3 bringing together many of our world- progress consistent with our long-term Main Battle Tank programmes. Munitions leading digital transformation, strategy, as well as the Saudi Arabian supply from 2023 will be delivered under cybersecurity, complex data analysis, and government’s National Transformation the 15-year Next Generation Munitions communication and information capabilities Planand Vision 2030. Our in-Kingdom Solution and volumes are expected to from across the Group. This activity will support business is expected to remain increase in the coming years given the enable even closer collaboration across stable, underpinned by the recent renewal elevated threat requirements. theGroup to help our customers operate of the Saudi British Defence Co-operation successfully, safely and efficiently in the Australia Programme, a key long-standing contract, digital world, and in time bring a greater for another five years, and negotiations The Australian business has long-term range of capabilities to our customers. | withthe Salam Project Office, to agree | sustainment and upgrade activities in | | --- | --- | | Phase 4 of the Typhoon Support Solution | maritime, air, wide-area surveillance, missile | | Service, which remain ongoing and which | defence and electronic systems. It has | | we expect to conclude during the course | expanded into ship design and production on | | of2023. | the Hunter Class Frigate programme, which | will drive growth in the coming years and is MBDA pursuing a number of further opportunities. MBDA has a strong order backlog supporting future years’ sales. Development programmes continue to improve the long-term capabilities of the business in air,land and sea domains. BAE Systems plc Annual Report 2022 115 Strategic report / Risk ## How we manage risk ## Effective management of risks is essential to the delivery of the Group’s ## strategic objectives and the creation of sustainable shareholder value. ### Board Approach Financial and non-financial risks The Board has overall responsibility The Group’s Risk Management Policy is Financial risks expose the Group to fordetermining the nature and extent setout in the Operational Framework, the potentialcosts which are quantifiable on ofthe risk the Group is willing to take, Group’s detailed governance framework. the basis that their probability and impact andensuring that risks are managed can be understood adequately and related The Group’s approach to risk management effectively across the Group. to the financial statements. is aimed at the early identification of Risk is considered on a regular basis at material risks, mitigating the effect of those Non-financial risks cannot be assessed Board and Board committee meetings risks before they occur and dealing with readily in financial terms and, therefore, andthe Board reviews risk (including them effectively if they crystallise. cannot be reflected reliably in the emerging risk) as part of its business financialstatements. The Group is committed to the protection planning and annual strategy review ### of its assets, which include human Process process. This provides the Board with resources, intellectual and physical property, anappreciation of the key risks within The responsibility for risk identification, and financial resources, through an effective thebusiness and oversight of how they analysis, evaluation and mitigation rests risk management process, underpinned arebeing managed. with the line management of the sectors. where appropriate by insurance. They are also responsible for reporting The Board delegates oversight of certain Reporting within the Group is structured andmonitoring key risks in accordance riskmanagement activities to the Audit sothat key issues are escalated through withestablished policy and processes under andEnvironmental, Social and Governance themanagement team and ultimately the Group’s Operational Framework. Committees. totheBoard where appropriate. The The Group’s risk management process Audit Committee underlying principles of the Group’s risk issetout in the Risk Management Policy, management processes are that risks The Audit Committee monitors the Group’s amandated policy under the Operational aremonitored continuously, associated key risks identified by the risk assessment Framework, and, in respect of projects, action plans reviewed, appropriate processes and reports its findings to the inthe Lifecycle Management Framework, contingencies provisioned and this Board twice a year. It is also responsible for acore business process under the information reported through established reviewing in detail the effectiveness of the Operational Framework. Further guidance management control procedures. Group’s system of internal control policies, isprovided by a Risk Management Maturity and procedures for the identification, self-assessment tool. The Board has conducted a review of assessment and reporting of risk. theeffectiveness of the Group’s systems Identified risks are documented in risk ofrisk management and internal control Environmental, Social and registers showing: the risks that have been processes, including financial, operational GovernanceCommittee identified; characteristics of the risk; the and compliance controls and risk The Environmental, Social and basis for determining mitigation strategy; management systems, in accordance GovernanceCommittee monitors the and what reviews and monitoring are withthe UK Corporate Governance Group’s performance in managing the necessary. Each risk is allocated an owner Code.The Group has developed a system Group’s significant non-financial risks, who has authority and responsibility for ofinternal controls that was in place including those arising in respect of assessing and managing it. throughout 2022 and to the date of businessconduct, health and safety, and thisreport. Project risks are reported and monitored theenvironment. The Committee reports inGroup-mandated format Contract itsfindings to the Board on a regular basis. As with any system of internal control, ReviewPacks, which are reviewed by thepolicies and processes that are management at monthly Contract Reviews. mandated in the Operational Framework The financial performance of projects is are designed to manage rather than reported and monitored using Contract eliminate the risk of failure to achieve Status Reports, which form part of the business objectives and can only provide Contract Review Pack. reasonable, and not absolute, assurance against material misstatement or loss. 116 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance These include programme margin Management responsibility for the Page 118 Our risk management framework metrics,which are reviewed regularly management of the Group’s most bytheExecutive Committee and Board. significant non-financial risks is Page 119 Our principal risks Project margin is recognised after making determinedby the Executive Committee. suitable allowances for technical and The OAS and non-financial risk registers otherrisks related to performance arereviewed regularly by the Executive milestones yet to be achieved. Committee to monitor the status and In addition, every six months, the progression of mitigation plans. The key businessesand Group functions complete risks are reported to the Board on a an Operational Assurance Statement regularbasis. (OAS),which is a mandated policy under ### Principal and emerging risks the Operational Framework. The OAS is in two parts: a self-assessment of compliance The Board has carried out a robust with the Operational Framework; and assessment of the principal and emerging areport showing the key financial and risks facing the Group. Principal and non-financial risks for the relevant business emerging risks have been identified, and and Group functions. Together with aremanaged or mitigated, through the reviewsundertaken by Internal Audit application of the policy and processes andthe work of the external auditors, outlined above. theOASforms the Group’s process for Principal risks include those that would reviewing the effectiveness of the system threaten the Group’s business model, ofinternal controls. futureperformance, solvency, liquidity Risks can develop and evolve over time orreputation. Risks have been identified andtheir potential likelihood and impact asprincipal based on the likelihood of may vary over time in response to events. occurrence, the potential impact on the These may include emerging risks, which Group and the timescale over which they are considered through the above existing might occur. The principal risks, together processes, or through the Group’s business with details of how they are being planning and annual strategy review process. mitigatedand managed, are detailed onpages 119 to 125. Executive Committee The directors have considered the The key financial and non-financial risks relevanceof the risks of climate change identified by the sectors and Group andtransition risks associated with the functions from the risk assessment Group’s net zero greenhouse gas emissions processes are collated into a report for targets when preparing and signing off review by the Executive Committee. In theGroup’s accounts. 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. BAE Systems plc Annual Report 2022 117 Strategic report / Risk ## Our risk management framework ## Board Overall responsibility for risk management Audit Committee Environmental, Social and Operational Assurance Statement Risk Register GovernanceCommittee and Non-financial Risk Register Non-financial Risk Register Risk challenge, Executive Committee Operational Assurance Statement Risk Register and Non-financial Risk Register monitoring and reporting 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 Core Business Processes Integrated Business Plan Annual long-term strategy review and five-year plan for each business Strategic objectives and shareholder value Project objectives and financial return Business Risk Project Risk Identification Risk Management Policy Lifecycle Management Framework Financial and non-financial risks (Mandated Policy) (Mandated Policy) recorded in risk registers Mitigation Analysis Risk owners identified and action plans Risks analysed for impact implemented. Robust mitigation strategy andprobability to determine subject to regular and rigorous review gross exposure Evaluation Risk exposure reviewed andrisks prioritised Operational Assurance Statement Lifecycle Management Project Performance Review Six-monthly management self-assessment of compliance Regular management review of project performance and issues withtheOperationalFramework and summary of key risks toensurethatappropriate decisions and actions are taken (Mandated Process) ## Audit Review Board Assurance of the Business and Project Risk management processes as mandated in the Audit Charter. Including Operational and Non-financial Risk Management assurance Page 135 See the Group’s Operational Framework for definitions of policies, processes and reviews 118 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance ## Our principal risks Key links to strategy ### Risks are identified based on the likelihood of occurrence, the 1 Sustain and grow our defencebusiness ### potential impact on the Group and the timescale over which | | 2 Continue to grow our business inadjacentmarkets | | --- | --- | | theymight occur. The Group’s principal risks are identified below | 3 Develop and expand our international business | | | 4 Inspire and develop adiverse workforce to drive success | ### together with a description of how we mitigate those risks. The 5 Enhance financial performance and deliver sustainable ### risks estimated as more significant to the Group (as at the date growth in shareholder value 1 ### ofthis Strategic Report) are placed at the top end of the list . 6 Advance and integrate our sustainability agenda Page 16 Our strategic framework Key links to strategy ### Government customers, defence spending and terms of trade 1 2 3 4 5 6 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. Description Impact Mitigation | In 2022, 95% of the Group’s sales were defence-related. | Lower defence spending by the Group’s | The business is geographically spread across | | --- | --- | --- | | Defence spending by governments can fluctuate | major customers could have a material | theUS,UK and international defence markets. | | depending on change of government policy, other | adverse effect on the Group’s future | The diverse product and services portfolio is | | political considerations, budgetary constraints, specific | results and financial condition. | marketed across a range of defence markets. | | threats and movements in the international oil price. | | Many of the countries in which we operate either | | There have been constraints on government expenditure | | have announced increases or are making plans to | | in a number of the Group’s principal markets. | | increase spending to address the elevated threat | environment. Whilst global economic and fiscal pressures weigh on governments, the commitment to defence in our major markets remains robust. Our principal markets – the UK, US, Kingdom ofSaudi Arabia and Australia – have a significant and sustained commitment to defence and security – see Our markets on pages 20 to 23 of this AnnualReport. BAE Systems benefits from a large order backlog,with established positions on long-term programmes in our principal markets. BAE Systems also has a portfolio of commercial businesses, including commercial avionics. The Group has long-standing relationships and security Deterioration in the Group’s principal BAE Systems has established strong and enduring arrangements with a number of its government government relationships resulting relationships in its principal markets and is recognised customers, including its three largest customers, the inthe failure to obtain contracts or as playing a key role in the industrial capability of governments of the US, UK and the Kingdom of Saudi expected funding appropriations, each of the countries in which it operates. Arabia, and their agencies. It is important that these adverse changes in the terms of its Government customers have sophisticated relationships and arrangements are maintained. arrangements with those customers procurement and security organisations with which In the defence and security industries, governments ortheir agencies, or the termination the Group has long-standing relationships with cantypically modify contracts for their convenience ofcontracts could have a material well-established and understood terms of business. orterminate them at short notice. Most long-term US adverse effect on the Group’s future In the event of a customer terminating a contract government contracts, for example, are funded annually results and financial condition. for convenience, the Group would typically be paid or incrementally and are subject to cancellation if funding for work done and commitments made at the time appropriations for subsequent periods are not made. of termination. Governments also 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. 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. The Group’s profits and cash flows are dependent, to a Amounts receivable under the Group’s The Group’s balance sheet continues to be managed significant extent, on the timingof, or failure to receive, defence contracts can be substantial conservatively in line with its policy to retain an award of defence contracts and the profile of cash and, therefore, the timing of, or failure investment-grade credit rating and to ensure receipts on its contracts. toreceive, awards and associated cash operating flexibility. advances and milestone payments could The Group monitors a rolling forecast of its liquidity materially affect the Group’s profits requirements to ensure that there is sufficient cash andcash flows for the periods affected, to meet its operational needs and maintain thereby reducing cash available to meet adequate headroom. the Group’s cash allocation priorities, potentially resulting in the need to arrange external funding and impacting its investment grade credit rating. 1. 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. BAE Systems plc Annual Report 2022 119 Strategic report / Risk / Our principal risks Key links to strategy ### International markets 1 2 3 4 5 6 The Group operates in international markets. Description Impact Mitigation BAE Systems is an international company The occurrence of any such events could The Group has a balanced portfolio of businesses conducting business in a number of regions, have a material adverse effect on the acrossa number of markets internationally. The Group including the US and the Middle East. Group’s future results and financial benefits from a large order backlog, with established condition. The risk of the Group’s inability positions on long-term programmes in the US, UK, The risks of operating in some countries include: to obtain and maintain the necessary Kingdom of Saudi Arabia and Australia. social and political changes impacting the export licences for our business in the business environment; economic downturns, The Group’s contracts are often long-term in nature Kingdom of Saudi Arabia could affect political instability and civil disturbances; the and, consequently, it may be able to mitigate these theGroup’s provision of capability to imposition of restraints on the movement of risksover the term of those contracts. thecountry. capital; the introduction of burdensome taxes Political risk insurance is held in respect of export ortariffs; change of export control, tax and contracts not structured on a government-to- othergovernment policy and regulations in government basis where considered appropriate theUK, USand all other relevant jurisdictions; withregard to the level of risk involved. and the inability to obtain or maintain the necessary export licences. BAE Systems 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, including export control requirements. The Group is exposed to volatility arising Significant fluctuations in exchange rates The Group’s policy is to hedge all material firm frommovements in currency exchange rates, towhich the Group is exposed could have transactional currency exchange rate exposures. particularly in respect of the US dollar, euro, a material adverse effect on the Group’s Saudiriyal and Australian dollar. There has been future results and financial condition. volatility in currency exchange rates in the year. | While the terms of the UK’s relationship with | If the UK is excluded from new European | BAE Systems benefits from a large order backlog with | | --- | --- | --- | | theEU after the end of the transition phase | collaborative defence programmes, this | established positions on long-term programmes in the | | on31 December 2020 have now been clarified | could impact the Group’s future results | US, UK, Kingdom of Saudi Arabia and Australia and | | bythe entry of the UK and the EU into the | andfinancial condition. | there is relatively limited UK-EU trading. BAE Systems | | Tradeand Cooperation Agreement, the UK | | has key roles in major ongoing European programmes, | | isnow a third country for the purposes of | | such as Eurofighter, which are only likely to be | | EU-funded defence projects. There remains | | marginally affected by Brexit. BAE Systems will | | therisk that, as a result of the UK leaving the | | supportthe UK government in achieving its aim to | | EU,the Group’s ability to take part in new | | ensure that the UK maintains its key role in European | | European collaborative defence programmes, | | security and defence in the post-Brexit environment, | | whether under such EU-funded projects or | | and to strengthen bilateral relationships with key | | otherwise, could be hampered. | | partners in Europe. As an example, the UK has | joinedthe Permanent Structured Cooperation (PESCO) military mobility programme as an observer. These actions will be important for ongoing collaboration withkey partners in Europe on the development of defence capabilities. 120 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance Key links to strategy ### Contract risk, execution and supply chain 1 2 3 4 5 6 The Group has many contracts, including a small number of large contracts and fixed-price contracts, and is dependent upon component availability, subcontractor performance and key suppliers. Description Impact Mitigation | In 2022, 51% of the Group’s sales were | The inability of the Group to deliver | Contract-related risks and uncertainties are managed under | | --- | --- | --- | | generated by its 16 largest programmes. | onits contractual commitments, the | the Group’s mandated Lifecycle Management process. | | At31 December 2022, the Group had ten | loss, expiration, suspension, cancellation | | A leadership development programme for project programmes with order backlog in excess or termination of any one of its large directorscontinues to be deployed across the Group, of£1bn. contracts or its failure to anticipate covering the leadership competencies required to manage technical problems or estimate A significant portion of the Group’s revenue complex projects containing significant levels of risk accurately and control costs on isderived from fixed-price contracts. Actual anduncertainty. fixed-price contracts could have a costsmay exceed the projected costs, including material adverse effect on the Group’s A significant proportion of the Group’s largest assumptions on future rates of inflation, on future results and financial condition. contractsare with the UK Ministry of Defence. In the whichthe fixed prices are agreed and, since these UK,development programmes are normally contracted contracts can extend over many years, it can be with appropriate levels of risk being initially held by the difficult topredict the ultimate outturn costs. customer and contract structures are used to mitigate risk It is important that the Group maintains a culture on production programmes, including where the customer in which it delivers on its projects within tight and contractor share cost savings and overruns against tolerances of quality, time and cost performance target prices. in a reliable, predictable and repeatable manner. The Group has a well-balanced spread of programmes and significant defence order backlog which provides portfolio resiliency and forward visibility. The Group has limited exposure to fixed-price design and development activity which is in general more risk intensive than fixed-price production activity. Robust bid preparation and approvals processes are well established throughout the Group, with decisions required to be taken at the appropriate level in line with clear delegations of authority. The Group is dependent upon the delivery Some of the Group’s suppliers or The Group’s procurement function is responsible ofmaterials by suppliers and the assembly of subcontractors may be impacted by forestablishing and managing end-to-end integrated components and subsystems by subcontractors theeconomic environment (including supplier arrangements, in partnership with the programmes used in its products in a timely and satisfactory inflationary pressures) which could they support. manner, on satisfactory commercial terms impair their ability to meet their The Executive Committee continues to monitor this andinfull compliance with applicable terms obligations to the Group and to supply risk.Inmany cases, the Group benefits from long-term andconditions. The external supply chain on satisfactory commercial terms. In programme positions and incumbencies with more stable environment is very dynamic at this time, some instances, the Group is dependent forward visibility for long-lead items allowing the Group withboth lead-time and availability issues, on one or a limited number of suppliers. tocontinue to actively manage supplier lead times against butalso pricing pressures, including from If any of these suppliers or subcontractors demand requirements. inflationary increases in labour, energy and fail to meet the Group’s needs, the otherkey materials. Group may not, in the short term, have The Group seeks to manage the inflation risk through readily available alternatives, thereby itscontracting arrangements on many of its major impacting its ability to complete its programmes, effective cost management and improved customer obligations satisfactorily and efficiency of the Group’s own operations and through in a timely manner. The above events itslong-term supplier agreements. could have a negative impact on the Group’s future results of operations andfinancial condition. BAE Systems plc Annual Report 2022 121 Strategic report / Risk / Our principal risks Key links to strategy ### Cyber security 1 2 3 4 5 6 The Group could be negatively impacted by threats to the security ofitsinformation technology and operational technology systems. Description Impact Mitigation Cyberspace is an increasingly contested Failure to combat these risks As a major defence, aerospace and security company, it is critical environment with criminals, hacktivists effectively could disrupt business thatour Group networks, as well as the products and services we and sub-threshold activity from nation operations, compromise the sell,are cyber resilient and the intellectual property and confidential states being asignificant threat. The security of the Group’s products information held and processed on them is appropriately secured. cybersecurity threats faced by the and services, erode the Group’s Our governance model and organisational structure (through the Groupinclude: the potential for business competitive advantage, harm ChiefTechnology and Information Officer and Group Security Director) disruptions due to an attack impacting staffand negatively impact the is designed to facilitate close alignment between company strategy the availability of its information Group’s reputation among its andthe resulting engineering, technology, and digital and cyber technology and operational technology customers and the public, security strategies. infrastructure and systems; unlawful resultingin a negative impact attempts to gain accessto both the onthe Group’s future results The cyber security risk is constantly reviewed and an agile, proactive, Group’s proprietary orclassified andfinancial condition. approach to mitigating the risk is taken. We do this byefficiently information and that of its customers, leveraging our core internal capabilities in cyber security, including partners and suppliers; and the potential ourspecialist threat intelligence service, tomaintain a managed risk forbusiness disruptions andloss or position as we digitally transform and the threat landscape evolves. compromise of classified, proprietary or Our suppliers, direct and indirect, are vital contributors to our business. personal information through an attack Many hold significant amounts of intellectual property and confidential onthe Group’s supplychain. information on behalf of both the Group and its customers and so,to mitigate the cyber security risk they pose, we include cyber security- related obligations in our contracts with relevant suppliers. We purchase cyber insurance; however, as with all insurance, it does notprovide full cover against all potential loss scenarios. Our internal Cyber Security Standards for Company networks are aligned to the National Institute of Standards and Technology framework and controls and a formal, three layers of defence, assurance programme isoperated to check adherence to Company standards and customer requirements, which is reviewed both internally andexternally. Additionally, many of our networks are formally accredited by our government customers. To further increase our cyber resilience, our Security Operations Centres in the UK and the US perform continual protective monitoring of our 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. Education and awareness to embed a strong cyber security culture across the Group is another vital part of our activities. We take a holistic approach providing training coupled with events and activities to drive better engagement and learning outcomes. We strive for the training to be relatable, both on a professional and personal level, sothat hybrid working employees maintain a strong sense of cyber awareness whether at home or in the office. 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 still involve email, we run a programme of phishing exercises for all email users across the enterprise. Key links to strategy ### Competition in international markets 1 2 3 4 5 6 The Group’s business is subject to significant competition ininternationalmarkets. Description Impact Mitigation The Group’s business plan depends The Group’s business and future The Group has an international, multi-market presence, abalanced uponits ability to win and contract results may be adversely impacted if portfolio of businesses, leading capabilities and a trackrecord of forhigh-quality new programmes, an itis unable to compete adequately delivery on its commitments to its customers. increasing number of which are expected andobtain new business in the The Group continues to invest in research and development, andto to be in markets outside the US and UK. markets in which it operates. reduce its cost base and improve efficiencies, to remaincompetitive. The Group is dependent upon US and In the UK, export contracts can be structured on a government-to- UKgovernment support in relation to government basis and government support can also involve military anumber of its business opportunities training, ministerial support for promotional activities and financial inexport markets. 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. 122 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance Key links to strategy ### People 1 2 3 4 5 6 The Group’s strategy is dependent on its ability to recruit and retain people withappropriate talent and skills. Description Impact Mitigation Delivery of the Group’s strategy and business plan The loss of key employees or inability The Group recognises that its employees are key to is dependent on its ability to compete to recruit toattract the appropriate people on a delivering its strategy and business plan, and focuses and retain people with appropriate talent and timely basis could adversely impact the ondeveloping the existing workforce and hiring skills, including those with innovative Group’s ability to deliver its strategy, meet talented people to meet current and future technological capabilities. the business plan and, accordingly, have requirements. anegative impact on the Group’s future The Group’s business plan is targeting an The Group has well-established graduate recruitment results and financial condition. increasing level of business in international export andapprenticeship programmes and, in order to markets outside the US and UK. It is important maximisethe contribution that its workforce can make that the Group recruits and retains management tothe performance of the business, has an effective with the necessary international skills and through-career capability development programme. experience in the relevant jurisdictions. In order to seek to maximise its talent pool, the Group iscommitted to creating a diverse and inclusive environment for its employees. Key links to strategy ### Outbreak of contagious diseases 1 2 3 4 5 6 The outbreak of contagious diseases may have an adverse effect on the Company’s business, financial condition and results of operations. Description Impact Mitigation There has been a COVID-19 pandemic across Contagious diseases, and the measures The Group’s experience in dealing with the COVID-19 theworld and governments have taken a number taken to control them, can have an adverse pandemic will assist it in dealing with further outbreaks of steps to mitigate the impact of this pandemic. effect on the Group’s business, financial of contagious diseases. This includes the use of safe Many people have contracted the disease across condition and results of operations. working practices and the effective use of home working. the world and many deaths have occurred. Areas of the Group’s business that could be In the COVID-19 pandemic, support for the defence Although there has been an effective roll-out impacted include a decrease in spending by industry from the governments in our key markets has ofvaccination programmes in certain countries, the Group’s major defence and commercial been strong around prioritisationof capabilities, cash itis still not clear how enduring the long-term customers; an increase in taxation by flows, recognising theneed to maintain a strong supply impact of the pandemic will be. governments; the failure to obtain awards chain and workingcollaboratively to maintain critical A further outbreak of a contagious disease for defence and commercial contracts; the defence andsecurity programmes. couldoccur. failure of suppliers to deliver parts to the Group; the requirement for the Group or itssuppliers to reduce site operational levels or close sites; the inability of the Group to meet contractual delivery requirements on time; the inability to adequately staff and manage the business; and an increase in the cost or lack of availability of funding. If the Group were unable to obtain appropriate funding, it could be forced tomake reductions in spending, seek to extend payment terms with suppliers and/ or suspend or curtail planned programmes. Any of the above could have a material adverse effect on the Group’s business,financial condition and results ofoperations. BAE Systems plc Annual Report 2022 123 Strategic report / Risk / Our principal risks Key links to strategy ### Pension funding 1 2 3 4 5 6 An aggregate funding deficit could arise in the Group’s defined benefit pensionschemes. Description Impact Mitigation The latest triennial actuarial valuations of the An increase in pension scheme In the UK, new employees have been offered membership of Group’s UK defined benefit pensions schemes liabilities or reduction in pension defined contribution rather than defined benefit schemes since showed as at their respective dates that there scheme assets could result in a April 2012 and, in the US, employees have not accrued salary- is no funding deficit in any of those schemes on pension scheme deficit which may related benefits in defined benefit schemes since January 2013. a technical provisions basis. A funding deficit require the Group to make deficit The investment strategy in place across the UK and US schemes could arise or be adversely affected by changes contributions to these schemes, aims to ensure that the pension scheme assets are invested in a number of factors, including investment thereby reducing cash available suchthat they match the cash flows needed to meet the pension returns and members’ anticipated longevity. tomeet the Group’s other cash liabilities, thereby reducing the risk of a deficit arising. Across the allocation priorities. UK schemes there are a number of longevity risk management strategies in place. The Company and Trustee agreed to carry out a triennial actuarial funding valuation as at 31 March 2021 of the Group’s largest UK defined benefit pension scheme. In June 2022, that valuation was agreed with the Trustee after consultation with The Pensions Regulator in theUK. The latest triennial actuarial valuations of that scheme and of the Group’s other smaller UK defined benefit pensions schemes showed as at their respective dates that there is no funding deficit in any of those pension schemes on a technical provisions basis. Key links to strategy ### Climate change and the environment 1 2 3 4 5 6 The Group may be impacted by environmental factors, including those relating to climate change. Description Impact Mitigation | The Group is subject to comprehensive | Environmental factors, including | We have set ourselves the target of achieving net zero greenhouse | | --- | --- | --- | | environmental laws and regulations in each | those relating to climate change, | gas emissions across our operations (Scope 1 and 2) by 2030 and | | ofthecountries in which it operates, including | have the potential to materially | working towards a net zero value chain by 2050. | | those relating to the impacts of climate | impact our business and operations. | | Climate and environment risk is embedded with our approach change. Such laws and regulations impose Increasing changes in environmental torisk management via our business and project risk registers. standards with respect to air emissions, laws and regulations can expose Climate-related physical and transition risks have been identified wastewater discharges, the use, handling theCompany to increasing capital and assessed as part of our decarbonisation strategy. andstorage of hazardous materials and and operating costs associated waste,remediation of soil and groundwater BAE Systems uses analytical tools to apply natural catastrophe withcompliance, remediation contamination and the prevention of pollution. classifications to its sites worldwide. This has informed our andprotection of the environment. Increasingly, environmental legislation is strategy as to where to target a programme of specific flood, Breaches of such laws and seeking to encourage a reduction in windstorm and earthquake assessments of our sites and regulations can result in substantial greenhouse gasemissions. implement the subsequent risk reduction recommendations. costs, including fines, penalties | The Group may also be impacted by | orother sanctions, investigations | During 2022, we further developed our understanding of | | --- | --- | --- | | environmental factors, including physical | andclean-up costs, and third-party | climate-related risks and opportunities, conducting scenario | | risksarising from climate change, such | claims for property damage or | analysis of material risks so that we could understand potential | | asextreme weather events, for example | personal injury as well as the | unmitigated risks and our business readiness to mitigate any | | floodingand storms, and scarcity of water | termination of permits. | suchrisks. | andother resources. Extreme weather events can impact The Group may also be impacted by climate ouroperational sites as well of those change transition risks resulting from the ofour suppliers. process of adjusting to a low carbon economy. The shift to a low carbon economy Associated with this are potential risks around has the potential to increase the cost our ability to attract and retain future talent, of business as the Group transitions energy-related taxes and the increased costs tolower-emissions technologies of compliance with energy-related schemes. anddeals with the disposal of its legacy assets. 124 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance Key links to strategy ### Laws and regulations 1 2 3 4 5 6 The Group is subject to risk from a failure to comply with laws and regulations. Description Impact Mitigation The Group operates in a highly regulated Failure by the Group, or its sales BAE Systems has a well-established legal and regulatory environment across many jurisdictions and is representatives, marketing advisers compliance structure aimed at ensuring adherence to subject, without limitation, to regulations relating orothers acting on its behalf, to regulatory requirements and identifying restrictions that to import-export controls, money laundering, complywith these regulations could could adversely impact the Group’s activities. false accounting, anti-bribery and anti-boycott result in fines and penalties and/or Internal and external market risk assessments form an provisions. It is important that the Group thesuspension or debarment of the important element of ongoing corporate development maintains a culture in which it focuses on Group from government contracts or andtraining processes. embedding responsible business behaviours the suspension of the Group’s export andthat all employees act in accordance with privileges, which could have a material A uniform global policy and process for the appointment therequirements of the Group’s policies, adverse effect on the Group. ofadvisers engaged in business development is in effect. including the Code of Conduct, at all times. Reduced access to export markets BAE Systems continues to reinforce its ethics programme Export restrictions could become more couldhave a material adverse effect globally, driving the right behaviours by supporting stringentand political factors or changing onthe Group’s future results and employees in making ethical decisions and embedding international circumstances could result financial condition. responsible business practices. intheGroup being unable to obtain or maintainnecessary export licences. Key links to strategy ### Acquisitions 1 2 3 4 5 6 The anticipated benefits of acquisitions may not be achieved. Description Impact Mitigation BAE Systems considers investment in The diversion of management The Group has established policies in place to manage value-enhancing acquisitions where market attentionto integration efforts and the theacquisition process, monitor the integration and conditions are right and where they deliver performance of the acquired businesses performance of acquired businesses, and identify onitsstrategy. Whether BAE Systems realises below expectations could adversely potentialimpairments. theanticipated benefits from these transactions affect BAE Systems’ business and create depends upon the successful integration of the risk of impairments arising on theacquired businesses as well as their goodwill and other intangible assets. post-acquisition performance in the markets inwhich they operate. 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 2022 125 Strategic report / Risk ## Viability statement ## 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. ### This assessment considered both The viability assessment period Assessment ### the Group’s long-term prospects The Directors have assessed the viability of The Board’s assessment of the Group’s the Group over a five-year period. This is prospects was informed by the following ### and also its ability to continue in considered the most appropriate period for business processes: ### operation and meet its liabilities the assessment as it is consistent with the Risk management process – the Group Group’s five-year business planning cycle. ### asthey fall due over its five-year has developed a structured approach to ### Analysis of business prospects themanagement of risk (see above) and ### business planning period. principal and emerging risks identified are The Board has considered the long-term considered as part of the Board’s annual prospects of the Group based on our review of the Integrated Business Plan. strategy, markets and business plan as | outlined on pages 16 to 37 of this report. | The Board recognises that the principal | | --- | --- | | Inits strategic review of the Group, the | risksidentified on pages 119 to 125 | | Board recognised the importance of certain | couldimpact the future viability of the | | factors that underpin its long-term prospects | Group, and has undertaken more detailed | | and viability. In summary, these are: | scenario analysis in relation to specific risks | that are considered most likely to have • a diverse portfolio of businesses based amore immediate and severe financial onwell-established market positions, impact on the Group. providing both complex, high-technology products and programmes, and The viability assessment has taken into differentiated technical services and account reasonably plausible, but severe, support. In 2022, 40% of Group sales downside scenarios related to these risks were product/programme related and and assessed the impact on the future 60% services and support; cashflows, profitability, financial covenants, • a geographically diverse business with a solvency and liquidity of the Group. high proportion of sales to governments Integrated Business Plan (IBP) – the IBP and other major prime defence contractors. represents a common process with standard In 2022, 35% of sales were to the outputs and requirements that produces USDepartment of Defense, 22% to anintegrated strategic and business plan theUK Ministry of Defence and 11% forthe Group and also for each of its tothe Kingdom of Saudi Arabia Ministry businesses over the following five years. of Defence and Aviation. The Group’s Theuse of a five-year period provides robust order backlog continues to provide arobust planning tool against which a strong foundation for further market long-term decisions can be made concerning, diversity and growth; amongst other things, strategic priorities, • long-term visibility of sales and future addressing the Group’s stated net zero saleprospects through a substantial order target and climate-related risks and backlog and incumbent positions on opportunities, funding requirements major defence programmes; and (including commitments to Group pension • market positions underpinned by a highly schemes), returns made to shareholders, skilled workforce, intellectual property capital expenditure and resource planning. assets and proprietary know-how, which Longer-term strategic inputs also form are safeguarded and developed for the partof the IBP process and, where activity future by customer- and Group-funded isrequired to meet such long-term investment. Such investment is focused priorities, this is provided for in the plan. on a well-developed understanding of The detailed plan is reviewed each year future technologies and the threat bythe Board as part of its strategy review environment shaping the long-term process. Once approved by the Board, the defence and aerospace market. 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. 126 BAE Systems plc Annual Report 2022 Strategic report Financial statementsGovernance Liquidity and solvency analysis – the Group’s liquidity isunderpinned by an undrawn committed Revolving Credit Facility of £2bn contracted to April 2025, and 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 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; and • the loss of a major export market. The scenarios tested included the impact ofmultiple adverse factors. ### Conclusion In undertaking its review of the IBP in 2022, 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 119 to 125). ### Strategic report The Strategic report was approved by the Board of directors on 22 February 2023. David Parkes Company Secretary BAE Systems plc Annual Report 2022 127 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approif 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 in the 12-month period from the date ofapprovof approving them. For this reason, they continue to adopt thegothe going concern basis in preparing theaccountthe accounts. Governance / Directors' report # Governance at a glance ## The Board of directors The Company is led by the Board of directors. Its role is to promote the long-term sustainable success of the Company, generating value for shareholders and contributing to wider society. Page 34 The work of the Board ### Contents | Chairman's governance letter | 129 | | --- | --- | | Board of directors | 131 | | Governance framework | 134 | | Applying the UK Corporate Governance Code Principles | 136 | | Compliance with the UK Corporate Governance Code provisions | 138 | | Board and Executive Committee diversity information | 139 | | Nominations Committee report | 140 | | Audit Committee report | 145 | | Environmental, Social and Governance Committee report | 151 | | Innovation and Technology Committee report | 157 | | Remuneration Committee report | 160 | The purpose of the Committee is to ensure effective succession planning for the Board, and to oversee the development of a diverse pipeline of succession, taking into account a balance of skills, experience and knowledge. ### Nominations Committee report Page 140 ![img-8.jpeg](img-8.jpeg) The purpose of the Committee is to monitor the integrity of the financial and narrative statements of the Group, monitor and review the effectiveness of internal controls and oversee the relationship with the external auditor. ### Audit Committee report Page 145 ![img-9.jpeg](img-9.jpeg) The purpose of the Committee is to assist the Board in promoting the long-term sustainable success of the Group with regard to environmental, social and governance matters. ### Environmental, Social and Governance Committee report Page 151 ![img-10.jpeg](img-10.jpeg) The purpose of the Committee is to promote the success of the Group through the effective oversight of the application of science, engineering, and technology and the successful exploitation of its intellectual property and know-how in pursuit of its business and commercial goals. ### Innovation and Technology Committee report Page 157 ![img-11.jpeg](img-11.jpeg) The purpose of the Committee is to set policies for Executive remuneration that are designed to promote long-term sustainable success aligned to the Group's values and successful delivery of its long-term strategy. ### Remuneration Committee report Page 160 ![img-12.jpeg](img-12.jpeg) 128 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ## Chairman’s governance letter ## Good governance ## practice has to be ## embedded into the ## culture of a company ## and be a natural part ## ofcorporate life. ### Sir Roger Carr ### Chairman ### Dear Shareholders The composition of the Board mirrors We have recently completed a review of thebalance between national and thefees paid to the non-executive directors As in past years, I will use this introduction international aspects of our governance – the first such review in three years. It was to the Governance reports to highlight a structure. A majority of directors and agreed that the basic fee should be increased few key governance themes concerning the theChief Executive are UK nationals by 4%. In order to recognise more fully work of the Board and its committees. | | (asrequired by the UK’s Special Share | thetime commitments and responsibilities | | --- | --- | --- | | As a UK listed company our governance | arrangements) but there is also a significant | involved, we also agreed an additional | | isbased on the successful UK model of a | international presence on the Board. | feepayable for membership of board | | unitary board applying the principles of the | Consistent with the special arrangements | committees (except the Nominations | | UK Corporate Governance Code – and I am | inplace to protect US national security, | Committee). Further details of the | | pleased to report that we are also compliant | thatincludes the President and Chief | non-executive director fee review | | with its provisions (see page 138). Whilst | Executive Officer of our US operation. | canbefound on page 176. | | weare a UK company, our governance | Hismembership of the Board is an | | In recent years, there has been a good deal structure respects and helps uphold the important part of our corporate governance of emphasis on a director’s duties but that special arrangements in place to protect arrangements and of great value to the has often been focused on decision-making thenational security interests of our Company and its stakeholders. and rather less on Board oversight of government customers. These arrangements The US President and Chief Executive operational performance, which I believe is are of great value to us. They are an Officer role can only be performed by a equally important. As a Board we exercise essential part of our ability to be both a locally based US national but, because of his operational oversight at all of our regular successful international company and, at the position on the Board, we do look to apply scheduled meetings but we also require same time, a valued and trusted part of our UK governance requirements when independent oversight, which iswhy boards government customers’ sovereign defence structuring the remuneration package for have committees, and audit committees and security interests. | | the role. In dealing with the renewal of our | inparticular. The Chair of our Audit | | --- | --- | --- | | Whilst being a British company, we | Directors’ remuneration policy at this year’s | Committee, Stephen Pearce, provides details | | operateinternationally. Notably, we have | AGM, the Remuneration Committee has | of the Committee’s activities in his report on | | asignificant presence in the US, which is | considered at some length how we deal | pages 145 to 150. The Committee has also | | byfar the largest defence market, and the | with that role in terms of reward, which | been monitoring the significant changes we | | US Department of Defense is our largest | isan important consideration in our being | expect to the audit, risk and internal control | | customer. We are one of the largest | able to sustain this unique, and highly | provisions in the Code and also the | | international defence companies – as such, | beneficial, arrangement in the long term. | proposed changes to the audit market, and | | we are well placed to support our national | Ithas required the Committee to balance | will ensure we are well placed to implement | | government customers in maintaining and | UK governance norms against the | these when necessary. | | developing the international relationships | remuneration standards for a US executive | | | that are a vital part of global defence and | role that is only comparable with the local | | | security structures. | US market. The Chair of our Remuneration | | Committee, Nicole Piasecki, provides more detail on this matter in her report on pages 160 to 164. BAE Systems plc Annual Report 2022 129 Governance / Directors’ report / Chairman’s governance letter The need for independent oversight is also The key activity undertaken by our This is my last annual report to shareholders akey factor in the growing trend for boards Nominations Committee last year was before I retire at this year’s AGM. I am sure to establish Environmental, Social and toidentify my successor. In line with the Board, led by the new Chair, will remain Governance (ESG) committees. Our ESG goodgovernance requirement, our diligent in its oversight and leadership of the Committee has been a core part of our SeniorIndependent Director, Chris Grigg, Company and ensure its governance keeps governance structure for over a decade. chaired and led the committee throughout pace with best practice and the expectations During that time, we have always structured that process. He engaged closely with all his of our shareholders and other stakeholders. its activities and responsibilities so that they non-executive director colleagues in agreeing are similar to those of the Audit Committee. a profile for the role that incorporated, That link is evident in the two committees among other things, the required skills, holding an annual joint meeting to bring knowledge and experience we were looking wider oversight of the effectiveness of our for in this appointment. The succession risk and internal controls processes and also planning process started in good time, review the capabilities and annual work which allowed the Committee to undertake programme for our internal audit function. a comprehensive and considered search. ### Sir Roger Carr The level and importance of ESG reporting Iam pleased that we were able to ### has grown significantly in recent years and concludethis matter successfully with Chairman ithas been encouraging to see how the theappointment of Cressida Hogg as a ESGCommittee has been working with non-executive director and Chair designate. theAudit Committee to develop a wider To provide continuity of experience understanding of risk, including climate- andknowledge on the Board following related risk and its reporting and assurance. myforthcoming retirement, Chris Grigg Last year, our Innovation and Technology willremain a non-executive director of Committee (ITC) completed its first full year theCompany until no later than the end of operation, it having been formed in July ofthe year. 2021. We wanted this committee to focus Last year, the Company continued to on how we innovate and develop new perform strongly. That was clear to the technology, something that is critical to our Board last November when it completed long-term success. By forming a committee itsannual strategy review and approved of the Board we were looking to gain a thebusiness plan for the next five years. more direct insight and deeper understanding However, regardless of operational of this important matter. Dr Ewan Kirk, the performance, good governance practice Chair of the ITC, has provided more detail hasto be embedded into the culture of a ofthe committee’s activities in his report company and be a natural part of corporate onpages 157 to 159. I am pleased that the life. By setting the right tone at the top of committee took the decision to hold most the company and leadership setting clear of its meetings at operational sites, which expectations on behaviours and actions, has allowed it to engage with employees theintrinsic culture of a company helps and understand at first hand theworkplace steer the right course through good times culture that is essential to the fostering of and bad. innovation. That was also true for the Board as a whole in 2022, when, freed from the restrictions of the COVID pandemic, all directors were able to visit our sites and engage directly with the workforce. 130 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ## Board of directors Sir Roger Carr Dr Charles Woodburn Brad Greve Chairman Chief Executive Group Finance Director N | Appointed to the Board: 2013 Nationality: UK | Appointed to the Board: 2016 Nationality: UK | Appointed to the Board: 2020 Nationality: US | | --- | --- | --- | | Skills, competence and experience | Skills, competence and experience | Skills, competence and experience | | Sir Roger was appointed Chairman in 2014, having | Charles joined BAE Systems in May 2016 as Chief | Brad joined BAE Systems in 2019 as Group | | joined the Board in 2013 as Chair Designate. He is | Operating Officer and became Chief Executive on | FinanceDirector Designate and joined the Board | | anexperienced company chairman with a wealth | 1July 2017. | on1April 2020. | ofknowledge gained across a number of business He is an experienced business leader with over He is a highly experienced executive with deep sectors. With over two decades of boardroom 26years’ experience in the defence and aerospace, financial and operational management experience, experience, Sir Roger has a deep understanding and oil and gas industries. Prior to joining the gained during a 30-year career in international ofgood stewardship, corporate governance and Company in 2016, he was Chief Executive Officer engineering and technology businesses. Prior to theenablers of board effectiveness. ofExpro Group, before which he spent 15 years joining the Company he held a number of senior Sir Roger is a Senior Advisor to KKR, a non-executive withSchlumberger Limited holding a number of executive roles in Schlumberger, undertaking director of Wella International Operations S.a.r.l. senior management positions in Asia, Australia, rolesinEurope, Africa, South America and the US. (acompany majority-owned by KKR), Chairman Europe and the US. Charles is a trustee and Chair ofthe English NationalBallet and Vice President ofthe charity Movement to Work. He is a Fellow ofthe RoyalNavyand RoyalMarines Charity. ofthe Royal Academy of Engineering. He has previously held a number of senior appointments including Chairman of Centrica plc, Vice Chairman of the BBC Trust, Deputy Chairman and Senior Independent Director of the Court of theBank of England, President of the Confederation of British Industry, Chairman of Cadbury plc, Chairman of Chubb plc, Chairman of Mitchells &Butlers plc, Chairman of Thames Water plc andChief Executive of Williams plc. Throughout his career he has served on a number ofexternal committees including the Prime Minister’s Business Advisory Group, the Manufacturing Council of the CBI, The Higgs Committee on Corporate Governance and Business for New Europe. He is a Fellow of the Royal Society for the encouragement ofArts, Manufactures and Commerce, a Companion Tom Arseneault Cressida Hogg CBE of the Institute of Management, and an Honorary Fellow of the Chartered Governance Institute. He is President and Chief Chair Designate and also a Visiting Fellow of Saïd Business School, Executive Officer of non-executive director University of Oxford and holds an Honorary Doctorate BAESystems, Inc. in Business from Nottingham Trent University. He was knighted for Services to Business in the Queen’s New Year’s Honours list 2011. Committee membership Chair of Nominations Committee. N. Appointed to the Board: 2020 Nationality: US Appointed to the Board: 2022 Nationality: UK Skills, competence and experience Skills, competence and experience Tom was appointed to the Board on 1 April 2020, Cressida is currently Chairman of the Board of Land and serves as President and Chief Executive Officer Securities Group PLC (Landsec), a position she has ofBAE Systems, Inc. Throughout his career, Tom has held since 2018, having served as a non-executive ledcomplex organisations responsible for fulfilling ofthe company since 2014. She will be retiring from critical and technologically challenging missions. the Landsec board on 16 May 2023. Before becoming President and Chief Operating Cressida is also a non-executive director of London Officer of BAE Systems, Inc., he hada24-year career Stock Exchange Group plc, where she is the Senior in various senior roles within BAE Systems, Inc. Independent Director and chairs its Remuneration | Prior to his senior leadership appointments, | Committee. She has previously enjoyed a long | | --- | --- | | Tommanaged various organisations and | executive career, spent largely with 3i Group, during | | programmes for Sanders, a Lockheed Martin | which she developed a deep understanding of large, | | company, until it was acquired by BAE Systems | long-term infrastructure projects and businesses, | | in2000. Earlier in his career, he held a variety | gaining international experience whilst working in | | ofengineering and programme management | various countries including the US, Canada, India, | | positions with General Electric and TASC. | Australia and the Middle East. | | Tom is a member of the Executive committee | Committee membership | | oftheAerospace Industries Association. | Nominations Committee. | BAE Systems plc Annual Report 2022 131 Governance / Directors' report / Board of directors ![img-13.jpeg](img-13.jpeg) E I N # **Appointed to the Board: 2020 Nationality: UK** **Skills, competence and experience** As 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. Since being appointed Group Chief Executive of Spirax-Sarco Engineering plc in January 2014, Nick has overseen the successful global growth of Spirax-Sarco Engineering, which serves customers in 130 countries worldwide. Prior to his roles at Spirax-Sarco Engineering, he was Vice-President of John Crane Asia Pacific and President of John Crane Latin America. # **Committee membership** Environmental, Social and Governance Committee, Innovation and Technology Committee and Nominations Committee. ![img-14.jpeg](img-14.jpeg) E N # **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 and Chief People Officer of the US health insurance company, Independence Health Group. 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. # **Committee membership** Environmental, Social and Governance Committee and Nominations Committee. ![img-15.jpeg](img-15.jpeg) A I N R # **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. # **Committee membership** Audit Committee, Innovation and Technology Committee, Nominations Committee and Remuneration Committee. ![img-16.jpeg](img-16.jpeg) E N # **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 Reda Pharma Plc, an AIM listed company, Chair of Theramex and a non-executive director of Johnson Matthey. 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. # **Committee membership** Chair of Environmental, Social and Governance Committee and member of Nominations Committee. ![img-17.jpeg](img-17.jpeg) A N R # **Appointed to the Board: 2013 Nationality: UK** **Skills, competence and experience** Chris is Chair of the UK Infrastructure Bank and Chair of Evelyn Partners. He has held a range of leadership roles including Chief Executive of Barclays Commercial Bank and, most recently, Chief Executive of The British Land Company PLC, a position he held for over 11 years. He brings extensive public company and business leadership experience to the Board. He has more than 30 years' experience in the banking and real estate industries. Prior to joining British Land, he was Chief Executive of Barclays Commercial Bank. Before that, he was a partner at Goldman Sachs. Chris is a former member of the executive board of the European Public Real Estate Association and the board of the British Property Federation. # **Committee membership** Audit Committee, Nominations Committee and Remuneration Committee. ![img-18.jpeg](img-18.jpeg) I N # **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. Ewan holds a PhD in General Relativity from the University of Southampton, a MAS in Mathematics from Queen's College, Cambridge, and a BSc in Natural Philosophy and Astronomy from the University of Glasgow. # **Committee membership** Chair of Innovation and Technology Committee and member of Nominations Committee. 132 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance Stephen Pearce Nicole Piasecki Mark Sedwill Non-executive director Non-executive director Baron Sedwill of Sherborne GCMG, FRGS Non-executive director | A N. | | R | E.N.E.I.N. | | --- | --- | --- | --- | | Appointed to the Board: 2019 Nationality: AU | Appointed to the Board: 2019 Nationality: US | | Appointed to the Board: 2022 Nationality: UK | | Skills, competence and experience | Skills, competence and experience | | Skills, competence and experience | | Stephen has more than 20 years’ experience as | Nicole has extensive experience gained from | | During a long career serving the UK government, | | adirector of public companies and over 30 years | executive positions within the aerospace industry | | Lord Sedwill held a wide range of national | | offinancial and commercial experience in the | and leadership of multi-functional teams. She | | securityand diplomatic roles in the UK and | | mining,oil and gas, and utilities industries. He is | previously held a number of engineering, sales, | | overseas.In hisfinal decade in public service, he | | currently Finance Director of Anglo American plc, | marketing and business strategy roles during her | | wasBritish Ambassador and NATO Representative | | arole he has held since April 2017, and a | 25-year career with the Boeing Company, including | | inAfghanistan, Foreign Office Political Director | | non-executive director of its majority-owned | Vice President and GeneralManager of the | | andHome Office Permanent Secretary, culminating | | subsidiary, DeBeers. | Propulsion Systems Division and Vice President | | in his appointments as National Security Adviser | | | ofBusiness Development & Strategic Integration | | (2017 to 2020) and Cabinet Secretary (2018 to | He previously served as CFO and as an executive forBoeing’s commercial aircraft business, and 2020).Earlier in his career, he held diplomatic director of Fortescue Metals Group Limited President of Boeing Japan. andsecurity posts, serving in Egypt, Syria, Jordan, from2010 to 2016. He is a Fellow of the Institute Cyprus and Pakistan. ofChartered Accountants, a Fellow of the She is Executive Chairman of VEA Aviation Inc., Governance Institute of Australia and a Member Chairof the Board of Trustees of Seattle University He is a senior adviser and Supervisory Board ofthe Australian Institute of Company Directors. and a director of Howmet Aerospace Inc. and memberof Rothschild & Co, and the Senior Weyerhaeuser Company. Nicole formerly Independent Director and Senior Deputy Chair Committee membership servedonthe Federal Aviation Authority’s ofLloyd’s of London. He is also the Chairman of Chair of Audit Committee and member Management Advisory Board, the US Department theAtlantic Future Forum and a member of the ofNominations Committee. ofTransportation’s Future of Aviation Advisory UKParliament’s House of Lords. Lord Sedwill is a Committee and the Federal Reserve Bank of Fellow of the Royal Geographical Society and of SanFrancisco’s Seattle branch. theInstitute of Directors. He is President of the Special Forces Club. Committee membership Chair of Remuneration Committee and member Committee membership ofEnvironmental, Social and Governance Environmental, Social and Governance Committee Committee, Innovation and Technology Committee and Nominations Committee. and Nominations Committee. ### Membership and attendance | | | | | | | Environmental, | Innovation | | | Chairman | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | | Socialand | and | | | | | | | Board | Committee | | Audit | Governance | Technology | Nominations | Remuneration | Executive director | | | | meetings | membership | | Committee | Committee | Committee | Committee | Committee | | | | 1 | | | | | | | | | Non-executive director | | Sir Roger Carr | | 8/8 | | N | – – – 5/5 – | | | | | | | Nick Anderson 8/8 | | | E.I.N. | | – 5/5 2/2 5/5 – | | | | | C Committee chair | 2 | Crystal E Ashby 7/8 | | E.N. | – 5/5 – 5/5 – | | | A. Audit Committee | | | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | 3 | | E. Environmental, Social and | | | Dame Elizabeth Corley 8/8 | | A.I.N.R. | 5/5 – 1/1 | | 5/5 7/7 | | | | | 4 | | | 2 | | | GovernanceCommittee | | Dame Carolyn Fairbairn | 3/3 | I.N.R. | – – 0/1 | | 1/1 3/3 | | | I. Innovation and Technology Committee Jane Griffiths 8/8 E N . – 5/5 – 5/5 – N. Nominations Committee 5 Chris Grigg 8/8 A.N.R. 4/4 3/3 – 5/5 7/7 R. Remuneration Committee 6 | Cressida Hogg | 2/2 | | N. | | – – – – – | | --- | --- | --- | --- | --- | --- | | Ewan Kirk 5/5 | | | I N | . | – – 2/2 5/5 – | | Stephen Pearce 8/8 | | | A N | . | 5/5 – – 5/5 – | | Nicole Piasecki 8/8 | | E.I.N. | | R | – 5/5 2/2 5/5 4/4 | 6 Lord Sedwill 2/2 E.N. – 1/1 – – – 4 Ian Tyler 3/3 A.N.R. 1/1 – – 2/2 3/3 7 Charles Woodburn 7/8 – – – – – Chief Executive Brad Greve 8/8 – – – – – Group Finance Director | Tom Arseneault | 8/8 – – – – – | | | --- | --- | --- | | President and Chief | | The average length of appointment | | Executive Officer of | | ofnon-executive members of the Board | | BAESystems, Inc. | | (asat 31 December 2022) was three | yearsand nine months. | 1. Sir Roger Carr joined the Board in October 2013 | 4. Retired from the Board on 5 May 2022. | | | --- | --- | --- | | andwasappointed as Chairman in February 2014. | 5. Stepped down from the Committee on 1 July 2022. | The average length of appointment of | | 2. Attendance impacted by personal matters. | 6. Appointed on 1 November 2022. | executive members of the Board (as at | | 3. Appointed to the Committee in May 2022. | 7. Could not attend due to customer meeting. | 31 December 2022) was four years. | BAE Systems plc Annual Report 2022 133 Governance / Directors’ report ## Governance framework ## This is the structure through which we manage the Group including the Board ## division of responsibilities. ## The Board ### Role of the Board The Board is responsible for promoting the long-term sustainable success Purpose of the Company, generatingvalue for shareholders, while havingregard The Company’s purpose (see page 1) recognises that we serve, supply toits other stakeholders and theimpact of itsoperations on the and protect those who serve and protect us, and that we have important environment and the communities in which we operate. Seepage 34 wider stakeholder responsibilities that the Board has regard to in its formore information on the workof the Board. decision-making. The Board monitors our strategy, behaviours and culture and their alignment with our purpose. The Board agrees the Company’s purpose, values and standards of behaviour expected of all employees, satisfying itself that these and Culture theculture of the business are aligned. The Board also sets the Group’s Our culture is to be performance driven and values led. The Board is strategy, oversees and monitors internal controls, risk management responsible for ensuring that culture is aligned with our purpose, values andthe Company’s governance framework. Ourrobust governance andstrategy. framework, the operational framework, is agreed by the Boardand Strategy setsout how we do business. Our strategy (see page 16) 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. ### 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 in pages 34 to 37. ### Board composition The Board consists of executive and independent non-executive directors, plusanon-executive chairman who wasindependent in accordance with the UKCorporate Governance Code on his appointment. There is a clear division inthe roles and responsibilities of the executive and non-executive directors and between the Chairman and Chief Executive which are detailed in our Board Charter (available on the Company’s website). Chairman Nominations Leads the Board and is responsible for its overall effectiveness in directing the Company. Also Committee Principal committees facilitates constructive Board relations and the effective contribution of all non-executive directors, Page 140 and ensures that directors receive accurate, timely and clear information. The Board has established principal committees which focus on particular Audit areas, as set out below. The chair of Senior Independent Director Committee each committee reports to the Board Acts as a sounding board for the Chairman and alsoas an intermediary for the other directors Page 145 onthe committee’s activities after asnecessary. Annually, or on other occasions asnecessary, leading the non-executive directors inappraising the Chairman’s performance, and providing feedback. eachmeeting. Environmental, Social and Governance Committee Chief Executive Page 151 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 Innovation and byleading by personal example with regards to company culture. TechnologyCommittee Page 157 Company Secretary Ensuring that Board procedures are complied with andadvising the Board on all governance Remuneration matters.Also supports the Board by ensuring that it has the policies, processes, information, Committee timeandresources it needs in order to function effectively. Page 160 134 BAE Systems plc Annual Report 2022 ### Executive and other committees Financial statementsStrategic report Governance ### 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. ### Internal controls Core Business Processes Operational Assurance Internal Audit This describes thereporting and reviews A process through which line and functional Assesses the effectiveness ofinternal mandated by theOperational Framework, leaders respectively confirm twice yearly controlsthrough aprogramme ofreviews which provide upwards visibility of project that their businesses andfunctions are based on acontinuous assessment of and business performance. compliant with theOperational Framework. business risk across the Group. ### We take pride in managing our operations effectively and responsibly Responsible Trading Principles Suppliers and a report showing the key financial and How we conduct business is fundamental to The Group depends upon its suppliers to provide non-financial risks for the relevant business thesuccess of our Company and we mandate fully compliant, cost-effective equipment, goods, andGroup functions. Together with reviews aprinciples-based approach to our business services and solutions, which are an integral undertaken by Internal Audit and the work activity. We do not compromise on the way partof the world-class products required by oftheexternal auditors, the OAS forms the weconduct business, and consistency of this ourcustomers, and also support the effective Group’s process for reviewing the effectiveness approach is key in defining our reputation. operations of our Businesses and the Group’s ofthe system of internal controls. standards of business conduct. Our supply Lifecycle Management (LCM) Framework Product Safety Policy chainmanagement and Supplier Principles – describes our approach to the assurance of We set out principles which describe our Guidance for Responsible Business (the Supplier Projects. LCM is integral to the successful approach to product safety to reduce the risk of Principles) are focused on high achievement of execution of the Group’s projects and unintentional harm to people, property and the our standards. Our supplier contracts contain programmes. Its application provides progressive environment. They apply throughout the life of anti-corruption and anti-bribery provisions risk-based assurance throughout the Lifecycle the Product and throughout the supply chain. andstipulate the expectation to compliance, toaid decisions, supporting delivery of Projects Workplace and Operational Environment meet ourstandards on ethical business conduct toachieve customer satisfaction, schedule Our people management expectations are clearly and Supplier Principles, including safety, andfinancial requirements. communicated to all employees and set out environment and human rights. The purpose of the Mergers, Acquisitions within our People Policy. We have a zero tolerance Product Trading Policy andDisposals process is to provide a structured policy regarding corruption and every member Underpins all of our business activity and is approach to managing the Acquisitions, strategic ofour workforce is aware of their role in ensuring applied to all Company products, trading, and Joint Ventures and Disposals. It forms a part of we maintain high standards of ethical conduct. throughout the product lifecycle. The Policy is our Strategy and Planning framework in order Pages 75 to 77 provide further detail about used to reflect the Company’s standards of tosupport the delivery of the IBP. ouranti-corruption programme. integrity and help us to thoroughly evaluate National Security Arrangements The safety and wellbeing of our employees is theopportunities we pursue. The Group is subject to various national security paramount and our high standards for Health Risk Management Policy requirements which are an important part of andSafety management provide a common We set clear requirements for the management howwe operate as a defence company and meet framework to guide our workforce and further and reporting of financial and non-financial the needs of our customers. Due to the nature information can be found on page 72. risksin support of the delivery of our strategy. ofits activities, the UK government holds a We use our expertise to reduce our global Project risks are managed through our Lifecycle Special Share in the Company, ensuring that environmental impacts and to develop products Management Framework. theCompany cannot be non-British controlled. and services for our customers which reduce their Wealso have a Special Security Agreement with Core Business Processes impacts on the environment. Our climate transition the US Department of Defense addressing national Our Integrated Business Plan (IBP) represents strategy and impact on the environment security matters relating to the ownership and acommon process with standard outputs including; greenhouse gas emissions, efficient control of our US defence businesses. Through andrequirements that produces an integrated useof resources, land use and biodiversity, and the Special Security Agreement, our governance strategic and business plan for the Group and the environmental impact of the Group’s supply structure is augmented by the BAE Systems, Inc. also for each of its businesses over the following chain is overseen by the Environmental, Social board, which is populated by leading figures five years. The IBP is reviewed each year by and Governance Committee. formerly from the US government and military theBoard as part of its strategy review process. and intelligence communities. We are committed to ensuring that IT systems Once approved, the IBP provides the basis for and services are used in a manner which setting all detailed financial budgets and strategic Similarly, our Australian operations are subject promotes effective communication and working actions across the businesses, and is subsequently toan Overarching Deed with the Commonwealth practices within the organisation and to used by the Board to monitor performance. of Australia which protects national security preventing damage to its business orreputation andother interests, and allows the Group to As mandated by the Operational Framework, through misuse of those systems. ownand manage certain Australian defence- Businesses and Group functions complete a related industrial assets. These national With the support of ourInternal Audit team, bi-annual Operational Assurance Statement securityarrangements are an important part ourIT assurance and governance programme (OAS). The OAS is in two parts: a self-assessment ofourgovernance. developed to support the effective management of compliance with the Operational Framework; of cyber risks. BAE Systems plc Annual Report 2022 135 Governance / Directors' report # Applying the UK Corporate Governance Code Principles **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. | Principles | Reference | | --- | --- | | **Section 1 – Board leadership and Company purpose** | | | A. 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. | **Page 64** Supporting our communities **Page 88** Dividends paid and capital allocation policy objectives **Page 144** Annual Board evaluation | | B. 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. | **Page 1** Our purpose **Page 16** Our strategic framework **Page 75** Sustainability / Our foundations / Robust ethics & governance **Page 134** Governance framework **Page 151** Environmental, Social and Governance Committee report | | C. 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 will help 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. | **Page 18** Our business model **Page 135** Governance framework – Operational Assurance Statement – Integrated Business Planning – Lifecycle Management Policy | | D. 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. | **Page 32** Our stakeholders **Page 34** The work of the Board **Page 151** Environmental, Social and Governance Committee report | | E. 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. | **Page 1** Our purpose **Page 16** Our strategic framework **Page 60** Sustainability / Our key themes / Creating opportunity for people and communities | | **Section 2 – Division of responsibilities** | | | F. The Chairman leads the Board and is responsible for the overall effectiveness of the Board in directing the Company. In doing so he 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. | **Page 134** Governance framework **Page 144** Annual Board evaluation | | G. The Board comprises the Chairman, three executive directors and ten non-executive directors. There is a clear division in the roles and responsibilities of the executive and non-executive directors and between the Chairman and Chief Executive which are detailed in our Board Charter (available on the Company's website). | **Page 129** Chairman's governance letter **Page 134** Governance framework | | H. 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. | **Page 134** Governance framework **Page 138** Governance disclosures **Page 139** Board information | | I. 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. | **Page 134** Governance framework **Page 144** Board performance evaluation | 136 BAE Systems plc Annual Report 2022 Strategic report Governance Financial statements | Principles | Reference | | --- | --- | | **Section 3 – Composition, succession and evaluation** | | | J. 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. | **1** Page 139 Board information Page 140 Nominations Committee report | | K. 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. | **1** Page 129 Chairman's governance letter Page 139 Board information Page 140 Nominations Committee report | | L. The Board annual performance evaluation undertaken by the Board in 2022 considered its composition, diversity and how effectively members worked together to achieve objectives. The evaluation included an assessment of the effectiveness of individual members. | **2** Page 140 Nominations Committee report Page 144 Annual Board evaluation | | **Section 4 – Audit, risk and internal control** | | | M. 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. | **1** Page 145 Audit Committee report | | N. As detailed in these reports, the directors confirm they consider the 2022 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. | **1** Page 210 Directors' responsibility statement | | O. The Board has established procedures to manage risks. It also oversees the internal control frameworks 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. | **1** Page 118 Our risk management framework Page 119 Our principal risks Page 134 Governance framework | | **Section 5 – Remuneration** | | | P. 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. | **1** Page 160 Remuneration Committee report Page 165 Annual remuneration report | | Q. 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. | **1** Page 160 Remuneration Committee report Page 190 Directors' remuneration policy | | R. 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. | **1** Page 160 Remuneration Committee report | BAE Systems plc Annual Report 2022 137 Governance / Directors’ report ## Compliance with the UK Corporate Governance ## Codeprovisions ### The Company is subject to the principles and provisions of the UK Corporate Governance Code 2018 (the Code), ### acopy of which is available at frc.org.uk. The Company was compliant with the provisions of the Code throughout ### 2022, with the exception of Provision 38 concerning pension contribution rates for executive directors. Following a ### change to the Chief Executive’s pension contribution arrangements (see below), the Company currently complies ### with the provisions of the Code. The following statements are made in compliance with the Code. ### Executive director The output from the OAS process is Non-executive directors are required to seek reviewed by (and subject to challenge prior approval before taking on additional ### pensionarrangements from)the Internal Audit function relative external appointments. The Board also In compliance with Provision 38 of the Code, toits understanding of matters within considers whether there are any matters last year the Remuneration Committee particular businesses. In addition, the that could have a bearing on a non- agreed that the Chief Executive’s pension OASrisk management process requires executive director’s independence pursuant contribution should be reduced such that thattwice-yearly the risks identified in to Provision 10 ofthe Code. The following with effect from 1 December 2022 it would eachof the businesses are reported against disclosure ismade on these matters: be set at a value equal to theweighted a set risk framework. The output from the Dame Elizabeth Corley average contribution rate ofthe UK active OAS process is provided to the Board and pension scheme members (see Dame Elizabeth Corley, a non-executive isreviewed in detail by the Audit and ESG Remuneration Committee report, director, was appointed a non-executive committees. The report to the directors on page166). That adjustment was made and director and Chair designate of Schroders the output from the OAS process provides consequently the Company is currently plc on 1 September 2021. Schroders are granular graphical and narrative analysis of compliant with all the Code’s provisions. ashareholder in the Company, holding compliance against the requirements of the approximately 0.4% of the total share Operational Framework, and as such is an ### Risk management and voting rights as at the date of this important part of how the Board monitors ### internalcontrol statement report.Consequently, an assessment was and reviews the Company’s risk management The Board is responsible for the Group’s risk undertaken prior to her appointment to and internal control systems. Further details management and internal control systems. assess whether this relationship could have of the Board’s monitoring and review It has delegated responsibility for reviewing a bearing on her independence for the process can be found in the Audit in detail the effectiveness of these systems purpose of Provision 10 of the Code. It was Committee report on page 145. to the Audit Committee, which reports to agreed that the number of shares held by The risk management and internal control Schroders was not sufficiently material to the Board on its findings so that all directors systems detailed in the Operational have a bearing on her independence. The can take a view on the matter. Framework were in place throughout the Company was also made aware of steps An overview of the processes used to year and the Board, having reviewed their that have been taken by Schroders to avoid identify, evaluate and manage the principal effectiveness, believes they accord with the a conflict of interest with regard to any risks can be found on pages 116 to 125. Financial Reporting Council’s Guidance on shares it may hold inBAE Systems plc. These processes are an integral part of our Risk Management, Internal Control and governance framework, and the Chris Grigg Related Financial and Business Reporting. | Operational Framework, details of which | | Chris Grigg was appointed a non-executive | | --- | --- | --- | | can be found on page 135. The Operational | Viability statement and going concern | director of the Company in July 2013 and | | Framework mandates the Operational | As required by the provisions of the Code, | his service on the Board therefore exceeded | | Assurance Statement (OAS) process, which | the Board has undertaken an assessment | nine years during 2022. In accordance with | | is owned by theGroup’s Internal Audit | ofthe future prospects of the Group, taking | Provision 10 of the Code, the Board believes | | function andis one of the principal | into account the Group’s current position | his independence has not been impaired | | processes used by the Board in monitoring | and principal risks. This assessment | because of his having served for a relatively | | the effectiveness of control systems. | considered both the Group’s long-term | short period in excess of nine years. | prospects and also its ability to continue The OAS process has been designed to As Senior Independent Director, he led the inoperation and meet its liabilities as they provide assurance with regard to compliance Nominations Committee last year in the fall due over its five-year business planning with the policies and processes mandated search activity that resulted in Cressida period. This can be found on page 126 by the Operational Framework. It is a key Hogg’s appointment to the Board as a ofthe Strategic report. element of the Group’s governance and is non-executive director and Chair designate. formed of two parts: a self-assessment It has been agreed that Mr Grigg will remain ### Directors bybusinesses and functions of compliance a non-executive director of the Company In compliance with the Code, all with the Operational Framework; and a until no later than the end of 2023. With directorsare subject to annual re-election report showing their assessment of key anexperienced Chairman retiring at the byshareholders. The Board considers all risks. Twice a year, the line leaders for our Company’s AGM in May, this short ofthe non-executive directors (except the business and the heads of our functions extension to his terms of office will help Chairman) named on pages 131 to 133 arerequired to critically analyse compliance preserve the level of knowledge and ofthis report to be independent for the relative to a scoring framework, which sets experience on the Board and help support purposes of the Code. The Chairman clear standards against which compliance asuccessful transition inthe leadership of wasalso independent on appointment. must be assessed. Line and functional the Board. During the second half of the leaders are required to assure themselves Prior to making Board appointments, year, the Board will appoint a new Senior ofthe level of compliance for a business, theBoard considers other demands on an Independent Director to succeed Mr Grigg and submit as required supporting individual’s time to ensure that, following in that role. information and data to provide evidence appointment, directors have sufficient ofcompliance. timeto meet their Board responsibilities. 138 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ## Board and Executive Committee diversity information ### Board information Gender Nationality Ethnicity Tenure (independent non-executive directors) C B B A A A C A B | A Male 9 | A UK 9 | A White 13 | A Up to three years 6 | | --- | --- | --- | --- | | B Female 5 | B US 4 | B Black 1 | B Over three and up to six years 2 | | | C Australia 1 | | C Over six years 2 | Skills and experience | Risk management | | 16 | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | Long-term contracting | | | | 36 | | | | | Legal and regulatory | | | 35 | | | | | | International business/commercial | | | | | | | 311 | | Human capital management | 3 | | | | | | | | Financial/accounting | | 16 | | | | | | | Environmental and social | | 7 | | | | | | | Engineering, science and technology | | | 26 | | | | | | Company leadership | | | | | 37 | Executive | | | Board experience | | | | 9 | | Non-executive | | | Board and Executive | Sex and gender identity | | | | | | | --- | --- | --- | --- | --- | --- | --- | | Committeediversity | | | | Number of senior | | | | | | | | positions on the | Number in | Percentage | | In accordance with Listing Rule 9.8.6(9) | | Number of | Percentage | Board(CEO, CFO, | executive | of executive | | oftheFCA’s Listing Rules, these tables set | | Boardmembers | oftheBoard | SIDand Chair) | management | management | outdetails of the diversity of the individuals Men 9 64% 4 11 73% onthe Board and Executive Committee at 31 December 2022. Women 5 36% – 4 27% There are 14 Executive Committee members Other categories – – – – – (including the Chief Executive, President and Not specified/ Chief Executive Officer of BAE Systems, Inc. prefernottosay – – – – – andthe Group Finance Director, who are alsoexecutive directors) and14directors of Ethnic background theBoard. The Company Secretary is included inthe calculation of executive management. Number of senior positions on the Number in Percentage The data was obtained on a voluntary self- Number of Percentage Board(CEO, CFO, executive of executive Boardmembers oftheBoard SIDand Chair) management management reported basis. Participants were invited to | complete a survey through a secure electronic | White British or | | --- | --- | | portal, wherein they were asked to confirm their | otherWhite (including | | sex andgender identity, and ethnic background. | minority-white groups) 13 93% 4 14 93% | Thedescriptive categories of sex, gender and Mixed/Multiple ethnic background set out in the survey, were Ethnicgroups – – – 1 7% taken verbatim from Listing Rule 9.8.6(9), and therefore correspond precisely with the tables. Asian/Asian British – – – – – Black/African/ Caribbean/Black British 1 7% – – – Other ethnic group, including Arab – – – – – In respect of the 2022 financial year, the Board has met the diversity targets in Listing Rule 9.8.6(9) and its Board Diversity and Inclusion Policy in relation to ethnicity. However, the targets in relation to gender diversity have not been met. The Board recognises the work it must undertake to meet those targets. From the Company’s AGM in May this year, we anticipate the only target it will not have met will be with regard to Board membership gender diversity. Following the AGM, it is anticipated that women will comprise 38.4% of Board membership, slightly short of the 40% target. There have been no changes in the composition ofthe Board or Executive Committee in the intervening period between the year end and the signing of this Annual Report. B BAE Systems plc Annual Report 2022 139 Governance / Directors’ report ## Nominations Committee report I will deal with each of our objectives Executive succession ### Sir Roger Carr belowbut first, by way of context, I will The decisions made by the Committee on Chair provide details of the national security executive director appointments in recent considerations that inevitably have a years have been a critical enabler for the bearingon much that the Committee strong performance that the executive doesin managing Board succession. team, headed by Charles Woodburn, National security hashelped to deliver. Managing future leadership succession has remained a high Government national security requirements priority for the Board and the Committee are an essential part of being a defence – Iam aware from my frequent engagement company. They shape our governance and with our largest shareholders that they too are an important factor in the Committee’s recognise the importance of this. deliberation on Board appointments. An Enterprise Talent Review, undertaken For our largest government customers, bythe Board in September last year, theCompany is an important part of their helpedinform the work the Committee defence industrial base, providing sovereign undertook subsequently in reviewing ### Members: defence capability that is a key element of detailed succession plans for the most their national security. Consequently, there Nick Anderson senior executive roles. That review was are certain specific nationality requirements Crystal E Ashby facilitated by a data-driven analysis of with which we must comply. | Dame Elizabeth Corley | | succession plans for the 14 senior executives | | --- | --- | --- | | Jane Griffiths | Even when there are no specific job-related | (three being executive directors) that | | Chris Grigg | nationality requirements, we have to | currently comprise the membership of | | Cressida Hogg | consider carefully whether a role could be | theExecutive Committee. The plans cover | | Ewan Kirk | discharged effectively given the general | individuals judged to have the potential | | Stephen Pearce | application of national security restrictions | tobe appointed to one of the EC roles at | | Nicole Piasecki | in our businesses. | future dates but may be up to two jobs | | Lord Sedwill | | away from being ready for that at present. | The UK government holds a Special Share A total of 66 individuals were identified in inthe Company specifically to ensure that the 2022 plans, a slight increase from the itremains UK controlled. In addition to previous year. As you would expect, the restricting the percentage of shares that plans are dynamic and individuals may be may be held by a non-UK shareholder, ### Dear Shareholders added, moved within the plan or removed. theSpecial Share requires that the Chief Senior executives are required to engage At the start of 2022, the Nominations Executive must be a UK national (and also actively in developing and retaining these Committee had three key objectives for places certain restrictions on the nationality highly talented individuals, and do so in theyear, which were: of the Chair) and that a majority of all linewith our diversity, equity and directors must be UK nationals. Operational • continue to drive the executive succession inclusiongoals. roles such as those running our UK planning process to ensure that we have businesses are effectively restricted, in In summary, the key points from our visibility of those high potential executives mostpart, to individuals with higher-level Enterprise Talent Review were: that will be available, in due course, to UK security clearances. Whereas, we are succeed the three executive directors Strengths less restricted with Group functional currently on the Board; positions, e.g. Finance, HR, Corporate • Executive Committee gender balance • complete the search for a suitable increased to 29% (from 8% in 2021). Communications, etc. candidate to succeed me as Chair of • The emerging talent pipeline almost theCompany when I retire in May this With regard to our US business, the doubled from 19 individuals to 37. year; and regulatory requirements governing its ownership and the level of individual • 28% of the successor pipeline executives • identify candidates to succeed the national security clearances required to have less than five years’ service – non-executive directors that were discharge the role mean that the President evidencing improved awareness of approaching the end of their final and Chief Executive Officer of our principal high-potential individuals and agility termsof office. USoperating company, BAE Systems, Inc., incareer development management. When dealing with all of the above, the has to be a US citizen. That is also the case Challenges Committee was clear that it would continue for members of the senior executive team • Growing the pool of female talent to be guided by its policy on diversity and inthe US. inmid-level management grades. inclusion. We see diversity as a key attribute to Board effectiveness and therefore we aim • Retention of key individuals identified to maintain a diverse membership, including, insuccession plans. among other attributes, an appropriate • Increasing the number of executives balance of nationalities, gender, ethnicity, voluntarily providing us with information skills, knowledge, experience, cognitive and on their ethnicity. personal strengths. At the beginning of a selection process for Board appointments, the Committee considers the blend of skills and experience required to maintain an effective Board. Further information on the skills and experience of the Board can be found on page 139. 140 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance As part of the Enterprise Talent Review, employees to inform us of their ethnicity, TheCommittee welcomed the fact that wewere pleased to see progress being ona self-identified basis, to complement thesuccession plans for these roles have made in increasing the level of gender the range of activities underway to realise continued to mature. Inparticular, we saw diversity within our executive populations. our diversity, equity and inclusion objectives. good evidence of howwe are managing In the executive succession pipeline leading thecareers of key individuals to ensure that During 2022, the Committee undertook to the Executive Committee and the Board, they have focused development plans, and adetailed review of executive succession we have seen a higher level of gender that their current roles provide ample scope plans, focused on the three current diversity (38%) compared with that of for them to grow as leaders and further Board-level roles: Chief Executive, Group oursenior executive population (24.3%). demonstrate the potential to take on Finance Director and the President and Interms of data analysis, ethnicity reporting Board-level positions. Chief Executive Officer of BAE Systems, Inc. remains a challenge and we require more Chair succession ## Chair appointment process When I retire at this year’s AGM, I will have served as Chairman for just over nine years, the maximum term permitted in accordance with the UK Corporate Governance Code. ### Scope The search for my successor began in 2021 and was undertaken in strict compliance Considered the key skills, attributes and experience with Code requirements and governance required for the Chair role, particularly in reference best practice. Therefore, I did not participate toboardroom dynamics, the Committee’s Board Diversity in the Committee’s meetings when it & Inclusion policy (see page 142) and nationality wasdealing with the matter. The search requirements concerning the composition of the Board. activity was undertaken by the Committee, led by our Senior Independent Director, Chris Grigg. The Committee appointed the search consultants Spencer Stuart (who provide ### Engage other recruitment and executive succession planning services to the Company) to Engaged the services of Spencer Stuart, independent identify suitable candidates for the Chair search consultants (who have previously provided other role. Spencer Stuart undertook a series recruitment and executive succession planning services ofinterviews with the members of the tothe Company) to identify suitable candidates for the Committee to develop and agree a profile Chair role. Spencer Stuart undertook a series of interviews for the search, including the skills, experience with the members of the Committee to develop and and knowledge required by candidates. agreea profile for the search, including the skills, Aspart of the search the Committee also experience and knowledge required by candidates. considered diversity (see Board Diversity & Inclusion Policy on page 142) and nationality requirements concerning the composition ofthe Board (see above). ### I am delighted that, at the end of July Interview lastyear, the Board formally approved Reviewed candidate profiles against the pre-determined theCommittee’s clear and unanimous criteria, and invited a shortlist of prospective candidates nomination of Cressida Hogg, and tointerview. All Board members had the opportunity appointed her a non-executive director tomeet with shortlisted prospective candidates. andChair designate with effect from November 2022. She will succeed me with effect from the close of our AGM in May. Cressida brings a strong combination ofbusiness and boardroom experience toour Board. She currently chairs the boardof Land Securities Group PLC and isthe Senior Non-executive Director of ### Nomination London Stock Exchange Group plc. Previously, she had a long executive career, A unanimous nomination largely with 3i Group, during which she was received. developed a deep understanding of large, long-term infrastructure projects and businesses, whilst working in various parts of the world, including the US, Canada, India, Australia and the Middle East. BAE Systems plc Annual Report 2022 141 Governance / Directors’ report / Nominations Committee 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 Appointments and succession plans are based • At least one member of the Board shall be from We are committed to maintaining a diverse and onmerit and objective criteria, reflecting the an ethnic minority background (as referenced in inclusive Board. As a company, we value diversity skills, knowledge and experience needed to categories recommended by the UK’s Office for and are committed to creating a diverse and ensure we have a well-rounded, diverse and National Statistics). inclusive working environment for our employees, effective Board. In the case of non-executive In line with UK regulatory requirements, the in which colleagues from any background can directors, other relevant matters are also taken Committee shall report in the Company’s annual fulfil their potential. This is reflected in our clear into account, such as independence and the report on compliance with the above targets. purpose, values and the behaviours that guide ability to fulfil time commitments. our culture. The Board and Committee will maintain oversight Due to the nature of its activities, the UK of the range of activities the Company is pursuing The Board understands that diversity is a key government holds a Special Share in the aimed at increasing the diversity of our workforce attribute to its effectiveness. We aim to maintain Company, ensuring that the Company cannot – including the executive pipeline that is essential a diverse Board, including an appropriate balance benon-British controlled. The Special Share also for executive directors’ succession planning. of nationalities, gender, ethnicity, skills, includes provisions requiring that a majority of Inaddition, when the Committee engages knowledge, experience and personal strengths. the directors on the Board are British nationals searchconsultants we will use their services and the roles of Chairman and Chief Executive Board Composition tohelp identify a diverse range of potential are also subject to UK nationality restrictions. | The Nominations Committee (the Committee), | | non-executive director candidates and, where | | --- | --- | --- | | onbehalf of the Board, undertakes a formal, | The Committee shall aim to comply with the | necessary, to help with executive directors’ | | rigorous and transparent approach to succession | following targets in respect of Board membership: | succession requirements. | | planning for director appointments. The | • At least 40% of Board members shall be | | Reporting Committee oversees the development and women (including those identifying as women). The Committee will ensure that there is continued implementation of succession plans for directors • At least one of the four senior Board positions appropriate and meaningful disclosure in the and senior managers. (Chair, Chief Executive Officer, Senior Company’s annual report against the matters set Independent Director, Chief Financial Officer) out in this policy. shall be a woman (or identifying as a woman). Non-executive directors setby the Committee at the beginning employment period covered by the UK ofthe year, we were able to appoint Government’s Business Appointment Rules At the beginning of last year, Ian Tyler LordSedwill to the Board at the beginning for Civil Servants. Notwithstanding that, retired having served on the Board as a of November. He enjoyed an outstanding hereceived written confirmation that the non-executive director for nine years. He career working for the UK government at UK government did not have any concerns made an excellent contribution to the Board, the most senior levels, before retiring from regarding his appointment. chairing both the Corporate Responsibility public service in September 2020. His career and Remuneration committees. Generally, the Committee appoints search covered a wide range of national security consultants to assist in identifying During the year, Dame Carolyn Fairbairn and diplomatic roles in the UK and overseas. candidates for appointment to the Board. also stood down as a non-executive With his depth of knowledge and However, given the roles he held during director. Her decision to stand down after experience, Mark brings a well-informed hislong government career, Lord Sedwill arelatively short period on the Board was geopolitical and economic perspective to isa well-known public figure. Consequently, taken following her acceptance of a new the Board as well as experience in leading the Committee did not employ search role as Chair of Mencap, an appointment large and complex organisations. consultants or use advertising to assist in that was of particular personal importance Lord Sedwill’s appointment to the Board identifying him as an individual with the to her. | | was made over two years after he had | necessary experience, skills and knowledge | | --- | --- | --- | | I am pleased that, as part of the non- | retired from public service in September | for appointment to the Board. | | executive succession planning objectives | 2020. As such, he joined after the post- | | ### Non-executive director induction As part of the induction programme, Cressida Hogg and Lord Sedwill met with senior executives to better understand the operating context ofthebusiness. The below provides an overview of the conversations and the persons who they met with. Purpose, strategy, competitive Financial performance, Sectoral overviews landscape, customer and broader investor insights stakeholder context Chief Executive, President and Chief Group Finance Director, Group Financial Managing Director of each Business Executive Officer of BAE Systems, Inc. Controller, Group Tax Director, Group Investor Relations Director Legal and regulatory environment, Risk and Assurance Employees, Safety, Special Security Agreement Health and Environment Group General Counsel Internal Audit Director, Group HR Director, Group ESG, Culture GroupFinancialController & Business Transformation Director 142 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance Board diversity As a Company, we have set an ambition • Employee engagement – the Board tobe recognised as the leading employer andESG Committee were successful At the end of last year, I reported that indefence and security for valuing diversity, inincreasing the level of employee wehad met the targets set by the equity and inclusion, and to be representative engagement they were able to undertake Hampton-Alexander and Parker reviews ofthe localities in which we operate in during 2022. Further details of this can concerning gender and ethnic diversity terms ofgender and ethnicity. This ambition befound on pages 151 to 153. respectively. The successor to that review, and the range of actions being taken to the FTSE Women Leaders Review, has now • Induction – two new non-executive achieve it (see page 73) is shaping the adopted new voluntary minimum targets directors joined at the end of the year and leadership pipeline that ultimately leads to ofincreasing the level of women on boards their induction programmes are underway. the Board. Itis work in progress but the and leadership teams to 40%, and also With travel no longer restricted by Board is encouraged by the progress to date forone of the chair, senior independent COVID-19 regulations, these programmes in increasing the level of gender diversity director, chief executive or finance director include visits to the Company’s principal inour executive succession plans. | roles to be held by a woman by the end of | | sites in the UK and US. In addition, | | --- | --- | --- | | 2025. These new gender-based targets and | We recognise that further work is | Boardmembers visited a number of sites | | the board ethnicity target, set previously by | requiredin terms of ethnic diversity and | in 2022, which provided an opportunity | | the Parker Review, are consistent with the | theCompany continues to evolve its | for the directors that had joined in the | | targets adopted by the Financial Conduct | inclusive practices in order to attract and | previous two years to meet employees | | Authority (FCA) in its new regulations on | retain diverse talent. To be in a position | and learn more about the Company. | | gender and ethnicity reporting. | toreport authoritatively on progress in | | Concluding comments increasing ethnic diversity across the During the year, the Committee reviewed As I shall be retiring from the Board at countries we operate, we require voluntary and updated its policy on Board diversity thisyear’s AGM, this is my last report self-identification disclosures from and inclusion to reflect the progress made toshareholders on the activities of the employees. Data privacy regulations differ over the last few years, and also evolving Nominations Committee. When I took across the territories in which we operate stakeholder expectation as evidenced by onthe role of Chairman back in 2014, and, in certain countries, we are limited or theFTSE Women Leaders Review and the Iexpanded the membership of the unable to solicit, hold or use data regarding FCA’s regulations. Our revised policy is Nominations Committee to comprise all protected and personal characteristics. shown opposite. You can see that we ofthe non-executive directors, as I believe Whilst we continue to work towards haveadopted a gender target of 40% and that the group of directors charged with creating an inclusive organisation, collecting agoal of at least one of the four key board managing succession to a board needs to diversity data and therefore monitoring and positions being held by a woman. be as wide as possible. Therefore, a large reporting on the improvements in ethnic part of the Board’s membership has been Whilst we are not required to report against diversity below the level of the Executive engaged in identifying and meeting the new FCA regulations until next year, the Committee is challenging. potential candidates for appointment. Board has decided to do so on a voluntary Board evaluation basis, using 31 December 2022 as the I would like to thank members of the reference date for this reporting (see The performance of the Board, its Committee, past and present, for the page139 for our disclosures using the committees and individual directors manner in which they engaged in the standardised numerical table on diversity). wasundertaken by an external facilitator, nomination process – all recognising how Independent Board Evaluation, at the critical that is to any successful board and At present, women comprise 36% of beginning of last year. A number of actions the overall success of the Company. theBoard’s membership; when I retire in were identified in the evaluation, and I Decisions onthe executive leadership are May that will increase to 38%. With the canreport the following in respect of the particularly challenging. They require the appointment of Cressida Hogg as my work we have undertaken this year to non-executives on the Committee to successor, a woman will occupy one of the address these: exercise critical judgement and be bold in principal Board positions. We also continue • Succession planning – as reported appointing candidates that can lead and to meet our objectives on ethnic diversity. above, we have focused on executive take the Company forward. The success of With regard to diversity, equity and succession planning and continue to the Company in recent years is, in part, due inclusion inoursenior leadership makeprogress on this matter. tothe Committee showing those qualities. population, we haveseen the number of • Culture – the Board specifically Succession planning is an ongoing women on the Executive Committee considered culture during the year, process.Those that have the good fortune increasing to 4, 29%ofthe membership. including feedback received from to serve on boards recognise that they Gender diversity is greater in the wider employees on a range of matters. havetheir entrances – and ultimately their group formed of those executives reporting Thisisreported more fully on page 35. exits. I wish the Committee well in its directly to an Executive Committee member, • Strategy – the formation of the Innovation futuredeliberations. standing currently at 38%. For the and Technology Committee (see page combined Executive Committee, Company ### Sir Roger Carr 157) has helped the Board develop its Secretary and their direct reports the level ### understanding of the key attributes and Chair of the NominationsCommittee of gender diversity is 37%. technologies required for our long-term success. Its approach has been to meet atour sites and engage with employees on how we organised to identify and develop technology in support of our strategic objectives. We are pleased with the contribution that this new committee has made, and after this positive start we look forward to it developing its activities further in future years. BAE Systems plc Annual Report 2022 143 Governance / Directors’ report / Nominations Committee report ## The Nominations Committee’s year March May June July September Committee Committee Committee Committee Committee ## March June September ### Committee (Farnborough, UK) Committee (Virginia, US) Committee (Boston, US) – Reviewed Board composition and – Discussed the ongoing Chair search. – Reviewed succession plans for themembership of its Committees. executivedirectors and members ## July oftheExecutive Committee. – Discussed the ongoing Chair search andreviewed a shortlist of candidates. – Reviewed the Board Diversity and ### Committee (Videoconference) Inclusion Policy, in light of the FCA’s – Discussed the outcome of the Chair search ## May Policy Statement (PS22/3). and made a nomination to theBoard. ### Committee (Videoconference) – Discussed the ongoing Chair search. – Discussed the ongoing search for anon-executive director. ## Board evaluation 2022/23 ### Period of evaluation The evaluation covered a range of matters, Feedback including the following: | The evaluation was conducted at the end | | A report on the survey, as it applied to | | --- | --- | --- | | of 2022, with feedback and review taking | Board | theBoard, was provided to directors | | place at a Board meeting held on | | aheadof the Board meeting held on | • Strategy oversight and implementation 22 February 2023. 22 February 2023. The principal findings • Market and technology awareness and recommendations for the evaluation ### Evaluation process andunderstanding were discussed at the meeting and a The process was internally evaluated using • Risk management number of resulting actions agreed a questionnaire developed by the • Composition of the Board – skills, (seebelow). Reports were also provided Company using best practice guidance, diversity, experience and knowledge toeach of the Committees on the finding including the Financial Reporting Council’s of the evaluation as it applied to them. • Engagement with shareholders and other Guidance on Board effectiveness. TheChairman will provide feedback from stakeholders the evaluation to individual directors. Questions covered the performance • Board focus and priorities, use of time ### oftheBoard, its committees and Key Resulting Actions • Quality of papers and presentations individualdirectors. Succession planning – we will continue • Access to management tofocus on executive succession and • Succession planning, for Board development activity to ensure the membership and senior management Company has a strong and diverse pipeline of candidates for all senior executive roles, Board Committees and those at Board level in particular. • Information and resources available Skills and training – the Board will set tomembers aside time to update directors on key • Support and engagement with ESG-related matters, including training executivemanagement onclimate change. • Quality and extent of matters covered Stakeholder engagement – further bycommittees opportunities will be arranged for • Quality of papers and presentations directorsto engage directly with stakeholders, including customers andemployees. ### 2022 Board evaluation, overview ofself-assessment areas of focus: Strategic oversight Board meetings and materials Committees Board composition and dynamics Risk management oversight Chair and individual directors Executive support and engagement 144 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ## Audit Committee report ### Dear Shareholders Audit, corporate reporting and corporate ### Stephen Pearce governance reform I am pleased to present the Audit Chair | Committee report for the year ended | We discussed the key themes from the | | --- | --- | | 31 December 2022. This report is intended | government’s response to the BEIS white | | to provide you with an insight into key areas | paper on ‘Restoring Trust in Audit and | | we considered, together with how the | Corporate Governance’, with the | | Committee has assisted the Board in | management team to understand the | | fulfilling its responsibilities. The Committee | preparation the Group was undertaking | | monitors the Group’s internal control | inorder to be ready for the implementation | | environment and the integrity of financial | of the reforms. | reporting. Additionally, we challenge the During the year, we heard from the management teams and the external GroupFinance Director on the progress auditor on a number of areas, including key ofaprogramme designed to enhance accounting judgements and control matters. theeffectiveness of the Group’s Finance The Committee’s Terms of Reference are function. The first phase, introducing available on the Company’s website. arevised functional design, has been ### Members: Overview and Committee composition implemented to enhance the capability Dame Elizabeth Corley ofthe function, and create more efficient Our biographies and Board information Chris Grigg infrastructure and processes. Certain of onpages 132 to 133 provide a summary these changes have been made to ensure ofour skills and our experience, which we are well placed to deal with the BEIS highlights that all Committee members requirements. We noted, in particular, the havethe necessary skills, and financial evolution to a three lines of defence model literacy, to effectively discharge our for financial assurance, which would dutiesas a Committee. broaden the coverage and depth of the After each Committee meeting, I report review of financial risks. tothe Board on the Committee’s activities, We will continue to monitor the preparatory the key matters discussed and present activities during 2023, and next year we will anyrecommendations to the Board. The provide further detail as to the scope and Committee met six times during the year impact of these reforms on the Group, its and had five formal meetings. After four assurance processes and financial reporting. ofthe formal meetings, we met privately with the External Auditor and the Internal External audit Audit Director. Following a tender process Deloitte LLP | During the year, the membership of the | wasappointed as the Company’s external | | --- | --- | | Committee changed. We welcomed Chris | auditor at the 2018 Annual General | | Grigg to the Committee and said goodbye | Meeting and has just completed the fifth | | to Ian Tyler, who stepped down from the | year of its first five-year cycle. John Adam, | | Board at the conclusion of the 2022 AGM. | the audit partner responsible for the | | Iwould like to thank Ian for his valued | Group’s audit since 2018, will rotate off the | | contribution over many years. | audit following the completion of the 2022 | audit. The Committee has agreed with In addition to members of the Audit Deloitte that Claire Faulkner, a suitably Committee, our meetings are routinely experienced audit partner, will succeed him. attended by the Chairman of theBoard, theChief Executive, the Group Finance During the year, we approved the external Director, the Group General Counsel, the audit plan as proposed by Deloitte. As part Internal Audit Director, the Group Financial of the plan, we agreed the scope and level Controller, the Senior Audit Partner and of materiality and discussed with Deloitte other senior members of the External the areas that it had identified as key risks Auditteam from our auditors, Deloitte LLP. and other particular areas of focus. In addition, other senior executives are The scope of work agreed was largely invited to attend meetings, as required to consistent with the prior year, and included provide the Committee with a deeper level consideration of the impact of climate of insight onrelevant matters. change throughout the financial statements | An outline of the work that we have | and the enhancement of disclosures for | | --- | --- | | undertaken in the last 12 months can | TCFD reporting. The Maritime Services, | | befound on page 150 and, during this | ShipRepair and Holston and Radford | | report, I will give an overview of some | USbusinesses were added to the audit | | ofour discussions. | scope, and the Hägglunds and Weapons | UK Competition and Markets Authority Audit Order 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 2022. BAE Systems plc Annual Report 2022 145 Governance / Directors’ report / Audit Committee report UKbusinesses were removed. This periodic into account the effectiveness and half-year review and ESG assurance work, rotation of certain businesses, in and out independence of the auditors and the best which has been undertaken by Deloitte for ofscope, ensures sufficient coverage interests of shareholders, and will ensure the first time this year. acrossthe Group. that an audit tender is conducted no later Internal control and risk than the 2028 financial year. Auditor independence The Group’s Risk Management and Non-audit services policy | The Committee oversees the relationship | | InternalControl Framework are designed | | --- | --- | --- | | with the external auditor and is responsible | The Committee has a formal policy on | tomanage rather than eliminate the risk | | for assessing its effectiveness. It also | non-audit services. This was reviewed | offailure to achieve its strategic objectives. | | approves its terms of engagement, fees | during the year, to ensure that it remains | It can only therefore provide reasonable | | andmonitors the auditor’s independence | fitfor purpose and aligned to the FRC’s | andnot absolute assurance against material | | and objectivity. | 2019 Revised Ethical Standard of Permitted | misstatement or loss. Detailed information | | | Audit-Related and Non-Audit Services. | in respect of the Group’s internal controls | We review the relationship with the Thepolicy governs the engagement of and risk management systems is provided externalauditors on a regular basis, theauditor to provide non-audit services. on pages 116 to 125. including consideration as to when it would Italso prohibits certain activities from be appropriate to complete a competitive The Committee monitors the Group’s risk beingundertaken bythe auditor and places tender process for the role, in line with management and internal control systems, restrictions on theemployment of former theCompetition and Markets Authority including their effectiveness, on behalf of employees oftheauditor. order concerning the frequency and the Board and provides feedback to the governance of tenders for the appointment The policy permits the provision of Board on these matters. In considering of the external auditor. The Committee Audit-Related Services and Permitted theeffectiveness of internal controls, the considers that Deloitte is effective in Non-Audit Services up to limits that are Committee received and discussed reports itsroleas auditor. The scope and output pre-approved by the Committee, with from the Group Financial Controller, Internal ofourannual review of the external specific Committee approval required Audit Director and the External Auditor. auditor’s independence and effectiveness beyond such limits. Such approvals With the easing of COVID-19 restrictions, isdiscussedbelow. arekeptto a minimum and relate to work external assurance providers, the Group’s which, by its nature, is most appropriately In view of this, and having considered the own assurance teams and Internal Audit carried out by the auditor. | continued objectivity, independence and | | teams were able to work on site when | | --- | --- | --- | | effectiveness of the auditors, the | A copy of the policy is available on | undertaking assurance activities during | | Committee considers it to be in the best | theCompany’s website. Details of fees | theyear. Areas of assurance focus included: | | interests of the Company’s shareholders for | payableto the auditor are set out on | financial controls; IT and cyber security; | | Deloitte LLP to remain as external auditors | page236. The 2022 non-audit fees for | Joint Venture management; export control; | | for the upcoming financial year. We will | Deloitte represented 5% of the audit fee. | supply chain resilience; safety; and | | continue to monitor this position, taking | The principal non-audit services provided | environmental targets. | byDeloitte during the year relate to the Assessing the effectiveness of External Audit 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. A key area of focus in 2023 would be the continuity of audit teams as a result of partner rotation, and changes toaudit personnel. Effective handovers were key in ensuring that audit quality and the knowledge of the Group’s businessand risks were maintained. On the basis of the review following the 2022 year-end audit, the Committee hasproposed to the Board that it recommends that shareholders support the re-appointment of Deloitte LLP at the 2023 AGM. 146 BAE Systems plc Annual Report 2022 Communication Planning Scope Partners & Challenge Senior Finance Executives Who we surveyed to inform our assessment on the effectiveness of the Group’s External Auditor Internal Audit Director Audit Teams & Reporting & Execution & Insight What we surveyed Outcome Financial statementsStrategic report Governance | The six-monthly Operational Assurance | particular importance in the early | These reports together allowed the | | --- | --- | --- | | Statement (OAS) provides the basis for | identification of programme risk and | Committee to monitor, review and assess | | ourreview of the effectiveness of internal | thedetermination of profit recognition | the effectiveness of the Group’s risk | | controls and risk management. The OAS | orprovisioning which tend to be areas | management and internal control systems | | returns, comprised of submissions by each | where judgement is required to be | incontext of the total landscape of risks | | business or function, are amalgamated to | exercised. At the current time, when | andthe Group’s strategy. The Board and | | create the foundation for the assessment | theGroup has several large programmes | the Committee have determined that the | | offinancial and non-financial risks. These | inrelatively early stages, adherence to | most significant risks, as measured through | | risks are reviewed by the Executive | LCMmethodology is vital to ensure timely | potential impact and probability, are those | | Committee and the Group Audit Review | delivery and margins at target or better. | shown as the Company’s Principal Risks | | Board, following which, an assessment is | | thatcan be found on pages 119 to 125. | • General IT controls – the importance made on the probability of the risks arising Inrelation to the risk horizon, the Group ofa strong IT control environment is and potential impact to the Group’s Finance Director provided an overview acknowledged and remediation is a key five-year Integrated Business Plan (IBP). ofpotential and emerging risks which are focus where testing has identified that Specific responsibility for managing each monitored through the Group’s risk radar. improvement is required. identified risk is allocated to a member of These processes are a key component of • Cyber risk – we continue to monitor the Executive Committee. theGroup’s governance framework (page thedevelopments in IT and cyber security 134) and provided key context for the We also received reports from the internal and associated regulatory and legislative Committee’s consideration of the directors’ and external auditors on control areas. compliance. The Chief Information Viability statement. During the year, we discussed the process, Security Officer attended a Committee outputs and improvement actions relating meeting to give an assessment on the Internal Audit to cyber and IT, financial, programme Group’s cyber security standards, and Internal Audit plays an important role in management and project accounting provide an update on the work underway theGroup’s governance framework through controls testing. Areas of specific focus to evolve cyber security processes, and its objective and independent review of the haveincluded the following: the associated assurance processes to effectiveness and efficiency of internal • General financial controls – the monitorthis evolution. control systems. The scope and authority continuing importance of a robust • Export control compliance – throughout ofthe Internal Audit function is defined financecontrol environment, particularly the year, the Group General Counsel within its charter which is approved in the light of the Audit and Corporate updated the Committee on developments annually by theCommittee. Governance Reform changes, is in export licensing and export control Committee meetings are attended by the recognised with benchmarking of compliance matters and enhancements Internal Audit Director and the VP Internal assurance practices underway. toexisting procedures. Additionally, the Audit, Inc. During the year under review, • Lifecycle Management (LCM) – the Chief Counsel Compliance and Regulation inaddition to the private meetings we hold bedrock of our programme execution provided a thorough overview of the with the Internal Audit Director without andmanagement, LCM is integral to Company’s compliance with the various management present, the Committee thesuccessful execution of the Group’s export control regimes inthe territories helda separate session with the Internal projects and programmes, and of inwhich it operates. Audit Director and the external auditor. Assessing the effectiveness of Internal Audit The Committee reviewed all the feedback provided by survey participants and was pleased with the positive nature of the comments, wherein participants noted the integral role and value-adding services of the Internal Audit function. The responses highlighted the following areas of development which we will review during next year’s survey: bolstering the Internal Audit function ESG assurance expertise; exploring opportunities to refine and evolve the focus of Audit Review Boards; continuing to build relationships with subject matter experts to provide fuller context to audit recommendations. BAE Systems plc Annual Report 2022 147 Audit Committee members Audit Review Board Chairs Executive & Reporting Role of Internal Audit People & Processes Sector Leadership Executive Team Value-add Who we surveyed to inform our assessment on the effectiveness of the Internal Audit function What we surveyed Outcome Governance / Directors’ report / Audit Committee report Duringthis session, wediscussed: The effectiveness of the Internal Audit Annual Report and Accounts, taken as a function is monitored regularly by a variety whole, is fair, balanced and understandable, • the demarcation of roles and of inputs including: the quality and content and provides the requisite information to responsibilities of the Audit and ESG of ongoing Internal Audit reports received; allow stakeholders to assess the Group’s committees in respect of ESG assurance our formal and informal interaction with the position and performance, business model and data; Internal Audit Director; an annual evaluation, and strategy. • the importance of accurate and assessing the function’s effectiveness; and clearESGreporting and the requisite Working alongside the ESG Committee, we the six-monthly OAS outputs that provide processes for ESG horizon scanning; asked the executive team to undertake an asummary of the progress against the exercise to codify the sources and assurance • the evolving threat to cyber Internal Audit programme. activities which were undertaken in relation systemsandassociated regulatory The responses from the 2022 Internal to the ESG disclosures published within the expectations;and Auditevaluation raised no significant issues Group’s Annual Report. The output of this • the government’s response to the and were consistent with prior years, with was an Annual Report assurance map which BEISwhite paper on ‘Restoring Trust participants noting the integral role of provided us an overview of the data inAudit and Corporate Governance’. Internal Audit and recognising that the disclosed within the Annual Report and the The Internal Audit Director provides Internal Audit function added value to the data sources; how verification was sought regularreports to the Committee on the business. An outline of the process and over the data sets; and the internal or assessment of the Group’s risk management results is shown above. external parties that provide assurance over activities, internal controls and corporate the data. The assurance map is intended to Environmental, Social and Governance governance framework. These reports be a dynamic document reviewed at least (ESG) data provide an overview of the work undertaken annually and updated in line with regulatory We recognise that with the increased or statutory changes. in the period under review, individual disclosure of ESG, and particularly climate- reports on audits conducted, progress Climate-related disclosures related data, there are increasing demands against the agreed Internal Audit plans and, for greater assurance in areas of narrative Climate-related disclosures were an area in the case of any control failures, progress and non-financial reporting. In recognition ofcontinued focus of the Audit and ESG of remediation plans. We also review the of this, I worked with Dr Jane Griffiths (ESG Committees. During the year, we reviewed outputs of the twice-yearly OAS process. Committee Chair), the Internal Audit the context and requirements of the TCFD The Internal Audit programme is driven Director and the Climate Resilience & and the Group’s compliance against the primarily by the Group’s strategy and Environment Director, to clarify the role of reporting requirements. theCompany’s assessment of key risks. the Audit Committee and the role of the The Committee welcomed the enhancement Theprogramme is agreed jointly by the ESG Committee, in relation to the oversight made to support improvements in climate Audit and ESG Committees. The of assurance and implementation activities. subject matter command, evaluation of risks programme encompasses financial and This is a fast-evolving area which requires and opportunities, and climate reporting. non-financial risks, and the programme the appropriate infrastructure and data to allows for dynamic recalibration, which allow for both Committees to effectively The Committee is in agreement that provides Internal Audit with the flexibility discharge their duties in this regard. climate-related transition and physical risks toaddress emerging risks and business could cause impairment and changes to We agreed that the Audit Committee requirements. One of the objectives for expected credit loss and that, although we wouldmaintain oversight of the internal theInternal Audit function is to provide have judged there to be no material impact and external assurance processes in regard assurance that ethical business conduct and on the Group’s consolidated financial to ESG data, and the ESG Committee would an appropriate culture exists, and is being statements for the year ended 31 December monitor the progress and implementation fostered to support the executive 2022, close monitoring must continue. of the Company’s ambitions against the management in matters that could lead to Work to address climate-related data ESG metrics. This approach will allow both operational and/or reputational risk, so that limitations and to build accurate modelling Committees to seek comfort in the risks are minimised. of the financial impact of climate-related robustness of the assurance processes risks is continuing and webelieve will deliver The 2022 assurance programme covered thatunderpin the provision of TCFD improvements to disclosure quality in abroad range of assurance areas including: requirements along with other elements respect of future years. Financial Control Framework Audits; ofESG and non-financial reporting. Our effectiveness of the Operational Framework; annual joint Audit and ESG Committee Financial statements risk register findings; OAS outputs; meeting will allow us to assess the The Committee reviews all significant ESGmatters; change programmes; effectiveness of this approach. The Audit issues concerning the financial andJoint Ventures. Committee will continue to be well placed statements which include the going to make an assessment on whether the 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 making this How we ensure that the Group’s Annual Report, taken as a whole, is fair, balanced assessment, we considered the robust input and understandable and provides information necessary for shareholders to assess and review processes undertaken as part of the Group’s position and performance, business model and strategy the drafting of the Annual Report. We also The process is: examined disclosures during the year, discussed with senior management, and – comprehensive guidance issued to all the contributors at operational level; – a verification process dealing with the factual content of the reports; – comprehensive reviews undertaken at different levels in the Group that aimtoensureconsistency and overall balance; and 148 BAE Systems plc Annual Report 2022 – comprehensive review by the directors and the Executive Committee. Financial statementsStrategic report Governance confirmed matters that representations had Pensions Taxation been substantiated, and reviewed internal Accounting for pensions and other Computation of the Group’s tax expense control reports. post-employment benefits involves making and liability, the provisioning for potential We received early sight of the draft estimates when measuring the Group’s tax liabilities and the level of deferred tax AnnualReport and Accounts, in advance retirement benefit obligations. These asset recognition are underpinned by offinal review and sign-off by the Board. estimates require assumptions to be made management judgement and estimation This allowed us to review the consistency about uncertain events, such as discount ofthe amounts that could be payable. ofthe narrative disclosures and financial rates, inflation rates and longevity. As at Whilst tax policy is ultimately a matter for statements. It has also provided opportunity 2022 year end and following recent the Board’s determination, we reviewed to consider the reporting of climate risks changes in discount rates and inflation theGroup’s tax strategy as set out on and opportunities. After careful review and assumptions, a number of the Group page89. Twice during the year, we consideration of all relevant information, the pension schemes are in an accounting reviewed the Group’s tax charge and Committee was satisfied that, taken as a surplus. The Group has recognised the taxprovisions, and discussed these with whole, the 2022 Annual Report and surpluses on the basis thatthe future theGroup Tax Director. | Accounts was considered to be fair, | economic benefits are unconditionally | | | --- | --- | --- | | balanced and understandable and it | available to the Group. These have been | Alternative Performance Measures | | affirmed that view tothe Board. | recognised after deducting a 35% | (APMs) | withholding tax, which would be levied The Group monitors the underlying The Committee agreed the parameters prior to the future refunding of any surplus performance measures of the Group of,and subsequently reviewed a report and have been presented on a net basis usingAPMs, as a mechanism to support providing support for, the going concern asthis is not deemed to be an income tax theyear-on-year business performance statement (seepage 127) and the statement ofthe Group. We have reviewed this andcash generations, and to enhance on the Board’s assessment of the prospects presentation and concluded this estimate management’s planning and decision- of the Group (see the viability statement isappropriate based on the Group’s ability making on the allocation of resources. onpage 126) over the five-year period used to access its defined benefit surpluses. in the Integrated Business Plan (IBP). The One such measure is underlying EBIT, Committee considered the period covered We reviewed the methodology used to whichprovides a measure of operating by the viability statement, and whilst a allocate a proportion of the net post- profitability, excluding one-off events number of companies have elected to use employment benefit surpluses to equity ortransactions that are not considered athree-year horizon, we continue to be accounted investments and concluded tobe part of the ongoing operational ofthe view that a five-year period remains thatthis continues to be appropriate with transactions of the business. This provides the most appropriate timespan for this reference to agreement between the management with a more comparable Group given our business planning cycle Company and the retirement benefit position with which to monitor the and the long-term nature of a number schemes. We also considered the disclosures performance of recurring operations ofour programmes. in respect of the sensitivity of the surplus overtime. tochanges in these key assumptions In assessing going concern and viability, During the year, management reviewed (seenote 25 to the Group accounts on theCommittee has considered cash flow thedisclosure of reconciling items as pages 267 to 277). projections and timings, which include ‘non-recurring’ in the calculation of assumptions, as far as they can be made, Goodwill underlying EBIT. As some of the items inrespect of inflation and climate change. Impairment testing of goodwill on the couldbe considered recurring in nature, Such analysis included related sensitivity balance sheet is underpinned by the value andin order to provide more clarity as to analysis and stress testing scenarios of the future prospects of the related the nature of these items, the disclosure andborrowing facilities available to the business, which have to be estimated. hasbeen amended to describe the items Company. Other related issues such as Within the year, the Group restructured part as‘adjusting’. A financial glossary is credit ratings were also considered. of its operations and, as a result, changed included in the Annual Report to provide the level at which goodwill is monitored. acomposite explanation of APM content, In line with regulatory guidance, the We considered this alongside the level of and the respective prominence given to IFRS potential impact of the Ukraine war on goodwill held on the Group’s balance sheet measures and APMs has been considered. liquidity and cash management (including and whether, given the future prospects related covenants) has been considered. Priorities for the year ahead ofthe acquired businesses, the value of In addition to the going concern and We await the outcome of the Financial goodwill held on the balance sheet viability statement reviews, the principal Reporting Council’s consultation on Audit remainsappropriate. matters we considered concerning the Committee minimum standards and the No goodwill impairments were judged to 2022 financial statements were: implementation of regulatory standards to berequired as aresult of this review. The address the BEIS response in respect of the Recognition of revenue, profit and methodology forimpairment testing used corporate governance and audit reforms. provisioning by the Group isset out in note 8 to the The Committee will review its processes The estimation of contract margin and the Group accounts on pages 243 to 245, andimplement changes to its operations, level of revenue and profit to recognise in a including disclosures on Cash-Generating asmay be required. We will also monitor single accounting period requires the exercise Units andtheir assumptions. the Group’s implementation of any required of management judgement. The Committee changes resulting from the reforms. reviewed key estimates and judgements ### Stephen Pearce applied in determining the financial status of ### the more significant programmes, including Chair of the Audit Committee Type 26 frigate and US Land programmes. BAE Systems plc Annual Report 2022 149 Governance / Directors’ report / Audit Committee report ## The Audit Committee’s year February June July October December Committee Committee Committee Committee Committee Meeting | February | June | October | | --- | --- | --- | | Committee (Videoconference) | Committee (Washington DC, US) | Committee (Videoconference) | | – Reviewed the financial statements | – Agreed the 2022 external audit plan | – Received a presentation from the | | andspecific disclosures, including | andscope. | GroupGeneral Counsel on the | | viability and going concern, for | | governance and operation of Group | – Reviewed external auditor independence. recommendation to the Board. Joint Venture companies. – Agreed external audit engagement letter – Received a presentation from the Group ### and fee. Meeting (London, UK) Financial Controller and Group Treasurer – Considered any emerging accounting – Informal meeting with the Internal Audit in respect of work supporting the issues prior to the half year. Director and external auditor to discuss viability and going concern statements. – Received a presentation from VP, arange of issues as detailed above on – Considered the accounting, financial InternalAudit, for the US businesses. page 145. control and audit issues reported by – Reviewed the Non-Audit Services Policy. theexternal auditor that flowed from ## December the audit work. – Reviewed the nature and value of ### non-auditservices. Committee (Videoconference) – Reviewed the effectiveness of the external audit process. – Received an update on the Finance team – Considered any emerging accounting modernisation plans from the Group issues prior to the year end. – Received a report from the Group Finance Director. TaxDirector. – Considered the external auditor’s – Agreed external audit partner successors controls report. – Reviewed external auditor for the US and UK/RoW businesses. independenceand nature and value – Considered output of the Internal ofnon-audit services. AuditDirector’s report. ## July Joint session with the Environmental, – Received a report on export control ### Social and Governance Committee: Committee (Videoconference) compliance from the Chief Counsel Export Control and Compliance. – Reviewed the financial statements and – Considered output from the six-monthly specific disclosures, including going concern, – Discussed the approach to ESG OAS review. for recommendation to the Board. assurance and endorsed the ESG – Reviewed the procedures and outputs assurance map. – Received a presentation from the Group for the identification, assessment and Financial Controller and Group Treasurer – Reviewed the risk radar. reporting of risk. in respect of work supporting the going – Received a report on cyber security – Agreed final iteration of the 2022 concern statement, together with an standards from the Chief Information Internal Audit programme. update on viability. Security Officer. – Considered development of ESG-related – Considered the accounting, financial – Set the parameters for work disclosures, including climate change control and audit issues reported by the supportingthe viability and going and TCFD reporting requirements. external auditor that flowed from the concern statements. half-year review work. – Received technical accounting and – Received a report from the Group financial reporting updates. TaxDirector. – Discussed the first iteration of the 2023 – Considered output from the six-monthly Internal Audit programme. OAS review. – Reviewed the Internal Audit Charter. – Reviewed the procedures and outputs – Discussed the outcome of the Internal forthe identification, assessment and Audit function effectiveness review. reporting of risk. – Reviewed external auditor independence – Reviewed external auditor independence and the nature and value of non-audit and the nature and value ofnon-audit services. services. 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 Group Finance Director, the Internal Audit Director and the external auditor on an ad hoc basis. 150 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ## Environmental, Social and Governance Committee report ### Dear Shareholders Page 156 gives an overview of our ### Jane Griffiths keydiscussions in 2022 and this report I am pleased to present the Environmental, Chair isintended to give further context of Social and Governance (ESG) Committee theseconversations. Further information report for 2022. ontherole of the Committee and our At the Company’s ESG event last October, TermsofReference can be found on we provided shareholders with some theCompanywebsite. insightinto the work of the Committee and Diversity, equity and inclusion discussed the Group’s progress against its | ESG ambitions. Our Committee meetings | In order to fulfil the Group’s commitment | | --- | --- | | span abreadth of ESG topics but the key | tocreate a diverse, equitable and inclusive | | areas of focus in 2022, particularly inlight | working environment, we regularly review | | of the cost of living challenges | the progress against various diversity | | facingemployees, the communities in | metrics and inclusion indicators. Itwas | | whichthe Group operates and the | goodto see the progress made against | | widersupply chain, were: | theGroup’s ambition to be recognised as | aleading employer in the defence and • increasing gender and ethnic diversity; ### Members: security sectors for valuing diversity and Nick Anderson • progress of theGroup’s environmental inclusion, particularly in respect of Crystal E Ashby ambitions; and increasing the gender diversity ofthe Nicole Piasecki • employee engagement. Executive Committee to gender parity by Lord Sedwill 2030. Women now account for 29%of Committee overview theExecutive Committee and, whilst there | Our individual biographies and summary | is further work to be done to meet this | | --- | --- | | ofour collective experience as a Board can | ambition, there is clear momentum which | | be found on pages 131 to 133. | sets the ‘tone from the top’ for the broader | organisation in regard to the value of The composition of the Committee has diversity and inclusivity. evolved to reflect changes to the Board membership during the year. Chris Grigg During the year, we heard from the Group stepped down as a member of the ESG, Culture & Business Transformation Committee and we welcomed Lord Director and the Chief Diversity, Equity MarkSedwill to the Committee, following andInclusion Officer on the progress of Dame Carolyn Fairbairn’s retirement from theGroup’s strategy to increase diversity the Board. I would like to thank Chris and foster inclusive cultures. There are forhisvaluable and much-appreciated threemain areas of continued focus: contribution during his tenure as a • inclusive and visible leadership; memberof the Committee. • refreshed recruitment practices; and Committee meetings are attended by the • broader awareness and training materials. Chairman of the Board, the Chief Executive, the Group Finance Director, the President The Group has sought to create more and Chief Executive Officer of BAESystems, inclusive employment opportunities through Inc., the Group ESG, Culture & Business changes in how we recruit and define roles, Transformation Director, the Group General for example ensuring a gender-neutral Counsel and the Climate Resilience & approach to advertising and,where possible, Environment Director. Other senior offering more flexible, shared andhybrid executives are invited to attend meetings working options. Mandatory diversity, toprovide the Committee with first-hand equity and inclusion awareness e-learning subject matter, views and expertise as training has been created and rolled out required. During the year, we welcomed toimprove managerial awareness and thecreation of the Group ESG, Culture encourage leaders to take proactive and &Business Transformation Director, an visible steps tofoster inclusive and diverse Executive Committee position, that has teams. Wehave also been made aware of further endorsed thecommitment to how some individual employee narratives delivering our ESGagenda. were being used to bring the value of diversity to life; the narratives were both The Committee met five times during powerful and extremely thought provoking. theyear, and after each Committee meetingI reported to the Board on the Committee’s activities, key takeaways from conversations and, where relevant, offered specific recommendations. BAE Systems plc Annual Report 2022 151 Governance / Directors’ report / Environmental, Social and Governance Committee report The Group’s performance on diversity, ### Employee engagement framework equity andinclusion is a non-financial component of the annual incentive plan for senior executives. These objectives operate Hear from executives on Senior executives as a downward underpin to the incentive, employee matters such as reducing incentive payment if performance safety, wellbeing, diversity and inclusion and is not at theexpected levels. We believe this companydecisions that demonstrates that good performance could impact employees. inthese areas is the expectation, rather thanthe exception. The Committee sets, measures and determines the level of performance Review employee sentiment Operational managers achieved against these objectives and andwellbeing surveys and otherdata sources makes a recommendation to the evidencing employee views. Remuneration Committee. In 2022, the diversity, equity and inclusion objectives were: Learn from operational Direct engagement • for UK/RoW, increasing gender and management teams on the ethnicdiversity particularly within practical application and early-career employees; impact of workforce policies. • for BAE Systems, Inc., increasing the representation of employees from a minority ethnic background in mid- Direct engagement with Data management roles; and groups of employees. • driving inclusion through training, leadership and demonstrating inclusivebehaviours. In 2022, there was a 1% increase in the number of women in the organisation. The executive annual incentive plan includes the following objectives for 2023: ESGmatters, is to oversee the assurance programmes, operational models were framework, internal controls, activities and created to include financial data, support • increase gender diversity in mid- financial planning that relates to the Group’s risk assessments and identify renewable management grades; plans. Accordingly, wework closely with energy investment and self-generation • for UK/RoW, increase representation theAudit Committee on these matters, opportunities. An exercise to homogenise ofemployees from minority ethnic particularly in respect of ESG assurance and data and improve the Group’s rigour on backgrounds; reporting in relation to the Task Force on data reporting had also been undertaken. • for BAE Systems, Inc., increase Climate-related Financial Disclosures (TCFD). As part of the Integrated Business Plan representation of employees from process, each sector has created roadmaps Members of the executive team and senior minority ethnic backgrounds in inorder to make the Group’s net zero executives (as detailed above) areinvited mid-management roles; and ambition an integrated part of sector toattend all meetings of the Committee, business planning. • drive inclusion through training, which helps us to effectively discharge our leadership and demonstrating oversight duties through regular engagement We also heard from the Chief Procurement inclusivebehaviours. and challenge on climate transition matters. Officer and the Supply Chain Sustainability In addition to dialogue with internal Director on the progress being undertaken Environment and climate transition colleagues, and to build on the foundations in regard to the Group’s supply chain. As outlined on page 124 of this Annual of the prior year’s training, the Board Report, the Group considers the potential In support of the Group’s net zero ambitions, received further training from PwC and impacts of climate change as one of its specific objectives were included in the anupdate on climate risk. principal risks. The Board is responsible senior executive annual incentive plan. forthe oversight of climate-related risks The rich conversations during the session Aswith the objectives regarding diversity, andopportunities and, as a Committee, helped to further bolster our subject equity and inclusion, and safety, the wesupport the Board in monitoring command and understanding of climate Committee sets, measures and determines theprogress of the executive team in riskand TCFD, and provided clarity on the the level of performance achieved implementing an integrated, strategic next steps for the Group. againstthese objectives and makes a approach to address climate transition recommendation to the Remuneration Several times during the course of the year, risksand opportunities. Committee. The 2022 environmental we heard from the Climate Resilience & objectives were in regard to the creation of Our role is to oversee the Group’s response Environment Director on the progress of the the net zero framework and roadmaps to to the impacts of the Group’s activities on net zero programme, particularly in relation achieve a reduction in Scope 1, 2 and 3 the environment, and its response to the to theCompany’s own operations (Scopes emissions in the timeframes committed by potential impacts of climate change on the 1and 2). We learned that a Group-wide the Group. A fuller discussion on the incentive Group’s current and future operations. transformation and governance programme outcomes can be found in the Remuneration Whereas the role of the Audit Committee, had been established and implemented Committee report on pages 160 to 164. in respect of climate change and other within the sectors. In support of these 152 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance We will continue to improve our Employee voice This decision rationale for this is as follows: understanding of climate transition, emerging In accordance with Provision 5 of the • engaging with employees has been risks and opportunities by working with UKCorporate Governance Code (the Code), apartof the Committee’s activities external and internal subject matter experts the Board is required to maintain an sinceits inception; and continue to challenge the executive effective mechanism to engage with the • the non-executive membership of team on the pace of implementation. workforce. The Committee annually theCommittee meets the same Ifapproved by shareholders at the 2023 reviewscontemporary employee independence criteria as appointing AGM, the executive long-term incentive engagement practices and effectiveness asingle non-executive director, as plan will include climate change-related ofthe model adopted by the Group. proposed in the Code; and objectives with the aim of increasing TheBoard agreed that the mechanism by alignment between executive performance • the size and complexity of the Group’s which the Committee undertakes employee 1 and the creation of long-term sustainable business, with 93,100 employees in engagement on its behalf remains effective. | success through the delivery of the Group’s | around 40 countries, means that there | | --- | --- | | climate ambitions. Further details regarding | arelogistical and practical advantages | | the ESG targets in the executive long-term | tothe role being performed by more | | incentive plan may be found on page 191. | thanone director. | ### Employee engagement timeline ### March Location Location Location Location Location Videoconference Warton and London Christchurch Nashua Samlesbury Activity Activity Activity Activity Employee conversations: Activity Dinner with UK Site visit and informal Site visit and town hall UK Embrace Employee Site visit and townhall high-potential employees lunch Key themes Resource Group Co-Chairs Key themes Key themes Key themes Leadership and Company Key themes Parental leave and Talent development and Talent development performance Ethnic and cultural diversity ethnic diversity UK customer insights Those involved Those involved Those involved Those involved Those involved Innovation and Board of directors and ESG Committee Chair Board of directors Board of directors Technology Committee BAESystems, Inc. Board Chair ### July June May Location Location Location Location Location Videoconference Videoconference Washington Videoconference London Activity Activity Activity Activity Activity Employee Board review onethical Dinner with Inc. Employee Trade Union National conversations: businessconduct high-potential conversations: Officers Dinner Kingdom ofSaudi Key themes employees AustraliaSafety Key themes Arabia Safety teams Company culture, Ethics teams Key themes Impact of cost Key themes Officertraining Talent development Key themes oflivingcrisis Roll-out of wellbeing Those involved and UScustomer Improved safety Those involved resources Board of directors, Group ESG, insights culture Chief Executive and Culture & Business Transformation Those involved Those involved Those involved ESG Committee Chair Director, Governance, Conduct ESG Committee Chair Board of directors ESG Committee Chair and Sustainability Director ### September Location Location Location Boston Merrimack Boston Activity Activity Activity Dinner with Inc. Site visit and Board discussion on culture and review of key culture senior executives informallunch indicators Key themes Key themes Key themes US customer insights Talent development Mental health and wellbeing, business transformation, and higher education cultural evolution and alignment with behaviours Those involved partnering andinclusion Board of directors Those involved Those involved Innovation and Board of directors, Group HR Director and Group ESG, Technology Committee Culture & Business Transformation Director 1. Including share of equity accounted investments. BAE Systems plc Annual Report 2022 153 Governance / Directors’ report / Environmental, Social and Governance Committee report As global coronavirus restrictions eased In addition to the conversations held during Governance andcolleagues returned to offices, we these visits, I attended trade union dinners We heard from the Group General Counsel wereable to resume our programme and had conversations with employees on the application of the Group’s Product ofphysical site visits whilst continuing representing Employee Resource Groups. Trading Policy and the Responsible Trading toleverage technology for virtual These included across-section of employees Principles and the evaluation process that employeeengagement. within safety teams in Australia and the apply to how we do business throughout Kingdom of Saudi Arabia which provided In order to ensure that the conversations the product lifecycles. aspotlight onsafety and DEI, a key area and key themes are shared and discussed offocus forthe Committee. These We also received presentations from the atthe Board, I updated Board colleagues conversations were not attended by Chief Counsel, Compliance and Regulation onthe employee engagement activities members of the executive team, to ensure on the global use of advisers during the year undertaken at the mid-year andfull year. that colleagues felt comfortable in having and of the application of the Advisers Policy, This standing agenda item, coupled transparent conversations. As a result of that helps ensure we have the necessary withthe organic discussions and actions these meetings, I was able to feed back controls and governance in place. from site visits provided for a rich and tothe Board employee suggestions on deeper understanding of the matters ESG data assurance improving diversity and create a more concerning employees. At the joint ESG and Audit Committee inclusive culture, as well as improvements meeting in February, we reviewed the As a Board, we had the opportunity to visit inwellbeing and safety culture and other context and requirements of the TCFD various sites in our UK and US businesses areas that would benefit from further focus. andthe Group’s compliance against and my ESG Committee colleagues, Nicole Our employee engagement framework and thereporting requirements. and Nick, in their roles as members of the further details of the employee engagement Innovation and Technology Committee, As a result of the increasing need to activity undertaken by or on behalf of the were also able to visit further UK and US discloseESG, and particularly climate- Board are shown on pages 151 to 153. sites. We recognise that site visits and tours related data, there is a requirement for only provide one element of interaction with Safety and wellbeing greater assurance in areas of narrative employees, so to properly gauge sentiment andnon-financial reporting. During the At regular intervals during the year, we and culture, we supplement these site visits year, I worked with Stephen Pearce reviewed the global safety performance with open and conversational town hall (AuditCommittee Chair), the Internal oftheGroup and we were pleased to sessions, informal lunches with on-site AuditDirector and the Climate Resilience seeareduction in the number of recordable colleagues, and dinners with high-potential &Environment Director, to better articulate injuries, compared with the prior year. The employees. Our town halls during site visits the role of the Committee versus that of various initiatives put in place to improve allowed for employees to ask questions of theAudit Committee, in relation to the safety culture and embed personal and the Board and local management teams. oversight andassurance of ESG activities team responsibilities within operational teams, have resulted in an overall reduction and the associated data. Duringthese town hall meetings, in the in safety incidents. In 2022, the Group had UKandUS, employees raised questions We agreed that the Committee would a recordable injury rate of 486 (493 in 2021) aboutparental leave, ethnic diversity monitor the progress and implementation and had 32 (33 in 2021) major injuries. andleadership development. We were of the Group’s ambitions against the ESG pleased to be given the chance to hear metrics and that the Audit Committee Mental health and wellbeing continued these questions first-hand and witness would oversee the internal and external tobe a focus of the global safety agenda. theChief Executive and executive teams assurance processes for ESG data. This We learned about the work of the mental providing clear answers on progress approach reduces duplication, creates health Employee Resource Groups and regarding gender and ethnic diversity, and abetter understanding of our roles and thework being done to address the share some of their personal experiences responsibilities and will allow for both perceived taboo ofdepression and anxiety. and stories. Following these visits, as a Committees to discharge their duties in Encouraging employees to share stories and Board, we were able to discuss employee thisregard effectively. providing individual and line managerial sentiment and reflect particularly on the training on how to identify signs of strained In support of this, the executive team progress of diversity, equity and inclusion mental health, were some of the tools the presented an ‘Annual Report assurance measures and challenge the executive team Group has deployed during the year. map’, which codified sources of on the pace of change. To support these As in prior years, safety performance informationand assurance activities conversations, the executive team provided remains an underpin of the annual incentive whichwere undertaken in relation to the Committee with details of the diversity, plan for senior executives, reducing ESGdisclosures published within the equity and inclusion roadmap, that had incentive payments if performance does not Group’s Annual Report. been developed to identify the steps achieve the level expected. The Committee needed to effect change. We also sets, measures and determines the level of undertook several deep dives onvarious performance achieved against the safety Group-wide initiatives to createan inclusive objectives andmakes a recommendation culture, and thereby attract, retain and tothe Remuneration Committee. develop our employees, particularly inregard to gender and those from under-represented backgrounds. 154 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance Looking forward In 2022, we invited the Investor Relations Director to provide updates on the investors’ views of the Group’s ESG performance. He provided an overview ofthe Group’s approach to creating furthertransparency and demonstrating itsresponsible business credentials through better disclosures and engagement with investors and ESG indices and ratings agencies. Webelieve this was a worthwhile exercise and will continue to monitor investor views of the Group’s ESG performance during thecourse of 2023. For 2023, we have taken the decision to undertake one ‘deep dive’ on an E,S or G theme to ensure appropriate focus and understanding of these topics. As we look forward to 2023, our key areas of focus remain broadly consistent with the prior year and we will continue to challenge the executive team to deliver against the Company’s ambitions relating to the environment and climate change; diversity, equity and inclusion; and safety. I would like to thank my colleagues on the Committee for their contributions during the year and I look forward to continuing this work in 2023. ### Jane Griffiths ### Chair of the Environmental, Social ### and GovernanceCommittee BAE Systems plc Annual Report 2022 155 Governance / Directors’ report / Environmental, Social and Governance Committee report ## The Environmental, Social and Governance Committee’s year January February June September December Committee Committee Committee Committee Committee ## January June December ### Committee (Videoconference) Committee (Washington DC, US) Committee (Videoconference) – Received an update on the Group’s – Performed a deep dive on the Group’s – Received a briefing on the application responsible supply chain activities. safety performance to date. ofthe Group’s Product Trading Policyandthe Group’s Responsible – Received an update on global safety – Received a briefing on the progress TradingPrinciples. performance. oftheGroup’s diversity, equity and inclusion programmes. – Received an update on the Group’s – Reviewed the 2021 safety and diversity, useof advisers during the year and equity and inclusion performance in – Discussed the progress of the Group’s theapplication of the Advisers Policy. respect of the outcomes of the annual environment and climate transition – incentive plan. netzero programme. – Undertook a deep dive into the roadmap for Scopes 1, 2 and 3 of the – Agreed the 2022 objectives and annual – Reviewed the Group’s ESG priorities Group’s net zero programme. incentive targets in respect of safety, against investor and other stakeholder and diversity, equity and inclusion. expectations. – Reviewed the 2022 safety and diversity, equity and inclusion performance in – Reviewed the efficacy of our employee ## September respect of the outcomes of the annual engagement framework. incentive plan. ### Committee (Boston, US) ## February – Considered the initial proposed – Discussed the Group’s lobbying activities. objectives and annual incentive targets ### Committee (London, UK) – Received a briefing on the Group’s for 2023 in respect of safety, and – Received an update on the Group’s approach to tackling modern slavery. diversity, equity and inclusion. environment and climate transition – – Discussed the progress of the Group’s – Reviewed some of the Group’s netzero programme. environment and climate transition – community and social impact activities. – Discussed the application ofthe Group’s netzero programme. – Discussed the Financial Reporting anti-bribery and corruption programme. – Reviewed the Operational Assurance Council’s report on ESG data production. – Reviewed investor trends and Statement process and the audit and – Approved our 2023 programme sentimentin light of EU social assurance landscape during the year. ofactivities. taxonomyregulations. – Received a briefing on the progress | – Reviewed the Group’s 2022 planned | oftheGroup’s diversity, equity and | | --- | --- | | ESG activities and longer-term roadmap. | inclusion programmes. | | – Joint meeting with the Audit Committee | – Discussed the impact of the cost of | | to review TCFD requirements, non- | livingcrisis on employees and the | | financial risk register and agree the 2022 | supportprovided to employees. | Internal Audit programme. ## Schedule of activities in 2023 February June September December • Environment and climate • Environment and climate • Environment and climate • Environment and climate transition – net zero transition – net zero transition – net zero transition – net zero • Deep dive: diversity, equity • Deep dive: employees’ and • Deep dive: waste and • Diversity, equity and inclusion and inclusion broader stakeholder views watermanagement • 2023 annual incentive | • Safety and wellbeing | • ESG ratings and investor | • Deep dive: community | objectives review | | --- | --- | --- | --- | | | landscape | andsocial value | | | • Approach to ESG assurance | | | • 2024 annual incentive | | | • Anti-bribery and corruption | • Operational Assurance | objectives approval | • Joint meeting with Audit Statement Committee • Full Board session – • Deep dive: responsible Ethicshelpline review • Advisers Policy procurement and supplychain • Product Trading Policy andcontroversial weapons 156 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ## Innovation and Technology Committee report ### Dear Shareholders The Committee presentations, site visits ### Ewan Kirk andmeetings allow this group of directors I am pleased to introduce the report on the Chair acloser engagement with senior executives activities of the Innovation and Technology on innovation and technology as it pertains Committee during 2022. The Committee to the fulfilment of the Group’s strategic was established by the Board in July 2021 objectives. Our meetings are attended by with the purpose of supporting the theChairman of the Board and members Company’s future success. The Committee ofthe senior executive team: the Chief focuses principally on the UK business and Executive, President and Chief Executive we pay particular attention to the effective Officer of BAE Systems, Inc., Group Finance oversight of the application of science, Director, Chief Technology and Information engineering and technology, and the Officer (CTIO), Group General Counsel Group’s ability to successfully exploit andTechnology Director. Following each itsintellectual property and know-how in Committee meeting, I provide a report to pursuit of business and commercial goals. the Board on our conversations, key themes One of the Group’s strategic priorities is to and any recommendations. advance and further leverage technology. ### Members: The Committee met four times during To help achieve this, we are investing in key theyear, in March, May, September and Nick Anderson technologies, particularly electronic warfare, October and had two formal meetings. Dame Elizabeth Corley combat aircraft, precision weapons, cyber Page 159 gives fuller context as to the Nicole Piasecki and the underwater battlespace. From these nature of these meetings and an outline of core areas we are building adjacent market our conversations. Our terms of reference capabilities in multi-domain networks, can be found on the Company’s website. autonomy, low carbon and space solutions. The strategic priorities are the foundation Research and Development (R&D) ofour discussions as a Committee. Equally, In order to properly assess progress and we recognise that these ambitions will only identify areas where we as a Committee beachieved if we are able to foster an could add value, as part of each meeting, innovative culture and attract, retain and we are provided with and discuss the develop the best talent. strategic context for each topic. This context allowed us to understand the areas in which During the year, we took time to reflect on the Group is doing well and identify areas the efficacy of the Committee’s operations, for development, or those which may discussions and agenda. Unlike other Board benefit from further resource, stewardship committees, there is no precedent or or financial investment. We were also able guidance for a committee such as this, and to develop our understanding of the the format, focus and discussions of the Group’s horizon-scanning processes and Committee will continue to evolve to ensure thevarious Technology Readiness Levels we are able to properly discharge our andR&D strategies associated with them. duties. Throughout this report, I will give some insights as to our key conversations During the year, we discussed at length and the activities undertaken by the theGroup’s strategic priorities and how Committee in the last year. they aligned with the Integrated Business Plan (IBP) process and sought to understand Committee context how, through the IBP, key technology Our individual biographies and summary focuses were identified. We learned how ofour collective experience as a Board the determination of technology focus areas canbe found on pages 131 to 133. during the strategy process allowed Thecomposition of the Committee evolved engineering teams to articulate the required during the year, to reflect changes to Board areas of investment, the source of funding, membership. Dame Elizabeth Corley joined and whether partnerships are required to the Committee in May, following Dame deliverthe requisite outcomes. Carolyn Fairbairn’s retirement from the | Board. More details of membership and | The executive team have provided us | | --- | --- | | attendance at meetings can be found on | withadditional insight and context on | | page 133. | theGroup’s R&D funding. The Group’s | overall self-funded R&D budget has grown Our conversations, site visits and meetings significantly in recent years and,in our are undertaken in recognition ofnational 1 meetings, we considered the ‘Seedcorn’ security considerations. Much ofthe budget and portfolio as a whole, and intellectual property and know-how owned howthey support the Group and sector by the Group is subject to national laws strategies. Page 29 discusses the andregulations. AllCommittee activities are R&Dbudget. This provided helpful context undertaken in accordance with the national to help us understand how we support security requirements of the UK and other innovation and identify and fund key nations. We are particularly cognisant of and R&Dpriorities. observe the requirements of BAE Systems, Inc.’s Special Security Agreement. 1. ‘Seedcorn’ refers to investments in very early stageand often speculative R&D projects. BAE Systems plc Annual Report 2022 157 Governance / Directors’ report / Innovation and Technology Committee report Technologies We heard from the Technology Director Intellectual property on the work underway to advance the Throughout the year, we discussed five As a Committee, we recognise the efficiency of current and new products current and emerging technology focus ingenuityof the designs, engineering and services, through the introduction areas (see below) that we see as being processes and technologies which are oflowor zero emissions technologies strategically important for the long-term created and captured throughout the andthe potential longer-term revenue development ofthe Group. We heard from business. Whilst the Group is a market opportunities in these technologies. the CTIO andTechnology Director regarding leader in terms of its capability and ability Wereviewed case studies of these progressin these areas: todeliver on complex programmes, we are technologies such as can be found keen to see how we can be more innovative • Autonomy – over the past few years, onpages 55 to 59. in non-customer funded R&D opportunities. particularly in our strategy conversations, • Manufacturing and design – the The patentportfolio has the potential to the Board has discussed the evolving Technology Director also highlighted create opportunities for commercialisation. nature of warfare and the shift to uncrewed theSeedcorn investments made in ‘factory In linewith our ambitions regarding market and autonomous systems. It is therefore of the future’ developments in areas of adjacencies, wediscussed at length the important that the Group is innovating Cobotics, 5G and digital modelling, which potential for wider commercial application and creating technologies that anticipate are being achieved through collaboration of certain Group intellectual property. and meet customer expectations both in with SMEs and universities. We discussed Clearly, any such consideration of the delivering autonomy and in countering how these improvements create furtherapplication of the intellectual the use of autonomous technologies. efficiencies in design and cost, whilst also property and know-how would be • Space – in the UK, we learned of the undertaken in compliance with applicable supporting our climate ambitions through progress with LEO satellite solutions, national laws, regulations and in line with waste reduction. primarily through the In-Space Missions our obligations to customers and partners. • Multi-domain and digital integration business we acquired in 2021 and the – the CTIO kept the Committee abreast To undertake a review of the Group’s development of its imaging and radio on Project Juno – a Company programme intellectual property catalogue and identify signal monitoring LEO satellite for thedevelopment of multi-domain potential commercial advances, it was (Prometheus 2); and orbit capable optical autonomous solutions, and also various important to set guidelines for the level of communication satellite (Titania). During Group-wide programmes to develop available investment and clearly determine our visit to Christchurch, we were able interoperable and platform agnostic, risk appetites. It is critical to properly assess tohear from the In-Space Missions team digitally integrated defence systems. requisite funding levels and the overall and received live product demonstrations During our site visits wewere able to viability of this exercise. We recognised that which conveyed the breadth of the Digital learn more about BAESystems, Inc.’s the articulation of a clear technology Intelligence portfolio and the skills of its FASTLabs business and the UK Digital strategy is the foundation of this exercise, employees. We also discussed the equity Intelligence business, both of which are and would, in turn, determine the feasibility investment in ICEYE, a company on the cutting edge oftechnological and level of investment required to achieve specialising in Synthetic Aperture Radar developments. The conversations broader success in this area. technologies which will help to bolster highlighted the growing strategic need the Group’s space-based Intelligence, Meaningful incentivisation and workplace ofour global customers forintegrated Surveillance andReconnaissance culture are key to fostering innovation and fullspectrum and multi-domain solutions. (ISR)capabilities. broader thinking. During the year, we spent These discussions helped to improve our time considering how we can do more to Similarly, we noted that our US business’s understanding of developments in foster such a culture, including how the space strategy was focused on building Command & Control, Communications, Group encouraged employees to consider onits current activities in this area and Computers, Cyber, Intelligence, commercial application of intellectual pursuing opportunities to expand its Surveillance and Reconnaissance property, andmore broadly how it engages customer offering. (C5ISR)systems. and encourages employees to generate • Sustainability – in addition to the We also noted that within the Group’s newideas. Group’s own ambitions regarding climate portfolio, there may be examples of At our meeting in October, the CTIO change and its net zero ambition, wesee technologies with potential adjacencies in presented specific activities which would opportunities to help our customers and defence. These potential adjacencies could help us achieve more success in this area. others achieve their sustainability align with strategic objectives and provided Inparticular, we noted that a small team objectives through the development of opportunities for the Group to partner with hadbeen formed, within the CTIO, working decarbonisation services and products. commercial companies. We understand that closely with the central intellectual property these opportunities require careful evaluation We discussed the innovation, technological and legal teams, as well as teams within and discipline in order to be effective and and engineering challenges that could thebusiness units. deliver robust commercial partnerships, result from changes in physical landscapes whilst complying with national security as a consequence of climate change, requirements and protecting the Group’s andthe possible impact on military know-how and commercial advantages. doctrine and the nature of warfare. This is an area that we will continue to Giventhe likely pace of environmental review over the next year. change, we noted that, in order to meet customer performance expectations, suchenvironmental factors needed to beconsidered as an integral part of ourproduct design and support plans. 158 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance Innovative culture The diverse geographic footprint of Looking ahead theGroup provides opportunities for Our culture values diversity, and rewards At our meeting in October, we agreed collaboration, and strong, global integrity and merit so that everyone can specific activities with the aim of continuing collaborative relationships have been built fulfil their potential. The Board recognises to evolve the innovation culture across the with SMEs, peers and strategic university that in order to maintain long-term Group. These activities are: creating an partners. The six strategic universities in sustainable success, the Group must be innovation challenge programme; better theUK, our preferred academic partners ableto attract, retain and develop engineers understanding intellectual property inthe US, and the twouniversity partners and business leaders who are able to drive monetisation opportunities and exploring inAustralia focus largely on fundamental innovation and help deliver the Group’s alternate intellectual property business science and physics through applied strategic objectives. models; and providing entrepreneur training technologies. These partnerships assist in and support. | The Group has a rich history of innovation | assessing a broad range of technologies | | | --- | --- | --- | | and technology, and it continues to pursue | andas a vehicle for novel innovation | These will be the key areas of focus of our | | its technological ambitions through a | challenges, whilst providing an insight | discussions during 2023 and I will provide | | number of research labs which act as new | tothe prospective undergraduate and | you with an update as to the progress of | | technology incubators and provide new | postgraduate talent pipeline. | each matter in next year’s annual report. | capability and solutions, whilst fostering All of these activities together foster I’d like to thank my fellow Committee innovative and collaborative cultures. innovation and strengthen relationships. members for their diligent engagement Wewere able to visit one such lab, andperspectives, and the executive team FASTLabs in the US Electronic Systems Our site visits are useful opportunities to who continue to provide us insight and business, and further details regarding this engage with employees. We discuss culture, arereceptive to our challenge. I’d also and other site visits can be found below. professional development and receive liketothank the employees who have Wewere pleased to hear about the horizon- product demonstrations. As a Committee, enthusiastically and patiently shared scanning activities both within academia we relished these visits and the presentations, appropriate and permissible insights and the SME community which led to demonstrations and conversations with oftheirwork. It has been a pleasure to opportunities for collaboration on projects colleagues added an additional lens to our seesuch engaged colleagues and meet and fostering broader industry relationships. strategy discussions in June and November. first-hand the skilled workforce that Additionally, we learned about the These conversations provided assurance supports the Group in creating its sponsoring of accelerator programmes concerning workplace culture; infrastructure; sustainable and long-term success. forstart-ups in the defence technology collaborative practices; and the effectiveness ### space, and the provision of support to SMEs of the activities that foster innovation. Ewan Kirk in navigating the complexities of operating ### Chair of the Innovation and in the defence sector. ### Technology Committee ## The Innovation and Technology Committee’s year March May September October Site visit Meeting Site visit Meeting Meeting ## March May October ### Site visit and meeting (Christchurch, UK) Meeting (Videoconference) Meeting (Videoconference) – Site visit to Christchurch, UK. – Informal meeting with the Chief – Strategic context. Technology and Information Officer, – Strategic context. – Sustainability projects. andTechnology Director, to discuss – Deep dive on the Digital Intelligence – University partnerships. theapproach to intellectual property business. – Review of Committee operations and monetisation and the sectoral – Informal lunch with various employees. key themes. innovationlandscape. – Product demonstrations and ## conversations with employees. September ### Site visit (New Hampshire, US) – Site visit to New Hampshire, US. – Strategic context. – Deep dive on FASTLabs business. – Product demonstrations and conversations with employees. BAE Systems plc Annual Report 2022 159 Governance / Directors’ report ## Remuneration Committee report ### Dear Shareholders 2022 pay outcomes for ### Nicole Piasecki ### On behalf of the Board, I am pleased to executivedirectors Chair present the Remuneration Committee’s 2022 has been another strong year, with: report for 2022. • top-line sales growth of over 4%; It is hard to imagine a time in which pay • underlying earnings per share (EPS) decisions could matter more. Whether growth of9%; determining pay outcomes for directors • free cash flow of £1,950m, exceeding orprotecting employees from inflationary expectations; stress, our pay decisions need to reflect the current and future needs of the business, • record annual order intake; and while respecting our values, including: • increased returns to shareholders • ensuring our financial sustainability, viadividends and buyback. onwhich our ability to produce returns 75% of the annual bonus for executive for shareholders and create high-quality directors is determined by financial jobs depends; performance, with the remaining 25% ### Members: • respecting our employees and the determined by theachievement of key communities that support our ongoing Dame Elizabeth Corley strategic objectives. Financial performance operations; Chris Grigg measures are agreed by the Committee at • acknowledging the importance of defence the beginning of the year, with performance capabilities that underpin national security levels set at threshold, target and stretch in an increasingly volatile world; inline with the Integrated Business Plan (IBP). For 2022, each of the financial • balancing pay continuity with a need measures exceeded stretch requirements. topivot quickly in a rapidly changing TheCommittee reviewed the achievement macroeconomic environment; and of the key strategic objectives for each • maintaining operations in countries with executive director in 2022, considering different approaches to the structure, alsothe safety and diversity & inclusion amounts and conditions of pay underpin, described in more detail on page arrangements. 179. This evaluation resulted in overall | In making its decisions, the Committee | bonus outcomes of c.97% of maximum for | | --- | --- | | hasbeen mindful of the UK Corporate | executive directors for 2022. One-third of | | Governance Code’s principles in relation | the bonus amounts are deferred into shares | | toremuneration – clarity, simplicity, risk, | for a further three years. | predictability, proportionality and alignment The performance share awards granted to culture. You will see evidence of this on toexecutive directors in 2020 are subject page 173 and in the remainder of this toEPS and total shareholder return (TSR) reportwhich describes the pay outcomes performance conditions measured over for 2022 and the proposed changes to our athree-year performance period ended Directors’ remuneration policy (the Policy) 31 December 2022, with anyvested shares that will help ensure we are able to retain released up to five years after grant. and attract thekey talent needed to deliver our business strategy. ### 2022 key performance outcomes (extract) Vesting Threshold Stretch Actual outcome Annual bonus • Group underlying EPS 46.0p 49.6p 52.2p 100% • Group net cash/(debt) £(2,920)m £(2,170)m £(1,383)m 100% • BAE Systems, Inc. underlying EBIT $1,491.8m $1,611.8m $1,623.3m 100% • BAE Systems, Inc. net cash/(debt) $2,053m $2,593m $2,916m 100% Long-Term Incentive Plan (LTIP) • Annual average EPS growth 3% 7% 8.3% 100% • TSR against sectoral comparator group 31.5% 44.4% 63.5% 100% • TSR against FTSE 100 comparator group –1.0% 27.2% 63.5% 100% No adjustments were made to the performance targets in respect of the impact of COVID-19. 160 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ### Annualaverage EPS growth of8.3% Taking care of our people competitive market. The proposed key exceeded stretch requirement, and TSR changes are: Executive management remained active of63.5% was greater than theupper in2022 insecuring our employees’ services • Annual bonus for the Group Finance quintile of both the sectoral comparator and protecting their wellbeing in a period of Director to increase from 160% to 200% group and the FTSE 100 group,resulting high inflation. In the UK, actions included: of salary at maximum (from 80% to inthe performance sharesvesting at 100% of salary at target), to be better • securing support from our UK collectively 100%of maximum. No adjustments aligned with the external competitive bargained employees (c.27,000 UK toperformance targets were made in market and closer to the bonus employees) for a two-year pay deal, respect ofthe impact ofCOVID-19. opportunity for the other executive comprising a 6.75% salary increase in directors (225% of salary at maximum). | Before confirming the vesting of any | 2022 and a 6% salary increase with effect | | | --- | --- | --- | | performance shares, the Committee | from 1 January 2023, with two £1,000 | • Long-term incentive performance share | | considers the composition of EPS growth | lump sum payments, one in2022 and | awards for the President and Chief | | toensure that any windfall profits are | one in 2023, to help with thecost of | Executive Officer of BAESystems, Inc. | | excluded, and any other one-off amounts | living; and | toincrease from 298% to 440% of salary | | are linked to genuine management | | from 2023, to be brought into line with | • awarding salary increases to other endeavour, with the impact of currency the fiercely competitive US market in employees averaging 6% for 2023, with exchange rate fluctuations (upwards or which we compete for talent. two £1,000 lump sum payments, one in downwards) excluded by measuring 2022 and one in 2023, for our mid-level In addition, the Committee has reviewed EPSgrowth in constant currency. non-collectively bargained employees. the performance measures for the The 2020 performance shares were performance share awards to ensure they Additionally, UK employees are eligible grantedin March 2020, adopting the remain aligned to our business goals. toreceive company pension contributions, standard practice of using the closing share life insurance, income protection, health Group EPS, cash flow and return on capital price immediately prior to the date of grant. and wellbeing support through a flexible employed (ROCE) are key drivers of share With volatility in global stock markets at benefits platform, access to shopping price and shareholder returns, and will have that time due to the COVID-19 pandemic, discounts, the Employee Assistance higher weightings. TSR is influenced by the Committee considered if this approach Programme, a performance-related bonus, external factors, but toensure the executive may have resulted in a windfall gain for an annual award of free shares based on team is incentivised to outperform peers participants, and whether there should be Group financial performance, and the regardless of prevailingmarket conditions, acorresponding reduction in the number of opportunity to participate in and receive TSR will remain as a performance measure shares vesting. In making their determination, free matchingshares. with areduced weighting. This re-weighting the Committee considered share price ofperformance measures enables us movements in the 12-month periods before Actions in the US included: tointroduce a specific component based and after the March 2020 grant, and • awarding average salary increases of onthe achievement of our environmental, observed that there was no material 5%for 2023, while addressing critical social and governance (ESG) ambitions in difference in the grant prices between the talent retention with additional off-cycle line with our previous commitment. March 2019 awards (485.0p), March 2020 salary increases; and awards (485.1p) and March 2021 awards ESG is important for our long-term financial • extending short- and long-term incentive (499.9p). The Committee was satisfied that sustainability, and will help position us for a plan participation to align with the the level of vesting and values for the 2020 future in which sources of energy and their competitive market practices. performance shares remained appropriate associated costs shift rapidly, and where we inthe context of the Company’s underlying must demonstrate alignment to key criteria ## performance and share price history. Remuneration policy review for our customers’ procurement decisions. The ESG metrics will be specific and The share price at close on 31 December It will be three years since our Directors’ measurable, and aligned where possible 2022 was 856.0p with that share price remuneration policy was lastapproved by toexternal reporting frameworks. These appreciation mostly attained during 2022. shareholders in 2020, and therefore anew willfocus on goals that are most relevant Consequently the total single figures of policy will be submitted for shareholder toour financial sustainability and over remuneration for executive directors approval atthe 2023 AGM. whichwe have the greatest ability to includethe value ofthe long-term During 2022, the Committee reviewed makea near-term and ongoing difference, incentiveawards vesting in 2022 based theapproach to remuneration in the including the reduction of our onthethree-month average year-end share context of business strategy, investor environmental footprint. price, notwithstanding that those shares guidelines, and the increasingly competitive willnot be released in full until 2025, five A graphic illustrating the rebalancing of external environment in which we operate. years after grant. Long-Term Incentive Plan (LTIP) metrics is As part of its review, the Committee sought shown overleaf. | The Committee has the ability to exercise | feedback from institutional investors and | | | --- | --- | --- | | itsdiscretion to reduce formulaic outcomes | other stakeholders, and I am very grateful | The proposed 2023 Policy being submitted | | if appropriate, but the Committee did not | for all the responses and support received. | for approval at the 2023 AGM can be found | | consider this necessary in respect of the | The Committee considered various alternative | on pages 190 to 205. | | 2022 pay outcomes. Accordingly, the | approaches, and concluded that the core | | Shareholders will additionally be asked Directors’ remuneration policy, as approved elements and structure of our current toapprove the BAE Systems Long-Term by shareholders in 2020, operated as remuneration policy remain appropriate. Incentive Plan 2023 at the 2023 AGM, intended throughout 2022. Therefore, the proposed new remuneration theterms of which remain substantially policy is very similar to the existing policy, thesame as the existing BAESystems except for some adjustments to bring our Long-Term Incentive Plan 2014. remuneration policy into line with the BAE Systems plc Annual Report 2022 161 Governance / Directors’ report / Remuneration Committee report ### Rebalancing of LTIP performance metrics | | | | | | | | 2022 | 2023 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | 2022 Awards | | | Awards from 2023 | | | | % | % | | | | | | F | | A Group EPS 25 30 | | | | | D | A | | | A | B Cash flow 25 30 | | | C Total Shareholder Return (TSR) 25 15 E D Strategic progress 25 – • ROCE (8.3%) • Operational excellence (8.3%) • Advancing technology (8.3%) E Return on Capital – 15 Employed(ROCE) F Environmental, social and – 10 governance(ESG)metric C B B ## Executive director pay in 2023 Chief Executive Group Finance Director In order to align Brad’s salary with the median of the FTSE 30 peer group, his We are proposing no changes to the Brad Greve was recruited on 1 September salary would need to have been increased remuneration for Charles Woodburn, 2019 to succeed a long-serving predecessor by 17.6%. Our Remuneration Policy limits ourChief Executive, except for a 4% in the Group Finance Director role. Whilst the increase in an executive director’s salary salaryincrease effective 1 January 2023. Brad had impeccable credentials as a senior to a maximum of 10% per annum. | This increase is less than the average | financial executive in a large international | | | --- | --- | --- | | increase awarded to UK employees (6%). | business, his appointment at BAE Systems | In July 2022, the Chairman and I wrote to | | | was his first as the financial head of a | our major shareholders to communicate | In December 2022, the employer globalPLC. ourintentions regarding the alignment contribution to the Chief Executive’s ofBrad’s salary and we were pleased to pension was reduced from 16.4% to It was against this background that the receive overwhelming support. On 1 January 14%of salary, bringing it into alignment Committee chose to position his reward 2022, Brad had received an increase of with the weighted average employer structure at the low end of the range of his 2.5%, andfrom 1 August 2022 a further contribution rate of UK active members. peer group withaview to adjust upwards increase of 7.3% making a total of 10% in over time according to his performance The Committee is satisfied that the 2022. From 1 January 2023, Brad’s salary andachievement. Brad received two salary ChiefExecutive’s overall remuneration increased by a further 9.6% to £750,150 in increases of 2%(1 January 2021) and 2.5% package remains appropriate. keeping with the median for his peer group. (1 January 2022) aligned to the annual payincreases across the UK workforce. It is the Committee’s intention that any future salary increases will bein accordance Brad has proved to be a highly effective with general company payincreases across financial leader and a material contributor the workforce. to the overall growth and performance of | the business. Brad has led the improvement | As part of that same shareholder letter, we | | --- | --- | | of financial metrics across our business | signalled our intention to seek shareholder | | including capital management, balance | approval for a new remuneration policy | | sheet strength, pension fund arrangements, | atthe 2023 AGM enabling an increase | | shareholder returns and programme | inBrad’s annual bonus opportunity from | | performance metrics including margin | 160% to 200% of salary at maximum | | improvement and cost controls. | (from80% to 100% of salary at target) | | Additionally, his initial responsibilities | toalign his total package with FTSE 30 | | havebeen broadened to incorporate the | CFOmedian reward levels. | supply chain function, given the increasing We are not proposing any changes to importance ofthis to the performance of Brad’slong-term incentive award levels. the business. Throughout, Brad has also shown himself tobe a clear and trusted communicator regarding the financial health of the Company with all stakeholders. In the lightof his performance the Board believes that Brad has proved himself to be a highly effective and respected Group Finance Director of an important and complex FTSE30 global company and should be rewarded accordingly at the median of hispeer group. C 162 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance President and Chief Executive Officer, ## In conclusion BAE Systems, Inc. I hope you find this report a clear explanation Tom Arseneault, the President and Chief of the Committee’s considerations, decisions Executive Officer of our US subsidiary, and remuneration outcomes for 2022. BAESystems, Inc., is a US national based Further, I hope that you will support the inthe US. Unusually for the US market, he proposed changes to our remuneration isalso an executive director of a UK-listed policy at the 2023 AGM, which are company, BAE Systems plc, an arrangement designed to modernise our remuneration that benefits the Company and its offering and bring it into line with the stakeholders. In order toprotect US national competitive market. security, he has an enhanced level of | autonomy in leading our US business which | I cannot close without thanking both my | | --- | --- | | represents 44% of Group sales and is | Remuneration Committee Chair predecessor | | uniquely recognised as the major non | Ian Tyler who retired from the Board at last | | US-owned defence contractor in the largest | year’s AGM, and our colleague and | | market globally. BAE Systems, Inc. isthe | departing Board Chairman Sir Roger Carr, | | only top ten US government defence prime | who has overseen and helped us navigate | | contractor whose parent company isnot | to the strong position that the Company | | US-domiciled. As such, we need to compete | isin today. Further, I give a warm welcome | | for the best Aerospace and Defence talent | to our Chair designate Cressida Hogg and | | in the US market. | lookforward to her contributions in steering | the Company. To sustain this unique and critical role in thelong term, the Committee has to be Finally, I would like to thank the numerous responsive to market dynamics in a tight shareholders, institutional investors and talent pool by providing our US President other stakeholders who have helped and Chief Executive Officer, and other informand improve our remuneration US-based employees, with remuneration policyproposals. packages that are sufficiently attractive inthe US market, while still respecting On behalf of the Board UKcorporate governance requirements. ### Nicole Piasecki Tom received a 4% salary increase effective ### Chair of the Remuneration 1 January 2023, the same as our Chief ### Committee Executive and less than the average salary increase for our US employees. Reflective of the very competitive market inUS Aerospace and Defence, we propose to increase Tom’s performance share awardgrant from 298% to 440% of salary, subject to performance measured over three years, and vesting one-third equally after three, four and five years from grant. The Committee considers this change to beappropriate and indeed essential in light of themarket situation. No change is proposed to Tom’s annual bonus arrangements or restricted share award. These changes will enable Tom’s pay to bepositioned at an appropriate level for the US market, but with a longer vesting period, compulsory bonus deferral requirement and post-cessation shareholding requirement than is typical in the US, but in alignment with UK corporate governance standards. ### Implementation of the Policy in 2023 A summary of the implementation of the Policy in 2023 is set out on page 166 with more detail on the performance measures and weightings for the 2023 Annual and Long-Term Incentives set out on pages 194to 197, and 2023 Long-Term Incentive metrics on page 186. BAE Systems plc Annual Report 2022 163 Governance / Directors’ report / Remuneration Committee report ## The Remuneration Committee’s year January February May June September November December Committee Committee Committee Committee Committee Committee Committee | January | May | November | | --- | --- | --- | | Committee (Videoconference) | Committee (Videoconference) | Committee (Hampshire, UK) | | – Assessed outturn of 2021 strategic | – Reviewed feedback from shareholder | – Received an update on initial | | objectives for executive directors and | consultation and May 2022 Annual | shareholder engagement on | | Executive Committee members. | General Meeting. | proposedPolicy changes. | | – Agreed 2022 key strategic objectives | – Received an update on performance | – Approved shareholder consultation | | forexecutive directors and Executive | ofin-flight long-term incentive awards. | letter on proposed Policy changes. | Committee members. – Agreed scope of 2023 Directors’ – Received an update on broader – Received an update on provisional remuneration policy (Policy) review. workforce remuneration. 2021financial performance for annual – Agreed approach to development of ## and long-term incentivepurposes. June 2022 Directors’ remuneration report. – Approved remuneration package ### Committee (Washington DC, US) – Reviewed level of executive directors’ fornewor existing Executive andExecutive Committee members’ – Reviewed potential changes to Policy. Committeemembers. shareholdings relative to their Minimum – Approved salary changes for Group Shareholding Requirement. Finance Director. ## February – Approved operation of Group All- – Agreed appointment of new ### Committee (Videoconference) Employee Free Share Plans for 2023. Remuneration Committee advisers. – Determined 2021 bonuses against – Reviewed dilution levels and share performance for executive directors usageunder Employee Share Plans. ## September andExecutive Committee members – Approved changes to Executive ### forpayment in March 2022. Committee (Boston, US) Committee members’ and senior | – Approved 2021 Group All-Employee | – Agreed proposed changes to Policy and | executives’ remuneration packages. | | --- | --- | --- | | FreeShare Plans payments. | approach to consult with shareholders. | | | – Determined vesting outcome for Spring | – Received an external market trends | December | | 2019 Long-Term Incentive awards. | updateon executive remuneration. | | ### Committee (Videoconference) – Approved grant of 2022 Long-Term – Reviewed progress against Executive – Received an update on institutional Incentive awards and associated Committee 2022 key strategic objectives. investor guidance. performance targets for executive – Approved remuneration package – Discussed shareholder consultation directors and Executive fornewor existing Executive feedback to date on proposed Committeemembers. Committeemembers. Policychanges. – Reviewed feedback from – Approved the vesting outcome – Approved executive directors’ salary shareholderconsultation. ofthe2019 Autumn Long-Term increases from 1 January 2023. – Approved 2021 Directors’ Incentiveawards. – Agreed the approach, structure and remunerationreport. – Approved grant of 2022 Autumn financial targets for the 2023 annual Long-Term Incentive awards including incentive plan. targeted restricted shares awards to – Received an update on progress of selectkey, critical individuals at middle 2022key strategic objectives applicable management level. toexecutive directors and Executive Committee members. – Received an update on broader workforce remuneration. 164 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ## Annual remuneration report at a glance ## for the year ended 31 December 2022 ### Business performance and incentive outcomes in 2022 | | | | | 2022 | | 2022 | | | --- | --- | --- | --- | --- | --- | --- | --- | | | | | performance | | incentive outcome | | | | | 1 | AIP | | | | | | | Group underlying EPS | | | | 52.2p | | | | | | | | | | | | AIP Annual Incentive Plan | | | 1 | AIP | | | | | | | Group net cash/(debt) | | | £(1,383)m | | | | LTI Long-Term Incentive | | | 1 | AIP | | | | | | | Group order intake | | | £35.6bn | | | | | Below threshold Average three-year diluted underlying EPS growth LTI 57.8p Between threshold and target Three-year TSR LTI 63.5% At or above target 1. Adjusted to be on a comparable basis with the targets (see page 179). Very strong operational and financial performance for 2022 resulting in the following incentive outcomes: – 2022 annual bonus payouts for the executive directors were near to maximum; and – Performance Shares granted in March 2020 exceeded stretch performance against both the EPS and TSR conditions andtherefore100%willvest. ### Summary of executive directors’ remuneration in 2022 The charts below show the 2022 actual remuneration achieved, as disclosed in the single total figure of remuneration on page 177, compared with the 2022 on-target and maximum opportunity. Also included is the value of the actual shareholding for each executive director as at 31 December 2022 compared to their Minimum Shareholding Requirement (asset out on page 187). £m £m 1 £10.69m | 1.0 | 11.0 | 11.0 | | | --- | --- | --- | --- | | 0.0 | 10.0 | 10.0 | | | | 9.0 | 9.0 | £7.99m | | | 8.0 | 8.0 | | | | 7.0 | 7.0 | | £5.61m 6.0 6.0 Performance Shares 5.0 5.0 Restricted Shares 4.0 4.0 Annual Incentive 3.0 3.0 Pension and benefits .0 2.0 2.0 Base Salary Value of actual shareholding 1.0 1.0 Minimum Shareholding Requirement On-target 2 Maximum 2 Actual Shareholding On-target 2 Maximum 2 Actual Shareholding On-target 2 Maximum 2 Actual Shareholding 1,3 Charles Woodburn Brad Greve Tom Arseneault Chief Executive Group Finance Director President and Chief Executive Officer of BAE Systems, Inc. 1. The figures for Tom Arseneault have been converted from US dollars to sterling. 2. On-target remuneration assumes target vesting of incentives payable in respect of the performance period with year-end 2022, whilst maximum remuneration assumes maximum vesting of incentives payable. 3. Long-term incentive figures above are based on the 2020 Performance Shares and, for Tom Arseneault, include his 2022 Restricted Shares award(as required byregulation in the single total figure of remuneration). ### Consistent remuneration philosophy and strategy applicable to all our employees The Committee has responsibility for reviewing remuneration and related policies applicable to the wider workforce and the alignment of incentives and rewards with culture, ensuring this is taken into account when setting the policy for executive remuneration. Our people are critical to ensuring the long-term sustainability of our business and our ability to deliver for our customers. With this in mind, our people strategy is designed to support our aim to attract, retain and develop the very best talent. During 2022 various initiatives were deployed across the Group in response to challenges of post-pandemic global increases in workforce attrition and labour shortages, and the impact that the cost of living crisis is having on our employees. In the UK, actions included: In the US, actions included: – focused efforts on recruiting people with skills required – refreshing the employee value proposition in response to the £m tosupportourkey programmes; changingtalentmarket with a focus on attracting and retaining 1 – supporting c.4,500 young people through our award-winning adiverseworkforce; 1 earlycareer and skills programmes; – launching an ‘Employer of Choice’ initiative that includes more 9.0 – upholding our commitments as a Real Living Wage employer; family-friendly employee health and wellness benefits for 2023; 8.0 – a two-year pay deal for our manual and professional population; – additional targeted salary increases to address critical talent retentionconcerns; and 7.0 – increasing the reward packages for our executive population in line 6.0 withgradeand the market; and – extending short- and long-term incentive plan participation to align withmarket practices. 5.0 – providing a broad Employee Assistance Programme to our employees 4.0 andfamily members. 3.0 2 1.0 BAE Systems plc Annual Report 2022 165 Governance / Directors’ report ## Annual remuneration report at a glance ## for the year ending 31 December 2023 ### Summary of remuneration framework The table below sets out the overall remuneration framework applicable to each of the executive directors under the 2023 Directors’ remuneration policy that is subject to shareholder approval at the 2023 AGM. | | | | Charles | | | Brad | Tom Arseneault | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | Woodburn | | | Greve | President and | | | | | | | | CEO | | | GFD | | CEO Inc. Purpose and link to strategy | | | | Base Salary | | | | | | | | | | Recognise market value of role and individual’s | | (with effect from | | | £1,180,635 £750,150 $1,094,080 | | | | | | | skills, experience and performance to ensure | | 1January 2023) | | | | | | | | | | the business can attract and retain talent. | | Pension | | | Defined | | | Defined | US defined benefit | | | Provide employment benefits and competitive | | andbenefits | | contribution | | | contribution | | andSection 401(k) | | | post-retirement benefits to ensure overall | | | | | | 1 | | | | | 2 | package ismarket competitive. | | | | (14% salary | | ) | (8%salary) | | definedcontribution | | | | | Annual Incentive On-target/maximum | | 112.5%/225% 100%/200% 112.5%/225% Drive and reward annual performance of | | | | | | | | | | | opportunity (% salary) | | | | | | | | | individuals and teams on both financial and | non-financial metrics, including leadership | | 75% financial (earnings, cash and order intake)/ | | behaviours, in order to deliver sustainable | | --- | --- | --- | --- | | Performance condition | | 3 | | | | 25% non-financial (key strategic objectives) | | growth in shareholder value. | | Deferral into Deferred | | | Compulsory deferral into shares increases | One-third compulsory deferral Bonus Plan alignment with long-term shareholder interests. Performance Direct financial measures based on the Key Grant (% salary) 370% 335% 440% Shares Performance Indicators (KPIs) that drive our financial ambitions for the Company, and 15% relative TSR/ measures linked to our key long-term strategic 30% three-year diluted underlying EPS growth/ priorities including our sustainability agenda, Performance condition 30% cash generation/ aligned to the interests of our shareholders. 15% return on capital employed/ 10% ESG metrics Three-year performanceconditions Three-year performance Vesting and vested shares conditions,vests in year 5 released one-third in years 3, 4, 5 | Restricted | | | Designed to help ensure remuneration for | | --- | --- | --- | --- | | | Grant (% salary) | n/a 150% | | | Shares | | | senior US-based executive is competitive in | the local market. Three-year service Vesting n/a condition and two-year clawback period | Minimum | | | Provide long-term alignment with | | --- | --- | --- | --- | | | (% salary) | 300% 200% 425% | | | Shareholding | | | shareholderinterests. | Requirement Post-cessation shareholding 300% for 200% for 300% for requirement (% salary) two years two years one year 1. CEO’s employer pension contribution rate is aligned to the weighted average employer contribution rate of UK active members. 2. Further detail on Tom Arseneault’s pension is provided on pages 183 and 198. 3. Shared key strategic objectives include those more focused on supporting our sustainability agenda. Safety and diversity 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. Application of 2023 package forUKexecutivedirectors Application of 2023 package forUSexecutivedirector Performance Shares Vests in years 3, 4 and 5 subject to three-year EPS, TSR,cash generation, ROCE and ESG metrics Performance Shares Vests in year 5 subject to three-year EPS, TSR, cashgeneration, ROCE and ESG metrics Restricted Shares Vests subject to three-year service condition with an additional two-year clawback period Compulsory bonus deferral Compulsory bonus deferral into Deferred Bonus Plan into Deferred Bonus Plan One-third deferred inshares for One-third deferred inshares for three years three years Annual Annual Incentive Cash-based element Incentive Cash-based element Two-thirds paid in cash Two-thirds paid in cash immediately immediately Base Base Salary Salary 11 22 33 44 55 YearYear Charts are illustrative and are not to scale. 166 BAE Systems plc Annual Report 2022 Strategic report Governance Financial statements # Annual remuneration report for the year ended 31 December 2022 This section details the remuneration of the executive and non-executive directors (including the Chairman) during the financial year ended 31 December 2022 and will be proposed for an advisory vote by shareholders at the 2023 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 Reporting against Code requirements can be found as follows: 1 Page 174 Strategic rationale for our directors' remuneration 2 Pages 167-172 Appropriateness of our remuneration 1 Page 173 Addressing Provision 40 factors 1 Page 160 Operation of our policy 1 Page 175 Engagement with shareholders 1 Page 175 Engagement with workforce 1 Pages 160-163 Exercise of discretion ## Statement of voting Shareholder voting on the resolutions to approve the Annual remuneration report put to the 2022 AGM and the Directors' remuneration policy put to the 2020 AGM was as follows: ### Annual remuneration report | Votes for | % | Votes against | % | Total votes cast | Votes withheld (abstentions) | | --- | --- | --- | --- | --- | --- | | 2,288,879,813 | 96.01 | 95,175,707 | 3.99 | 2,384,055,520 | 14,521,219 | ### Directors' remuneration policy | Votes for | % | Votes against | % | Total votes cast | Votes withheld (abstentions) | | --- | --- | --- | --- | --- | --- | | 2,423,919,276 | 97.55 | 60,821,405 | 2.45 | 2,484,740,681 | 18,848,820 | The current Directors' remuneration policy approved at the 2020 AGM is available in the Investor Relations section of the Company's website: baesystems.com The Directors' remuneration policy for approval at the 2023 AGM is detailed on pages 190 to 205. ## Appropriateness of remuneration and wider context ### Our reward philosophy and approach The Committee has responsibility for reviewing remuneration and related policies applicable to the wider workforce, ensuring that this is taken into account when setting the policy for executive remuneration. As part of this, we apply a consistent remuneration philosophy and strategy to all employees across the Group. Our aim is to provide a reward package that is aligned to shareholders' interests, supports the achievement of the Company's in-year financial and strategic objectives, is competitive against the appropriate market and is consistent with our focus on our Company Behaviours and our values of Trusted, Innovative and Bold. Across BAE Systems we continue to accelerate our performance, focusing on both what we do for our customers and how we do it. Our people strategy is designed to support our aim to attract, retain and develop the very best talent through: - robust succession planning; - targeted recruitment; - focused talent management; - culture of inclusivity, learning and development; and - competitive employee value proposition (EVP). We continue to ensure that our culture is inclusive and supportive and allows our employees to reach their full potential and feel valued for their contribution. This means: - base salaries are set with reference to median of the relevant market competitive level; - high performance and exceptional contribution are recognised through annual incentives; - remuneration packages for leadership roles have an increased emphasis on longer-term incentives; - providing employees with competitive and affordable post-employment benefits which reward long-term contribution and loyalty; and - offering a competitive and cost-effective package of other benefits as part of our total reward offering. ## Contents | Statement of voting | 167 | | --- | --- | | Appropriateness of remuneration and wider context | 167 | | Remuneration principles | 173 | | Strategic rationale for our directors' remuneration | 174 | | Single total figure of remuneration: | | | – for the Chairman and non-executive directors | 176 | | – for the executive directors | 177 | | Implementation of our policy in the year ending 31 December 2023 | 178 | | Annual bonus | 179 | | – Key strategic objectives | 180 | | Long-Term Incentive Plan (LTIP) performance | 182 | | Pension entitlements | 183 | | Share interests: | | | – Scheme interests awarded during the financial year | 184 | | – Description of share plans and summary of performance conditions | 184 | | – Statement of directors' shareholdings and share interests | 186 | | Remuneration Committee composition and advisers | 189 | BAE Systems plc Annual Report 2022 167 Governance / Directors’ report / Annual remuneration report ## Appropriateness of remuneration and wider context continued As set out on page 173, the Committee considered a number of core principles in the renewal of the 2023 remuneration policy for executive directors, including how reward policy and practice compares across the wider workforce. The table below illustrates this for the different groups of employees within BAE Systems. Executive Executive Senior Middle Wider directors Committee executives management workforce Base salary Base salary is set based on market pay approach recognising the individual’s skill, knowledge, experience Base salary is either subject to levels and contribution to role. negotiation with recognised trades unions and/or is set in Normally reviewed annually with increases typically in line with the wider workforce. linewith market and/or performance. Pension Range of employment benefits and competitive post-retirement benefits in line with relevant home market. andbenefits | Short‑term | Annual incentive based 75% on financial performance | Annual incentive based | Annual incentive | In UK businesses, | | --- | --- | --- | --- | --- | | incentives | of our KPIs and 25% on key strategic objectives | primarily on organisation | basedon organisation | incentivetypically based | | | relatingto the delivery of the Group’s strategy, including | performance of our | and individual | onbusiness and/or | | | our sustainability agenda, and the demonstration of | KPIs and remainder on | performance. | individualperformance. | | | leadership behaviours. Compulsory deferral into shares | personal objectives and | | | None in US, Australia orKSA. for three years. behaviours. Compulsory deferral into shares forthree years (forthemajority ofUKandRest of Worldexecutives). Eligible employees may participate in and receive free matching shares in our Company Share Incentive Plan (SIP) or international equivalent. Company rewards eligible employees with annual award of free shares, or cash equivalent, based on ourGroup financial performance. Long‑term Performance shares are Performance shares are subject to three-year incentives subject to three-year performance conditions designed to drive performance conditions sustained companyfinancial performance (andfurther holding alignedto interestsofshareholders. requirements) designed Restricted shares vest subject to three-year service todrive sustained company condition (predominantly applicable in the US). financial performance aligned to interests ofshareholders. Restricted shares vest subjectto service condition (applicable inthe USonly). The Committee regularly undertakes an in-depth session to build its understanding of reward arrangements applicable tothe wider workforce. 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 is non-discriminatory with respect to gender, ethnicity andother personal attributes not related to performance. The Committee is provided with visibility of remuneration practices in the different sectors and geographies in which we operate and for the different populations within the wider workforce across the Company globally. These sessions have covered a range of topics including the outcome of the annual reward review throughout the workforce, reward principles and pay philosophy, annual and long-term incentive design, employee share plans and other employee benefits including pension and retirement schemes. The Committee is also periodically updated on wider employee matters such as the outcome of our UK gender pay analysis and an analysis of selected key talent such as those individuals on an Executive Committee succession plan. During 2022, the Committee was made aware of and fully supported the specific measures implemented by the Company to help the workforce in light of the challenging economic climate and increased cost ofliving. Committee members, in common with other Board members, meet periodically with the wider workforce and with high-potential employees to engage with them at first hand. The Company also receives insights from the broader employee population using an engagement survey. Further detail onengagement with employees is givenon page 175. 168 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ### Pay comparisons Pay ratio of Chief Executive to UK average employee The Committee is mindful of the relationship between Chief Executive remuneration and the remuneration of the wider BAESystems employee population. As required by legislation, the table below provides the ratio of the Chief Executive tothat of the median, 25th and 75th percentile total remuneration of full-time equivalent UK employees. We voluntarily disclosed the pay ratio on the required basis in 2018. | | | 25th | | | 75th | | --- | --- | --- | --- | --- | --- | | | percentile | | Median | percentile | | | Year Method | pay ratio | | pay ratio | pay ratio | | 2022 Option B 228:1 164:1 149:1 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 offer three calculation approaches for determining the pay ratio – Options A, B and C. The table above has been calculated using the approach determined by Option B which is deemed the most appropriate methodology for BAE Systems. Recognising that BAE Systems has more than 30,000 UK employees, operating on different human resources and payroll systems, it is not feasible to adopt Option A. The calculations for the relevant representative employees were performed as at 31 December 2022. To ensure Option B provides a sufficiently accurate representation of the UK workforce, we have performed sensitivity analysis around the three quartiles. Our approach has been to consider the total pay and benefits for a number of employees centred around each quartile. This allows any anomalies that may arise when calculating the total pay and benefits for the full financial year (such as if an employee left part way through the year) to be adjusted or excluded. By taking an average ofthe remaining figures, this provides a robust representation of each quartile. The total full-time equivalent pay and benefits for the relevant employees has been calculated based on the amount paidorreceivable in respect of the relevant financial year. The calculations are on a similar basis as required for the Chief Executive’s remuneration for single total figure purposes. For pension-related benefits, employer pension costs have been estimated using the employer contributions applicable to the member’s pension scheme made through payroll. In respect ofannual incentives, the amounts have been estimated based on the accrued expected financial outturn. No other estimates or adjustments have been used in the calculation and no remuneration items have been omitted. A minority of employees inthis calculation are employed on a part-time basis and therefore their remuneration has been annualised to reflect the full-time equivalent. 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 168). In the case of our Chief Executive, his total remuneration comprises asignificant proportion in variable pay and therefore the single figure will vary considerably depending on the level of performance against the measures which drive 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 difference in 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 consistent with our pay, reward and progression policies. 25th 50th 75th £ percentile percentile percentile Total pay and benefits 46,998 65,014 71,679 Salary component 35,802 46,523 55,057 Relative to 2021, the pay ratio in 2022 has increased by approximately 33%, 17% and 51% at 25th, 50th and 75th percentiles respectively. The total pay and benefits figures have increased at 25th and 50th percentiles in part reflecting theactions taken by the Company to address the increased cost of living. The pay ratio has been impacted by the increase inthe Chief Executive’s remuneration for 2022,primarily as a result of an increase in the long-term incentive vesting outturn(100% in 2022 versus 57.9% in 2021) and share price appreciation between the grant and vesting dates. BAE Systems plc Annual Report 2022 169 Governance / Directors' report / Annual remuneration report ## Appropriateness of remuneration and wider context continued ### Total Shareholder Return (TSR) performance and Chief Executive pay The graph below shows the value by 31 December 2022, on a TSR basis, of £100 invested in BAE Systems on 31 December 2012 compared with the value of £100 invested in the FTSE 100 index, including the effect of dividends. The graph additionally shows the remuneration of the Chief Executive, plotted as a bar chart on the secondary y-axis. The FTSE 100 is considered to be an appropriate comparator for this purpose as 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, it forms 50% of the TSR performance measure for awards made between 2016 and 2020 and 100% of the TSR performance measure for awards made since 2021. The chart below demonstrates the strong long-term alignment of our Chief Executive pay and the returns to our shareholders. We achieved this through the Chief Executive receiving a high proportion of his remuneration in shares and with our performance conditions being based on measures which directly support the implementation of our strategy. ### Value at 31 December 2022 of £100 investment at 31 December 2012 ![img-19.jpeg](img-19.jpeg) ### Change in Chief Executive's remuneration over ten years | | 2013 | 2014 | 2015 | 2016 | 2017^{1} | 2018 | 2019 | 2020 | 2021 | 2022 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | **Chief Executive's single total figure (£'000)** | | | | | | | | | | | | Charles Woodburn | – | – | – | – | 1,279 | 2,416 | 3,747^{2} | 6,080 | 7,071 | **10,693** | | Ian King | 2,499 | 3,519 | 2,929 | 3,463 | 2,086 | n/a | n/a | n/a | n/a | **n/a** | | | 2,499 | 3,519 | 2,929 | 3,463 | 3,365 | 2,416 | 3,747^{2} | 6,080 | 7,071 | **10,693** | | **Bonus paid as a percentage of maximum** | | | | | | | | | | | | Charles Woodburn | – | – | – | – | 75.8% | 65.6% | 95.6% | 78.7% | 97.1% | **97.5%** | | Ian King | 53.4% | 74.3% | 72.4% | 82.3% | 75.9% | n/a | n/a | n/a | n/a | **n/a** | | **LTI as a percentage of maximum vesting** | | | | | | | | | | | | Charles Woodburn | – | – | – | – | n/a | nil | 10.9%^{3} | 100% | 57.9% | **100%** | | Ian King | nil | 16.8% | nil | nil | 11.3% | 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 the 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. 170 BAE Systems plc Annual Report 2022 Strategic report Governance Financial statements ## Annual percentage change in directors' remuneration The table below shows the percentage change over the year ended 31 December 2021 to the year ended 31 December 2022 and prior years in respect of directors' remuneration and average employee remuneration. As required by legislation, directors' remuneration is compared to employees of the BAE Systems plc entity on a full-time equivalent basis. | | 2021/2022 | | | 2020/2021 | | | 2019/2020 | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Salary/fees % change | Benefits^{1} % change | Annual bonus % change | Salary/fees % change | Benefits % change | Annual bonus % change | Salary/fees % change | Benefits % change | Annual bonus % change | | **Executive directors** | | | | | | | | | | | C N Woodburn | +2.5 | +56.4 | +2.9 | +12.7 | +17.7 | +39.1 | +6.9 | -3.9 | -12.1 | | B M Greve^{2} | +5.6 | +79.3 | +6.0 | +36.0 | +44.2 | +68.7 | n/a | n/a | n/a | | T A Arseneault^{3} | +15.0 | +24.1 | +15.8 | +27.9 | +156.9 | +115.4 | n/a | n/a | n/a | | **Non-executive directors** | | | | | | | | | | | Sir Roger Carr | 0.0 | 0.0 | n/a | 0.0 | 0.0 | n/a | 0.0 | 0.0 | n/a | | N J Anderson^{2} | 0.0 | -42.7 | n/a | +500.0 | +81.0 | n/a | n/a | n/a | n/a | | C E Ashby^{2} | +200.0 | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | | Dame Elizabeth Corley | 0.0 | -47.6 | n/a | +1.5 | 0.0 | n/a | +4.7 | -100.0 | n/a | | Dame Carolyn Fairbairn^{4} | -58.2 | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | | J V Griffiths^{2} | 0.0 | -82.2 | n/a | +72.5 | 0.0 | n/a | n/a | n/a | n/a | | C M Grigg | 0.0 | n/a | n/a | +7.3 | 0.0 | n/a | +28.1 | -100.0 | n/a | | C M Hogg^{2} | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | | E M Kirk^{2} | +75.8 | +92.6 | n/a | n/a | n/a | n/a | n/a | n/a | n/a | | S T Pearce^{3} | 0.0 | -50.0 | n/a | +1.1 | +90.4 | n/a | +133.0 | -4.0 | n/a | | N W Piasecki^{4} | +19.2 | n/a | n/a | +1.5 | -100.0 | n/a | +79.5 | -35.5 | n/a | | Lord Sedwill^{5} | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | | I P Tyler^{4} | -65.2 | -8.8 | n/a | +1.1 | +8.9 | n/a | +3.6 | -64.7 | n/a | | **Average employee^{7}** | **+4.5** | **+4.5** | **+9.2** | **+1.5** | **+1.5** | **+28.4** | **+2.5** | **+2.5** | **-2.0** | 1. Benefit figures for Crystal Ashby, Chris Grigg and Nicole Piasecki were *Enll* in respect of 2021; therefore the 2021/2022 benefits percentage change is shown as n/a. 2. Remuneration for Brad Greve and Tom Arseneault in respect of 2020 reflects the period from their appointment as executive directors on 1 April 2020. Remuneration for Nick Anderson and Jane Griffiths in respect of 2020 reflects their part-year from joining the Board on 1 November 2020 and 1 April 2020 respectively. 3. Remuneration for Crystal Ashby and Ewan Kirk in respect of 2021 reflects their part-year from joining the Board on 1 September 2021 and 1 June 2021 respectively. 4. Remuneration for Dame Carolyn Fairbairn and Ian Tyler for 2022 reflects their part-year prior to stepping down from the Board on 5 May 2022; for Dame Carolyn Fairbairn, prior year figures relate to her having joined the Board on 1 March 2021. 5. Remuneration for Cressida Hogg and Lord Sedwill reflects the period from their appointment as non-executive directors on 1 November 2022 (no prior year remuneration so figures are shown as n/a). 6. Remuneration for Stephen Pearce and Nicole Piasecki in respect of 2019 reflects their part-year from joining the Board on 1 June 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 2022. BAE Systems plc Annual Report 2022 171 Governance / Directors’ report / Annual remuneration report ## Appropriateness of remuneration and wider context continued ### Gender pay BAE Systems has published its annual gender pay gap report in line with the UK regulations. For 2022, the average (mean) gender pay gap for our UK workforce was 8.6% in favour of men (2021 8.7%), which is lower than the current UK national average of 14.9%. 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. ### Relative importance of spend on pay 1 The following charts set out underlying EBIT , amounts paid in returns to shareholders, total employee costs and average headcount for the years ended 31 December 2021 and 2022. These charts have been chosen asthey are most representative in assisting to understand the relative importance of spend on pay. 1 3 Underlying EBIT (£m) Returns to shareholders (£m) +12.4% +38.9% | 2022 2,479 | | | 2022 1,590 | | | | --- | --- | --- | --- | --- | --- | | | | 2,2052021 | | | 1,1452021 | | | 2 | | | 4 | | | Total employee costs | (£m) Average headcount | | | (’000) | | +12.4% +1.2% 2022 7,495 2022 83 6,6672021 822021 1. This is included as it is the Group’s principal measure of operational profitability as defined in the Financial glossary on page 302. 2. After excluding the impact of exchange translation, wages and salaries increased by approximately 4.6% per employee in 2022. 3. Returns to shareholders comprise dividends to ordinary shareholders paid in the year and share buybacks in 2021 (£368m) and 2022 (£788m). 4. Excluding share of equity accounted investments. This is included foryear-on-year comparison of employee headcount. 172 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ## Remuneration principles The Committee established six core principles which underpin our approach to executive remuneration. The principles arealigned to BAE Systems’ 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 remuneration 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 In line with our commitment to full transparency and engagement with ### Remuneration Committee should be transparent and ourshareholders on the topic of executive remuneration, the Remuneration ### promote effective engagement Committee Chair engages with our major shareholders to set out the coreprinciples with shareholders and changesplanned. In a year of significant change, the Remuneration Committee theworkforce. Chair will consult with our major shareholders todiscuss andseek views on Simplicity potential changes. Clarity and simplicity of design; The Company consults directly with the broader employee population ease of understanding by ontheirremuneration through a variety of methods including Webex, executives and external explanatory guides hosted on the intranet, human resources or business-led stakeholders. briefings, and direct line manager engagement (see also page 175 for Motivational engagement on executive pay). Plans are relevant and meaningful Simplicity with clear line of sight between Remuneration structures Simple three-part construct of salary, annual incentive and long-term actions and reward outcomes; shouldavoidcomplexity and their incentives has been in use for a number of years. metrics and targets which drive rationale and operation should be superior performance and value Use of a single ‘umbrella’ LTI plan allowing for simplicity and flexibility easy tounderstand. ofdesign. for shareholders. Aligned with Risk shareholderinterests Remuneration arrangements Full range of design features exist within remuneration arrangements to take Close alignment of reward should ensure reputational risks into account as follows: andother risks from excessive outcomes and shareholder – malus and clawback mechanisms within annual and long-term incentives; rewards, and behavioural risks experience; long-term share – Remuneration Committee application of reasonable discretion to override that can arise from target-based ownership and ‘skin in the formulaic outcomes; and incentive plans, are identified game’for executives. andmitigated. – safety targets expected to be met in all circumstances, with downward underpin applying within Annual Incentive Plan (AIP) in the event of Globally competitive below-target performance. Reward opportunity alignedtorelevant competitive Predictability employment market; enabling The range of possible values Our remuneration policy contains the following: mobility across different ofrewards to individual – maximum award levels and vesting outcomes applicable to annual businesses and geographies. directorsand anyother limits andlong-term incentives; and ordiscretions should be identified Reflects ESG progress – as set out above in Risk, the Committee has the ability to apply malus, and explained at the timeof clawback and reasonableness discretion where appropriate. Embedding the sustainability approving the policy. agenda to benefit all stakeholders; Proportionality compliance and scrutiny of executive pay and fairness relative The link between individual Performance conditions attached to annual and long-term incentive to the wider workforce. awards, the delivery of strategy arrangements require a minimum level of performance to be achieved before and the long-term performance any payout is made. As set out onpage 174, there is a direct link between Flexibility of the company should be clear. anindividual’s reward and their contribution to driving strategy and increasing Outcomes should not reward company performance. No payment is made for poor performance. Any Transparent and responsible poor performance. individual’s performance that is below expectations is dealt with as part of application of discretion to our performance management process – any individual leaving due to override formulaic outcomes; performance issues would not be entitled to any incentive payments. ability to respond to special/ unforeseen circumstances Alignment to culture duringlife of binding policy. Incentive schemes should As set out on page 174, there is a direct link between driving BAE Systems’ drivebehaviours consistent strategy and an individual’s reward, with incentive measures chosen as they withcompany purpose, align with the Company’s shared strategic objectives. valuesand strategy. As shown on page 174, the Committee has established six core principles which underpin the philosophy and approach to executive remuneration to ensure alignment to BAE Systems’ strategic objectives. BAE Systems plc Annual Report 2022 173 Governance / Directors’ report / Annual remuneration report ## Strategic rationale for our directors’ remuneration As detailed on page 167, the Committee’s aim across the Group is to provide a reward package that is aligned to shareholders’ interests, supports the achievement of the Company’s in-year financial and strategic objectives, is competitive against the appropriate market and is consistent with our focus on performance and our values of Trusted, Innovative and Bold. Inthe context of our executive directors and senior executive population, a significant proportion of their remuneration package is performance-related, and the performance conditions applying to incentive arrangements support the delivery of the Company’s strategy. The chart below shows the alignment of our incentive measures with our shared strategic objectives. Shared strategic objectives Sustain and grow Continue to grow Develop and Enhance financial Inspire and Advance and ourdefence ourbusiness in expandour performance and developa diverse integrateour and security adjacent markets international deliver sustainable workforce to drive sustainability business business shareholder growth success agenda How our strategic objectives aremeasuredin our incentives Annual incentive Earnings per share Net cash/(debt) Order intake 1 Safety and diversity & inclusion Key strategic objectives Long-term incentive Earnings per share Relative Total Shareholder Return Cash generation Strategic progress Return on capital employed (from 2023) Environmental, social and governance (from 2023) 1. Safety and diversity & inclusion will be applied as a downward underpin if these are not achieved at high levels expected. The table below sets out how our executive directors’ and senior executives’ 2023 remuneration framework directly aligns to ourstrategy for 2023. Element Purpose and link to strategy Base salary Recognise market value of role and individual’s skills, experience and performance to ensure the businesscan attract and retain talent. Pension and benefits Provide employment benefits and competitive post-retirement benefits to ensure overall package ismarketcompetitive. Annual incentive Drive and reward annual performance of individuals and teams on both financial and non-financial metrics,including leadership behaviours, in order to deliver sustainable growthin shareholder value. Bonus deferral Compulsory deferral into shares increases alignment with long-term shareholder interests. Performance shares Direct financial measures based on the Key Performance Indicators (KPIs) that drive our financial ambitions for the Company, and measures linked to our key long-term strategic priorities including oursustainability agenda, aligned to the interests of our shareholders. Restricted shares Ensure remuneration for senior US-based executives is competitive in the local market and also to assist (predominantly in the US) inmitigating retention risks in respect of certain key executives. Shareholding requirements Provide long-term alignment with shareholder interests. 174 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ### Engagement with shareholders In line with our commitment to full transparency and engagement with our shareholders on the topic of executive remuneration, the Remuneration Committee Chair annually writes to our major shareholders and also the Institutional Shareholder Services, the Investment Association and Glass Lewis, to set out our planned remuneration changes. During the formulation of the 2023 Policy, the Remuneration Committee Chair has 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 has made herself available for such meetings to hear their perspective on remuneration matters which has helped shape the 2023 Policy. ### Engagement with workforce The 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 valued and can fulfil their potential. Our values of Trusted, Innovative, and Bold and our Company Behaviours provide our employees with focus on how we create value for our stakeholders. As part of this, the Behavioural Framework is a key element of how we provide clear guidance on what we expect from our employees and stress the equal importance of what we do and how we do it. These behaviours are embedded within the personal objective setting process, as well as within development and training materials for managers and individual contributors. In accordance with Provision 5 of the UK Corporate Governance Code (the Code), the ESG Committee undertakes workforce engagement on behalf of the Board, and Dr Jane Griffiths, Chair of the ESG Committee, provides regular updates to the Board on employee engagement. Additionally, reports from members of the executive team and our first-hand interactions with employees, allowed for discussions on various employee-related matters throughout the year. The Board engaged directly with employees through a mix of site visits, town hall Q&A sessions, informal discussions during on-site lunches, anddinners with high-potential employees. A fuller overview of the Board’s engagement during the year and our employee engagement framework can be found on pages 152 to 154. During 2022, we used a range of channels to engage with employees across the Group, including in-person and virtual meetings, briefings, conferences, toolbox talks, stand-downs and listening forums at all levels. Leaders provided regular updates through videos and podcasts, as well as attending events throughout the year. We also used digital channels including our Employee App, intranet, email and TV systems. Employees were encouraged to share feedback and get involved in Company activities. We ran surveys and insight sessions to measure employee sentiment in the year. Engagement has continued with trades unions in Australia and the UK and labour unions in the US. We engaged with employees on health and safety issues through regular communications, as well as ongoing implementation or refreshment of health and safety standards to ensure compliance. 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. Around 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, are subsequently reported to the Board for discussion. This did not impact executive remuneration policy in2022 as the remuneration policy was not due for renewal and is not used to seek feedback on individual outcomes. BAE Systems plc Annual Report 2022 175 Governance / Directors’ report / Annual remuneration report ## Single total figure of remuneration ### Single total figure of remuneration for the Chairman and non-executive directors (audited) | | | | | Total fixed | Total variable | | | --- | --- | --- | --- | --- | --- | --- | | Fees | Benefits | Other | Total | remuneration | remuneration | | | £’000 | £’000 | £’000 | £’000 | £’000 | | £’000 | 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Chairman Sir Roger Carr 700 700 – – – – 700 700 700 700 – – Non-executive directors N J Anderson 85 85 1 2 9 – 95 87 95 87 – – 1 C E Ashby 85 28 4 – 9 9 98 37 98 37 – – Dame Elizabeth Corley 85 85 1 2 9 – 95 87 95 87 – – 2 Dame Carolyn Fairbairn 30 71 1 – – – 31 71 31 71 – – J V Griffiths 110 110 1 5 9 – 120 115 120 115 – – C M Grigg 110 110 – – 9 – 119 110 119 110 – – 3 C M Hogg 14 n/a – n/a – n/a 14 n/a 14 n/a – n/a 4 E M Kirk 110 62 1 1 9 – 120 63 120 63 – – S T Pearce 110 110 1 2 9 – 120 112 120 112 – – N W Piasecki 101 85 6 – 14 9 121 94 121 94 – – 3 Lord Sedwill 14 n/a – n/a – n/a 14 n/a 14 n/a – n/a 5 I P Tyler 38 110 1 1 – – 39 111 39 111 – – 1. Appointed to the Board on 1 September 2021. 2. Appointed to the Board on 1 March 2021; retired from the Board on 5 May 2022. 3. Appointed to the Board on 1 November 2022. 4. Appointed to the Board on 1 June 2021. 5. Retired from the Board on 5 May 2022. Fixed remuneration element Variable remuneration element Chairman The Chairman’s fee is set by the Remuneration Committee. Sir Roger Carr’s fee is£700,000per annum and will not be reviewed during the remainder of his term in office. SirRogerisdue to retire as Chairman at the close of the 2023 AGM. Cressida Hogg will succeed Sir Roger Carr as Chair of the Company on 4 May 2023. She will receive the same fee andbenefits as her predecessor. Her fee will not be reviewed further during the first 12 months of her appointment. Non-executive directors The non-executive directors’ fees are set by the Non-Executive Directors’ Fees Committee which comprises Sir Roger Carr(Committee Chair), Charles Woodburn, Tom Arseneault and Ed Gelsthorpe (Group General Counsel) who joined theCommittee on 1 July 2022 and whose predecessor, Philip Bramwell, served on the Committee until his retirement on30 June 2022. The fee structure on a per annum basis has since April 2020 been set as follows: (i) each individual non-executive director: £85,000; (ii) additional fee for Committee chairs: £25,000; and (iii) additional fee for Senior Independent Director: £25,000. These amounts are shown in the ‘Fees’ column above. A travel allowance of £4,500 per meeting is also paid on each occasion that a non-executive director’s travel necessitates airtravel of more than five hours (one way) to the meeting location, subject to a maximum of six travelallowances per year. These amounts are shown in the ‘Other’ column. The amounts in the ‘Benefits’ column relate to travel expenses and subsistence. The non-executive fee structure was reviewed in January 2023 and, in order to recognise more fully thetime commitment andresponsibilities involved, the following was agreed with effect from 1 April 2023: – the fee of each individual non-executive director will increase by 4% (£3,400) per annum to £88,400; – an additional Committee membership fee of £15,000 per annum for membership of each Committee (with the exception of the Nominations Committee) will be introduced; – the additional fee for Committee chairs will increase to £35,000 per annum; – the additional fee for the Senior Independent Director will increase to £35,000 per annum; and – the travel allowance will cease. This fee structure will be subject to periodic review. The above table has been subject to audit. 176 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ### Single total figure of remuneration for the executive directors (audited) | Base | Taxable | | | | | | | | | | | Total fixed | Total variable | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | 1 | | 2 | | 3 | | 4 | | 5 | | | | | | salary | benefits | | Bonus | | LTIP | | Pension | | Other | | Total | remuneration | remuneration | | | £’000 | £’000 | | £’000 | | £’000 | | £’000 | | £’000 | | £’000 | £’000 | | £’000 | 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 C N Woodburn 1,135 1,108 37 24 2,490 2,420 6,846 3,332 184 186 1 1 10,693 7,071 1,356 1,318 9,337 5,753 B M Greve 657 622 31 17 1,025 968 3,842 – 53 50 1 1 5,609 1,658 741 689 4,868 969 6 T A Arseneault 851 740 56 45 1,865 1,611 3,869 479 89 26 1,261 1,109 7,991 4,010 996 811 6,995 3,199 Fixed remuneration element Variable remuneration element The above table has been subject to audit. 1. The benefits received by Charles Woodburn include the provision of a car allowance and private use of a chauffeur-driven car (2022 £25k; 2021 £22k), financial and tax advice support (2022 £6k; 2021 £nil) and provision of private medical insurance and medical benefits (2022 £6k; 2021 £1k). The benefits received by Brad Greve include the provision of a car allowance and private use of a chauffeur-driven car (2022 £19k; 2021 £16k), financial and tax advice support (2022 £6k; 2021 £nil) and provision of private medical insurance and medical benefits (2022 £6k; 2021 £1k). The benefits received byTom Arseneault include private use of achauffeur-driven car (2022 £14k; 2021 £8k); medical, dental and executive medical benefits (2022 £18k; 2021 £15k); insured life and disability benefits (2022 £4k; 2021 £7k); financial counselling benefit (2022 £12k; 2021 £nil); and the private use of acompany aircraft (2022 £7.5k; 2021 £15k). 2. Further detail on bonus payments is provided on page 179. One-third of the net bonus paid will be deferred compulsorily into BAE Systems shares for a three-year period, without additional performance conditions. 3. This column relates to: (i) the estimated or actual value of Long-Term Incentive Plans for which the performance period endedin the relevant financial year; and (ii) the value of shares deriving from notional reinvested dividends as appropriate. In respect of (i), the values in the 2022 column are calculated on the basis of the three-month average share price of £8.127 as at 31 December 2022 and relate to the vesting portion (100% overall; 100% vesting on both TSR and EPS), EPS TSR including shares deriving from notional reinvested dividends, ofthe 2020 LTIP PS /PS for which the performance period ended on 31 December 2022 (see page 182 for further detail). With respect to the level of share appreciation, the Committee was satisfied that there was no risk of windfall as a result of the COVID-19 pandemic and that the level of vesting and value were appropriate (see page 182 for further detail). There has been no exercise of discretion asa result of share priceappreciation or depreciation. An estimate of the amount of 2020 LTIP award attributable to share price appreciation is set out below. 2020 LTIPPS £ C N Woodburn +2,448,874 B M Greve +1,38 0,109 T A Arseneault +1,389,070 In respect of (ii), the figure for Tom Arseneault is the value of the shares deriving from notional reinvested dividends foryear 4 in respect of his 2018 Performance Share award, valued on release and pro-rated for his service as executive director since 1 April 2020 (£3k). The figure for Charles Woodburn is the value of the shares deriving from notional reinvested dividends for years 4 and 5 in respect of his 2017 Performance Share award and valued on exercise (£29k). As required by regulation, the estimated vesting values for the awards shown in the 2021 column (which were calculated in the 2021 Annual Report on the basis of the three-month average share price of £5.6227 as at 31 December 2021), have been adjusted to reflect the actual value on the vesting of the performance award in March 2022 based on the then share price of £7.228. The figures reported in the 2021 column in the 2021 Annual Report on the estimated basis were Charles Woodburn: £2,602k; and Tom Arseneault: £373k. The respective figures in the 2021 Total and Total variable remuneration columns have been recast accordingly. Additionally, the Chief Executive’s single total figure for 2021 as referenced on pages 169 and 170 has been recast. BAE Systems plc Annual Report 2022 177 Governance / Directors' report / Annual remuneration report ## Single total figure of remuneration continued 4. 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 183). Further detail on pensions is given on page 183. 5. This column includes (i) the value of Free Share awards under the UK all-employee Share Incentive Plan (SIP) of £628 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 2022 grant of Restricted Shares (£1,204k). This award formed part of Tom Arseneault's 2022 LTIP allocation but is required to be reported under 'Other' as it has no performance conditions attached. The balance of the 2022 figure (£57k) relates to the value of notional reinvested dividends in respect of his 2019 Restricted Share Plan award which vested in March 2022, the third anniversary of grant, and has been apportioned to include amounts in respect of his service as an executive director since 1 April 2020. 6. Tom Arseneault is paid in US dollars with the disclosed figures being converted into sterling at the required exchange rate. Tom Arseneault's 2022 salary reflects his 3.5% increase and the exchange rate fluctuations experienced during 2022. There were no payments to former directors in 2022. ### Implementation of our policy in the year ending 31 December 2023 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 7 May 2020 at the 2020 AGM. The remuneration for 2023 will be implemented as follows: - The salary of the Chief Executive is increased to £1,180,635 with effect from 1 January 2023. - The salary of the Group Finance Director is increased to £750,150 with effect from 1 January 2023. - The salary of the President and Chief Executive Officer of BAE Systems, Inc. is increased to $1,094,080 with effect from 1 January 2023. - On 1 December 2022, the Chief Executive's employer pension contribution rate was aligned to the employer contribution rate of weighted average UK active members. - Annual and Long-Term Incentive opportunity levels are in line with the 2023 Policy that is subject to shareholder approval at the 2023 AGM. - 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 measures and weightings for 2023 for the Annual and Long-Term Incentives are set out on page 166 with more detailed information on page 186 and pages 194 to 197. In addition, further information on rebalancing the LTIP metrics for 2023 is set out on pages 161 and 162. - 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. 178 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ## Annual bonus (audited) Annual bonuses for the 2022 year are paid in March 2023. Annual bonus is made up of financial metrics, shared key strategic objectives relating to the delivery of the Group’s strategy including objectives specifically focused on our sustainability agenda, and the demonstration of leadership behaviours. A safety and diversity 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. The breakdown of bonus measures, achievement and payout for each executive director is shown below. One-third of the net bonus payment is subject to compulsory deferral into BAE Systems shares for athree-year period, for which there is no additional performance condition. ### Charles Woodburn Chief Executive Weight (as a Actual performance against targets set Percentage percentage Threshold Target Stretch Actual ofmaximum 1 Measures oftarget) for 2022 for2022 for2022 performance opportunityBelow Threshold Target Stretch Financial | Group underlying EPS 45.0 | | 46.0p 48.4p 49.6p 52.2p 100% | | --- | --- | --- | | Group net cash/(debt) 22.5 | £(2,920)m £(2,670)m £(2,170)m £(1,383)m 100% | | | Group order intake 7.5 | £21.9bn £23.1bn £24.3bn £35.6bn 100% | | Non-financial Key strategic objectives 25.0 See Key strategic objectives section on page 180 90% 2 Safety and diversity & inclusion underpin 100% Total bonus (as a percentage of maximum) 97.5% Amount of bonus £2,490,402 ### Brad Greve Group Finance Director Weight (as a Actual performance against targets set Percentage percentage Threshold Target Stretch Actual ofmaximum 1 Measures oftarget) for 2022 for2022 for2022 performance opportunityBelow Threshold Target Stretch Financial | Group underlying EPS 45.0 | | 46.0p 48.4p 49.6p 52.2p 100% | | --- | --- | --- | | Group net cash/(debt) 22.5 | £(2,920)m £(2,670)m £(2,170)m £(1,383)m 100% | | | Group order intake 7.5 | £21.9bn £23.1bn £24.3bn £35.6bn 100% | | Non-financial Key strategic objectives 25.0 See Key strategic objectives section on page 180 90% 2 Safety and diversity & inclusion underpin 100% Total bonus (as a percentage of maximum) 97.5% Amount of bonus £1,025,243 ### Tom Arseneault President and Chief Executive OfficerofBAE Systems, Inc. Weight (as a Actual performance against targets set Percentage percentage Threshold Target Stretch Actual ofmaximum 1 Measures oftarget) for 2022 for2022 for2022 performance opportunityBelow Threshold Target Stretch Financial | Group underlying EPS 15.0 | | 46.0p 48.4p 49.6p 52.2p 100% | | --- | --- | --- | | Group net cash/(debt) 7.5 | £(2,920)m £(2,670)m £(2,170)m £(1,383)m 100% | | | Group order intake 2.5 | £21.9bn £23.1bn £24.3bn £35.6bn 100% | | | BAE Systems, Inc. underlying EBIT 30.0 | $1,491.8m $1,571.8m $1,611.8m $1,623.3m 100% | | | BAE Systems, Inc. net cash/(debt) 15.0 | $2,053m $2,233m $2,593m $2,916m 100% | | | BAE Systems, Inc. order intake 5.0 | $10.7bn $11.3bn $11.9bn $15.6bn 100% | | Non-financial Key strategic objectives 25.0 See Key strategic objectives section on page 180 91.7% 2 Safety and diversity & inclusion underpin 97.5% Total bonus (as a percentage of maximum) 97.3% Amount of bonus $2,304,127 The above table has been subject to audit. 1. Adjusted to be on a comparable basis with the targets. 2. Performance in respect of the safety and diversity & inclusion underpin to the bonus was determined by the Environmental, Social andGovernance Committee (whose composition is stated on page 151). In 2022, improvements insafety and diversity were underpins to the non-financial element of the executive bonus. In respect of 2022, the requirements fordiversity improvements were met. Safetyimprovements were met at a Group level (applicable to the UK directors), but were not achieved within BAE Systems, Inc. While progress was made with some of the long-term metrics improving, especially around major injuries rates, the overall injury rate increased slightly over 2021 within BAE Systems, Inc. Given the importance of safety to our Company, it was confirmed that a reduction be applied to the non-financial element of the bonus applicable to our US director. See page 181. Taking into consideration theoverall business performance during the year, theCommittee believes the bonus outturns are appropriate. BAE Systems plc Annual Report 2022 179 Governance / Directors’ report / Annual remuneration report ## Annual bonus continued ### Key strategic objectives Achievement against key strategic objectives represents 25% of the annual bonus opportunity applicable to each of the executive directors. These objectives relate to the delivery of the Group’s strategy centred on maintaining and growing our core franchises and securing growthopportunities through advancing our strategic priorities including our sustainability agenda, and demonstrating leadership behaviours. Asafetyand diversity underpin applies to the outturn of the non-financial element, with the 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. Charles Woodburn Brad Greve Tom Arseneault President and Chief Executive Group Finance Director Chief Executive OfficerofBAE Systems, Inc. Drive operational excellence Key successes in 2022 – Nine Hawk advanced jet trainer aircraft accepted and delivered to 11 Squadron, the joint Qatar-UK Hawk squadron based at RAFLeeming, UK; joining forces with defence partners in the UK, Japan and Italy to deliver the next generation of combat air fighter jets; bringing our expertise into the development, advanced manufacture, electronic warfare systems and sustainment of the world’s largest defence programme (F-35). – Delivered target net improved project – Delivered target net improved project – Delivered target net improved project performance margins per Group Salients. performance margins per Group Salients. performance margins per Group Salients. – Successful launch and roll-out of a refreshed Life – Successful launch and roll-out of a refreshed – Successful launch and roll-out of a refreshed Cycle Management (LCM) process to improve LCM process to improve agility, execution and LCM process to improve agility, execution and agility, execution and management of projects. management of projects. management of projects. Continuously improve competitiveness and efficiency Key successes in 2022 – Embarked on construction of a new, modern ship lift/land-level ship repair complex at our Jacksonville, Florida shipyard to improve production efficiency and increase capacity; in Lancashire, UK we continued to drive efficiencies and cost savings through our industry 4.0 Factory of the Future; worked hard to ensure continuity of supply and to proactively manage risks arising from supply chain disruptions as a result of global events. | – Demonstrable improvement in Supply Chain | – Demonstrable improvement in SCRM including | – Demonstrable improvement in SCRM including | | --- | --- | --- | | RiskManagement (SCRM) including | improvement in risk to baseline. | improvement in SCR position. | | improvement in risk to baseline. | – Developed and implemented strategy leveraging | – Developed and implemented strategy leveraging | | – Developed and implemented strategy leveraging | transportation movement and spend in support | transportation movement and spend in support | | transportation movement and spend in support | of ESG, and operational excellence. | of ESG, and operational excellence. | | of ESG, and operational excellence. | – Increased enterprise organisation effectiveness | – Reduced general and administration costs as | | – Increased enterprise organisation effectiveness | and efficiency by achieving 100% transition to | %sales at BAE Systems, Inc. | | and efficiency by achieving 100% transition to | transactional and common shared services and | | | transactional and common shared services and | delivering organisation health improvements in | | | delivering organisation health improvements in | layers and spans of control. | | layers and spans of control. Advance and further leverage our technology Key successes in 2022 – Leading the design, test, evaluation and build process and bringing together new digital engineering technologies as part of TeamTempest, critical in the delivery of the UK’s Future Combat Air System; completed acquisition of Bohemia Interactive Simulations (BISim) to provide cutting-edge virtual training forallied militaries; and continued integration and growth of the acquired In-Space Missions business and built satellites for DSTL,which were launched on the UK’s Virgin Orbit craft, Cosmic Girl. | – Exceeded Group integrated technology plans | | – Exceeded Group integrated technology plans | | – Significant progress against our Group integrated | | --- | --- | --- | --- | --- | | | asset in IBP with over £300m investment. | asset in IBP with over £300m investment. | | technology plans as set in IBP. | | – Significant progress against agreed strategic | | – Significant progress against agreed strategic | | – Significant progress against agreed strategic | | | technology growth themes of systems for | technology growth themes of systems for | | technology growth themes: world leader in | | | multi-domain operations including: | multi-domain operations including: | | developing, manufacturing and deploying | | i. Autonomy – including release ofUncrewed | | i. Autonomy – including release ofUncrewed | | state-of-the-art, radiation-hardened circuits for | | | Air System technology andautonomous | | Air System technology andautonomous | use in defence, space, intelligence, research, and | | | detection capabilities; | | detection capabilities; | commercial missions, resulting in our selection by | the US Department of Defense to qualify a new ii. Space – additional Low Orbit capability ii. Space – additional Low Orbit capability generation of integrated circuit technology for through In-Space Missions, ourUK-based through In-Space Missions, ourUK-based use in the harsh environment ofspace. satellite company and working with third satellite company and working with third parties on Azalea, our multi-sensing satellite parties on Azalea, our multi-sensing satellite cluster; and cluster; and iii. Sustainability – technology including iii. Sustainability – technology including sustainable ground power for UK Typhoons sustainable ground power for UK Typhoons and electrifying the combat vehicle force of and electrifying the combat vehicle force of the future. the future. Pursue and deliver growth Key successes in 2022 – UK Ministry of Defence awarded £4.2bn contract to manufacture the next five City Class Type 26 frigates; MBDA (in which the Group hasa 37.5% interest) won several export orders on air and naval platforms; won $699m contract for operations, maintenance and management services for the US Army’s Defense Supercomputing Resources Center; £3.4bn of further contract funding awarded as part of Delivery Phase 3 for the Dreadnought programme; contract received worth $1.4bn (€1.34bn) to supply 152 CV9035 infantry fighting vehicles to replace the Slovakian Army’s fleet; and we have signed a non-binding Memorandum of Understanding that provides a framework for negotiations to deliver CV90 combat vehicles to the Czech Republic. – Progressed and/or won specific key awards. – Progressed and/or won specific key awards. – Progressed and/or won specific key awards. 180 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance Charles Woodburn Brad Greve Tom Arseneault President and Chief Executive Group Finance Director Chief Executive OfficerofBAE Systems, Inc. Lead and inspire high-performance teams and individuals Key successes in 2022 – Award-winning early career and skills programmes in markets such as the UK and Australia; focused efforts of recruiting and retaining a diverse workforce set against a backdrop of growth in demand across our business and a buoyant employment market. – Executive Committee pipeline and succession – Executive Committee pipeline and succession – Exceeded movement and development of Inc. development with execution and tracking of development with execution and tracking of SLTsponsorship participants to advance pipeline development plan for potential successors. development plan for potential successors. and further career opportunities. – Achieved milestones against D&I roadmap with – Achieved milestones against D&I roadmap with – Increased representation of women and people an increase in rate of improvement in gender an increase in rate of improvement in gender of colour in executive grades. diversity, increasing diversity in early careers entry diversity, increasing diversity in early careers entry – Demonstrated inclusive leadership behaviours. population and people managers participating in population and people managers participating in diversity awareness training. diversity awareness training. – Demonstrated inclusive leadership behaviours. – Demonstrated inclusive leadership behaviours. Evolve, accelerate and integrate our sustainability agenda with progress across each of environment, social and governance Key successes in 2022 – Selected to design, test and supply energy management components for GE Aviation’s megawatt class hybrid electric propulsion system supporting NASA’s Electrified Powertrain Flight Demonstration project; use of sustainable ground power for UK Typhoons; integrated a hybrid electric drive (HED) system onto a Bradley armoured fighting vehicle to electrify the combat vehicle force of the future; working with other companies to deliver synthetic environment training as an alternative to large-scale military exercises. | – IBP approval of Net Zero roadmaps at Group | – IBP approval of Net Zero roadmaps at Group | – IBP approval of Net Zero roadmaps at Inc. level to | | --- | --- | --- | | andsector level to identify the key activities | andsector level to identify the key activities | identify the key activities andinvestment required | | andinvestment required to decarbonise our | andinvestment required to decarbonise our | to decarbonise our operations by 2030. | | operations by 2030. | operations by 2030. | – Improved employee engagement and culture | | – Improved employee engagement and culture | – Improved employee engagement and culture | through quantitative, ongoing assessment of | | through quantitative, ongoing assessment of | through quantitative, ongoing assessment of | employee sentiment on key workplace issues. | | employee sentiment on key workplace issues. | employee sentiment on key workplace issues. | – Reduced overall significant Group risk rating. | | – Reduced overall significant Group risk rating. | – Reduced overall significant Group risk rating. | – Improved investor ESG ratings through improved | | – Improved investor ESG ratings through improved | – Improved investor ESG ratings through improved | data, progress in key ESG material areas and | | data, progress in key ESG material areas and | data, progress in key ESG material areas and | transparency of reporting. | | transparency of reporting. | transparency of reporting. | – Improvements against key safety indicators | | – Improvements against key safety indicators | – Improvements against key safety indicators | including regular SHE engagement tours and | | including regular SHE engagement tours and | including regular SHE engagement tours and | SHEtraining. | | SHEtraining. | SHEtraining. | | | Payout (% of maximum): | Payout (% of maximum): | Payout (% of maximum): | | 90% | 90% | 91.7% | | Safety and diversity & inclusion underpin: | Safety and diversity & inclusion underpin: | Safety and diversity & inclusion underpin: | | 100% | 100% | 97.5% | | Overall non-financial outturn: | Overall non-financial outturn: | Overall non-financial outturn: | | 90% | 90% | 89.4% | In relation to the safety and diversity and inclusion underpin, the requirements for diversity improvements were met. Safety improvements weremet at a Group level (applicable to the UK directors), but were not achieved within BAE Systems Inc. Given the importance of safety to ourCompany, it was confirmed that a reduction be applied to the non-financial element of the bonus applicable to our US director. See page 179 forfurther details. The shared nature of the common strategic objectives and the fact that the overall level of performance in 2022 had been strong in most areas resulted in the executive directors achieving a similar outturn. BAE Systems plc Annual Report 2022 181 Governance / Directors' report / Annual remuneration report ## Long-Term Incentive Plan (LTIP) performance ### Annual average diluted underlying EPS growth | Outperformance of performance conditions ending on 31 December 2022 | Threshold | Maximum | Actual | Percentage of maximum achieved | | --- | --- | --- | --- | --- | | 2022 EPS requirement | 50.5p | 56.0p | 57.8p | | | Annual average EPS growth | 3% | 7% | 8.3% | 100% | ### Relative TSR against comparator groups | Outperformance of performance conditions ending on 31 December 2022 | Threshold | Maximum | Actual | Percentage of maximum achieved | | --- | --- | --- | --- | --- | | TSR against sectoral comparator group | 31.5% | 44.4% | 63.5% | 100% | | TSR against FTSE 100 comparator group | -1% | 27.2% | 63.5% | 100% | | Overall vesting against TSR | | | | 100% | ### 2020 Performance Shares (LTIP PS) Performance conditions: half on relative TSR against two comparator groups (with equal weighting), half on EPS growth of 3% to 7% per annum. The three-year performance period ended on 31 December 2022. With respect to the 2020 LTIP PS TSR award, the maximum TSR performance was exceeded against both the sectoral and the FTSE 100 comparator groups and therefore the vesting level of the TSR portion of the award is 100%. In confirming this outcome, the Committee considered the secondary condition and determined that there had been a sustained improvement in the Company's underlying financial performance. With respect to the 2020 LTIP PS EPS award, the 2019 EPS baseline for this award was based on underlying EBITA. During 2021 the Group moved to the underlying EBIT profitability measure which includes amortisation of software and development costs. The 2022 fully diluted underlying EPS, on an EBITA basis consistent with 2019 EPS is 57.8p as shown in the table above, having been adjusted to add back the amortisation of software and development costs. In line with the Committee's agreed principles, as disclosed last year, it was agreed that constant currency should be used to ensure that the calculation of EPS is not affected by currency exchange rate fluctuations, upwards or downwards. The baseline from which performance over the three-year performance period was measured was c.1p per share higher than if an actual currency basis had been used. 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. In addition to the deliberations referred to above, as described on pages 160 to 161, the Committee carefully reviewed whether there was any potential windfall gains arising from the volatility in the market at the onset of the COVID-19 pandemic in March 2020. Our Remuneration Policy contains sufficient flexibility to reduce the number of awards vesting if required and the Committee attached an additional condition to the March 2020 grant to exercise discretion to ensure that the value of the awards in three years' time at vesting was appropriate. In making its determination, the Committee considered the volatility of the Company's share price in the 12-month periods either side of the award date and observed that there was no material difference between the share prices between the March 2019 award (485.0p), March 2020 award (485.1p) and March 2021 award (499.9p). Taking these points into consideration the Committee was satisfied that there was no risk of windfall gains as a result of the COVID-19 pandemic, and the level of vesting and values were appropriate given the Company's underlying business performance over the three-year performance period and share price history. The Committee therefore believes the vesting outturns of 100% for both the TSR and EPS portions of the 2020 awards are appropriate. 182 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance A summary of TSR performance to 31 December 2022 on outstanding TSR-related LTIP awards is illustrated in the chart below. The vesting percentage for the 25 March 2020 award is the actual vesting outturn referred to on page 182. The grey boxes show the range of TSR required for 25% vesting to full vesting in respect of the FTSE 100 and sectoral international defence comparator groups, as appropriate, and the circles show BAE Systems’TSR. The proportion that wouldvest as at 31 December 2022 is shown in the boxes at the top of the chart. TSR performance under the TSR-related awards as at 31 December 2022 100% vesting 100% vesting 100% vesting 90% 80% 70% 60% 50% 40% 30% 20% FTSE 100 comparator group 10% Sectoral comparator group 0% BAE Systems’ TSR 20% 25 March 2020 25 March 2021 24 March 2022 ## Pension entitlements ### Total pension entitlements (audited) Figures included in the remuneration table on page 177 | | | | | | | | | | | Added pension | | | Added pension | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | | | | | | value received in | | | value received in | | | | | | | | | | | | | | | | the year from | | | the year from | | | | | | | | | | | Accrued | | | Accrued | | | defined | | | defined | | | | | | | Normal | | | benefit at | | | benefit at | | | benefit | | contribution | | | | | | | | | | | | 1 | | | 1 | | | | | | | | | | | retirement | | | 1January 2022 | | | 31 December 2022 | | | | scheme | | | scheme | | Total | | | Director Age | | | age | | | £ | | | £ | | | £ | | | £ | | £ | Charles Woodburn 51 65 64,928 66,229 n/a 4,000 4,000 Brad Greve 55 65 24,985 27,304 n/a 4,000 4,000 Tom Arseneault 59 65 See notes below 74,526 14,094 88,620 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. A salary supplement of £179,928 per annum waspaid in 2022 in lieu of the Company contributions in excess ofthose permitted by the Annual Allowance (£4,000 per annum from 6 April 2020) 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 from 6 April 2020). 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 2022 Accrued benefit at 31 December 2022 BAE Systems ERP Qualified Plan – life pension $39,348 per annum $39,348 per annum BAE Systems ERP 2006 Qualified Plan – lump sum $83,000 $84,000 12/31/2004 BRP Restoration Plan – life pension $5,283 per annum $5,283 per annum 2007 BRP – ten-year pension $109,834 per annum $101,177 per annum Section 401(k) $1,623,989 $1,421,754 Accrued defined benefit for Tom Arseneault is 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(2023 $22,500; 2022 $20,500). In 2022, the company paid contributions of $16,950 into this arrangement. 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. –10% BAE Systems plc Annual Report 2022 183 – award award award Governance / Directors' report / Annual remuneration report ## Share interests (audited) ### Scheme interests awarded during the financial year | Scheme | Type of interest | Date of grant | Number of shares | Basis of award | Face value of award^{1} £ | Exercise price £ | Date to which performance is measured | Performance condition | Percentage of interests receivable if minimum performance achieved | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | **Charles Woodburn** | | | | | | | | | | | LTIP PS^{TM} | Performance Shares/nil cost option | 24.03.22 | 142,869 | 92.5% of salary | 1,050,087 | nil | Three years to 31.12.24 | TSR/secondary financial measure | 25% | | LTIP PS^{PS} | Performance Shares/nil cost option | 24.03.22 | 428,605 | 277.5% of salary | 3,150,247 | nil | Three years to 31.12.24 | EFS | 25% | | **Brad Greve** | | | | | | | | | | | LTIP PS^{TM} | Performance Shares/nil cost option | 24.03.22 | 72,669 | 83.75% of salary | 534,117 | nil | Three years to 31.12.24 | TSR/secondary financial measure | 25% | | LTIP PS^{PS} | Performance Shares/nil cost option | 24.03.22 | 218,008 | 251.25% of salary | 1,602,359 | nil | Three years to 31.12.24 | EFS | 25% | | **Tom Arseneault** | | | | | | | | | | | LTIP PS^{TM} | Performance Shares | 24.03.22 | 81,386 | 74.5% of salary | 598,187 | n/a | Three years to 31.12.24 | TSR/secondary financial measure | 25% | | LTIP PS^{PS} | Performance Shares | 24.03.22 | 244,156 | 223.5% of salary | 1,794,547 | n/a | Three years to 31.12.24 | EOS | 25% | | LTIP RS | Retention | 24.03.22 | 163,863 | 150% of salary | 1,204,393 | 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. Key: LTIP – Long-Term Incentive Plan. PS – Performance Shares. RS – Restricted Shares. TSR – Total Shareholder Return. EFS – Earnings per share, Free Cash Flow and Strategic Progress. EOS – Earnings per share, BAE Systems, Inc. Operating Cash Flow and Strategic Progress. The performance share awards set out above have four performance conditions of EPS, TSR, cash generation and measures reflecting strategic progress with each condition equally weighted at 25%. Further detail on these performance conditions is set out on pages 185 and 186. 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. ### Description of share plans and summary of performance conditions Long-term incentives operate under the BAE Systems LTIP approved by shareholders at the 2014 AGM. The three main vehicles in use are Performance Shares, Restricted Shares and Share Options. 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. Shareholders will be asked to approve the BAE Systems Long-Term Incentive Plan 2023 at the 2023 AGM, the terms of which remain substantially the same as the existing BAE Systems Long-Term Incentive Plan 2014. ### LTIP Performance Shares For 2017, shares under award vest after satisfaction of the three-year performance condition. Awards that vest are capable of being exercised in three equal tranches on a phased basis from the third, fourth and fifth anniversary of grant. Any unexercised awards will lapse on the seventh anniversary of grant. From 2018, awards to UK executive directors remain subject to the 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. 184 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance Existing awards granted up to and including 2020 are weighted 50% on the EPS performance condition and 50% on the TSR performance condition as set out below. The TSR sectoral comparator group is shown below. Plan Performance condition EPS LTIP PS 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 LTIP PS The proportion of the award capable of exercise is determined by: (i) 50% of the TSR measure is on the sectoral comparator group of other international defence companies and 50% ison the companies in the FTSE 100 index. Under both the sectoral and FTSE 100 comparator groups, no shares vest if the Company’s TSR is less than median TSRs 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 1 such a view, the Committee may consider (but not exclusively) the following financial metrics: net cash/debt; EBIT ; order book; turnover; risk; and project performance. 1. With effect from 2021, the Group adopted the underlying EBIT profitability measure in place of the previously reported EBITA measure. Further details of this change are provided in the Financial glossary on page 302. The TSR sectoral comparator group for awards from 2017 to 2019 comprises: | Cobham | Leonardo | SAIC | | --- | --- | --- | | General Dynamics | Lockheed Martin | Thales | | Harris Corporation | Meggitt | United Technologies | | L3 Technologies | Northrop Grumman | | | Leidos | Raytheon | | The TSR sectoral comparator group for awards made in 2020 comprises: | General Dynamics | Lockheed Martin | SAIC | | --- | --- | --- | | L3 Harris Technologies | Meggitt | Thales | | Leidos | Northrop Grumman | | | Leonardo | Raytheon Technologies | | For awards granted in 2021 and 2022, the Company’s TSR is measured against a single comparator group of the companies in the FTSE100 index excluding BAE Systems. For awards granted in 2021 and 2022, four performance conditions of EPS, TSR, cash generation and measures reflecting strategic progress apply with each condition equally weighted at 25%. Plan Performance condition EPS LTIP PS 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 LTIP PS 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 TSRs 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; EBIT;order book; turnover; risk; and project performance. FCF LTIP PS Three-year cumulative Free Cash Flow (FCF) at a Group level, with 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 Applicable to sensitivity, the targets will be disclosed retrospectively after the end of the relevant financial year. UKdirectors only OCF LTIP PS Three-year Operating Cash Flow (OCF) in respect of the BAE Systems, Inc. business, with 25% vesting for threshold performance, 50% vesting for target performance and 100% vesting for stretch performance, with vesting on a Applicable to straight-line basis between these targets. Due to commercial sensitivity, the targets will be disclosed retrospectively USdirector only after the end of the relevant financial year. BAE Systems plc Annual Report 2022 185 Governance / Directors' report / Annual remuneration report ## Share interests continued | LTIP PS^{®} | The proportion of the award capable of vesting is determined by the following three key strategic objectives, each with equal weighting. Due to commercial sensitivity, the targets will be disclosed retrospectively after the end of the relevant financial year. (i) **Drive 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. (ii) **Continuously improve competitiveness and efficiency.** Measured by three-year Return on Capital Employed (ROCE) to support continually improving our competitiveness in order to drive profitable growth benefiting all of our stakeholders. For 2021: 25% vesting for 25bps reduction in 2023 ROCE, 50% vesting for 2023 ROCE consistent with the Integrated Business Plan (IBP) 2020 and 100% vesting for 25bps improvement in 2023 ROCE, with vesting on a straight-line basis between these parameters. For 2022: 25% vesting for 25bps reduction in ROCE compared to IBP 2021, 50% vesting for 2024 ROCE consistent with IBP 2021 and 100% vesting for 25bps improvement in ROCE compared to IBP 2021, with vesting on a straight-line basis between these parameters. (iii) **Advance and leverage our 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) with final approval by the Committee. | | --- | --- | For awards granted in 2023, the following metrics will apply: | Metric and weight | Performance condition | | --- | --- | | Earnings per share (EPS) – 30% | 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. | | Free cash flow (FCF) – 30% | Three-year cumulative FCF at a Group level, or in the case of the US executive director, three-year operating cash flow (OCF) in respect of the BAE Systems, Inc. business. 25% vesting for threshold performance, 50% vesting for target performance and 100% vesting for stretch performance, with vesting on a straight-line basis between these targets. Due to commercial sensitivity, the targets will be disclosed retrospectively after the end of the relevant financial year. | | Total shareholder return (TSR) – 15% | 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 TSRs 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/debit; EBIT^{1}; order book; turnover; risk; and project performance. | | Return on capital employed (ROCE) – 15% | 25% vesting for 25bps reduction in ROCE compared to IBP 2022, 50% vesting for 2025 ROCE consistent with IBP 2022 and 100% vesting for 25bps improvement in ROCE compared to IBP 2022, 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. | | Environmental, social and governance (ESG) metric – 10% | Objective to reduce Group greenhouse gas (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. Further details of this change are provided in the Financial glossary on page 302. 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. ### 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 end of 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. ### 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 on page 187. 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 186 BAE Systems plc Annual Report 2022 Strategic report Governance Financial statements 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 300% MSR 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 2022: | | Initial Value | Subsequent Value | Actual | | --- | --- | --- | --- | | Charles Woodburn | 150% | 300% | 353% | | Brad Greve | 100% | 200% | 102% | | Tom Arseneault | 212.5% | 425% | 613% | The actual MSR figures in the table are provided as at 31 December 2022, based on the year-end share price of £8.56. 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 Chairman or the non-executive directors. #### Share interests as at 31 December 2022 (audited) The interests of the directors who served during the year ended 31 December 2022 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 | | | | | Total scheme interests | | --- | --- | --- | --- | --- | --- | --- | --- | | | | 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 | | | Sir Roger Carr | 166,549 | – | – | – | – | – | – | | N J Anderson | 14,000 | – | – | – | – | – | – | | T A Arseneault | 626,430 | 1,262,415 | 596,266 | – | – | 1,739,974 | 3,598,655 | | C E Ashby | – | – | – | – | – | – | – | | Dame Elizabeth Corley | 19,000 | – | – | – | – | – | – | | B M Greve | 82,163 | – | – | 1,128,887 | – | – | 1,128,887 | | J V Griffiths | 10,117 | – | – | – | – | – | – | | C M Grigg | 24,555 | – | – | – | – | – | – | | C M Hogg^{1} | – | – | – | – | – | – | – | | E M Kirk | – | – | – | – | – | – | – | | S T Pearce | 10,000 | – | – | – | – | – | – | | N W Piasecki | – | – | – | – | – | – | – | | Lord Sedwill^{1} | – | – | – | – | – | – | – | | C N Woodburn | 468,600 | – | – | 3,115,297 | – | – | 3,115,297 | 1. Appointed to the Board on 1 November 2022. 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 188. The above table has been subject to audit. 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 2022 are given on page 188 together with details of options exercised in 2022. 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 2022, both Charles Woodburn and Brad Greve have each acquired an additional 51 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 468,651 and 82,214 respectively. There have been no changes in the interests of the remaining directors in the shares of BAE Systems plc between 31 December 2022 and the date of this report. BAE Systems plc Annual Report 2022 187 Governance / Directors’ report / Annual remuneration report ## Share interests continued Breakdown of scheme interests (audited) | Charles Woodburn | | | | | | | | | | | Tom Arseneault | | | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Options and awards held as at 31 December 2022 | | | | | | | | | | | Options and awards held as at 31 December 2022 | | | | | | | | | | | | | | | | | | | | Exercise | | Date from which | | | | | | | | | Exercise | | | Date from which | | | | | 31 December | | | | Date of | price | | exercisable or part | | | | 31 December | | | | Date of | | price | | exercisable or part | | | | | | | 2022 | | grant | | £ | | exercisable | | | | | 2022 | | grant | | | £ | | exercisable | | | TSR | | | | 1 | | | | | | | EPS | | | | 2 | | | | | | | | LTIP PS | | | 285,227 | | | 20.03.18 nil 20.03.23 | | | | | LTIP PS | | | 10,997 | | | 20.03.18 n/a 20.03.23 | | | | | | | | EPS | | | | 1 | | | | | | | TSR | | | | 2 | | | | | | | | LTIP PS | | | 285,227 | | | 20.03.18 nil 20.03.23 | | | | | LTIP PS | | | | 9,119 | | 20.03.19 n/a 20.03.23 | | | | | | | | TSR | | | | 2 | | | | | | | EPS | | | | 2 | | | | | | | | LTIP PS | | | 55,416 | | | 20.03.19 nil 20.03.24 | | | | | LTIP PS | | | 57,715 | | | 20.03.19 n/a 20.03.23 | | | | | | | | EPS | | | | 2 | | | | | | | TSR | | | | 2 | | | | | | | | LTIP PS | | | 350,737 | | | 20.03.19 nil 20.03.24 | | | | | LTIP PS | | | 211,994 | | | 25.03.20 n/a 25.03.23 | | | | | | | | TSR | | | | 2 | | | | | | | EPS | | | | 2 | | | | | | | | LTIP PS | | | 373,737 | | | 25.03.20 nil 25.03.25 | | | | | LTIP PS | | | 211,994 | | | 25.03.20 n/a 25.03.23 | | | | | | | | EPS | | | | 2 | | | | | | | TSR | | | | 3 | | | | | | | | LTIP PS | | | 373,737 | | | 25.03.20 nil 25.03.25 | | | | | LTIP PS | | | 108,764 | | | 25.03.21 n/a 25.03.24 | | | | | | | | TSR | | | | 3 | | | | | | | EOS | | | | 3 | | | | | | | | LTIP PS | | | 204,936 | | | 25.03.21 nil 25.03.26 | | | | | LTIP PS | | | 326,290 | | | 25.03.21 n/a 25.03.24 | | | | | | | | EFS | | | | 3 | | | | | | | TSR | | | | 3 | | | | | | | | LTIP PS | | | 614,806 | | | 25.03.21 nil 25.03.26 | | | | | LTIP PS | | | 81,386 | | | 24.03.22 nil 24.03.25 | | | | | | | | TSR | | | | 3 | | | | | | | EOS | | | | 3 | | | | | | | | LTIP PS | | | 142,869 | | | 24.03.22 nil 24.03.27 | | | | | LTIP PS | | | 24 4,156 | | | 24.03.22 nil 24.03.25 | | | | | | | | EFS | | | | 3 | | | | | | | | | | | | | | | | | | | LTIP PS | | | 428,605 | | | 24.03.22 nil 24.03.27 | | | | | | | | 1,262,415 | | | | | | | | | | | | | 3,115,297 | | | | | | | | LTIP SO 304,245 26.03.14 4.12 26.03.17 | | | | | | | | | | | | LTIP SO 258,380 25.03.15 5.43 25.03.18 Performance Shares – nil-cost options exercised during 2022 LTIP SO 289,258 23.03.16 4.99 23.03.19 | Exercised | | Exercise | | | | Market price | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | during the | | price | | Date of | Date of | on exercise | | LTIP SO 267,026 21.03.17 6.49 21.03.20 | | | year | | £ | grant | exercise | | £ | LTIP SO 268,594 20.03.18 5.82 20.03.21 | EPS LTIP PS 44,301 nil 21.03.17 22.03.22 7.34 LTIP SO 352,471 20.03.19 4.85 20.03.22 The Performance Shares nil-cost options exercised by Charles Woodburn attracted 1,739,974 notional reinvested dividends which equated to an additional 9,214 shares on LTIP RS 213,416 25.03.20 n/a 25.03.23 exercise of these options. LTIP RS 218,987 25.03.21 n/a 25.03.24 LTIP RS 163,863 24.03.22 n/a 24.03.25 Brad Greve 596,266 Options and awards held as at 31 December 2022 Exercise Date from which Share Options – options exercised during 2022 | | | 31 December | | | | Date of | price | | exercisable or part | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | 2022 | | grant | | £ | | exercisable | Exercised | | Exercise | | | | Market price | | | | | | | | | | | | | | during the | | price | | Date of | Date of | on exercise | | | | TSR | | | | 2 | | | | | | | | | | | | | | | LTIP PS | | | 210,626 | | | 25.03.20 nil 25.03.25 | | | | | | | | | | | | | | | | | | | | | | | | | | year | | £ | grant | exercise | | £ | | | EPS | | | | 2 | | | | | | | | | | | | | | | LTIP PS | | | 210,627 | | | 25.03.20 nil 25.03.25 | | | | | | | | | | | | | LTIP SO 288,602 3.89 25.03.13 11.10.22 8.34 TSR 3 LTIP PS 104,239 25.03.21 nil 25.03.26 Note: The Share Options granted to Tom Arseneault between 2013 and 2019 as EFS 3 LTIP PS 312,718 25.03.21 nil 25.03.26 setoutabove were granted prior to him being appointed as an executive director | | TSR | | 3 | | | | --- | --- | --- | --- | --- | --- | | LTIP PS | | 72,669 | | 24.03.22 nil 24.03.27 | anddo not have performance conditions attached to them. Options are normally | | | EFS | | 3 | | exercisable between the third and tenth anniversary of their grant. Share options | | LTIP PS | | 218,008 | | 24.03.22 nil 24.03.27 | | granted to him from 2015 onwards are subject to a two-year clawback period 1,128,887 afterthe initial three-year vesting period. Note: As reported in the Remuneration Committee Chair’s report in the 2020Annual Report, in light of the volatility in the market during March 2020, theCommittee attached an additional condition to the 2020 awards to retain theability to exercise discretion to ensure that the value of the 2020 awards atvesting is appropriate. Theoutcome is reported on page 182. Asreported in the Remuneration Committee Chair’s report in the 2021 Annual Report, a similar condition was applied to the 2021awards in light of volatility in the marketin March 2021. The tables above have been subject to audit. Performance conditions for the LTIP are detailed on pages 184 to 186. 1. All shares due to vest subject to agreed terms. 2. Subject to a performance condition that has been met. 3. Subject to a performance condition that is yet to be tested. 188 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ## Remuneration Committee composition and advisers The Committee members comprise Nicole Piasecki, who joined the Committee and succeeded Ian Tyler as Chair when the latter retired from the Board at the close of the Company’s AGM on 5 May 2022, Dame Elizabeth Corley and Chris Grigg. Dame Carolyn Fairbairn also served as a Committee member until she too retired from the Board with effect from the close of the Company’s AGM on 5 May 2022. Committee attendance is shown on page 133. 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 Human Resources Director, Tania Gandamihardja, and her predecessor in this role, Karin Hoeing. Charles Woodburn in his role as Chief Executive also provided advice that was of material assistance to the Committee. Fees (in respect ofservices provided | Adviser Services provided Appointment Governance | | | | tothe Committee) | | --- | --- | --- | --- | --- | | Watson Towers Willis | Since July 2022, independent adviser | Committee | The Committee is aware that WTW | £60,000 | | (WTW) | tothe Committee, including attendance | appointment. | provides unrelated services to theCompany | | Fee basis: Fixed fee/ at Remuneration Committee meetings. in the areas of benefits andpensions. hourly Also provided information on By the Company The Committee is satisfied that the remuneration market practice, market attherequest of WTWlead adviser and team who provide trends and benchmarking of the theCommittee. remuneration advice to the Committee do remuneration packages for the senior not have connections with the Group, or executive population. 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. PricewaterhouseCoopers Up to June 2022, independent adviser Committee The Committee is aware that PwC £38,044 (PwC) to the Committee, including attendance appointment. providesavariety of other services to Fee basis: Fixed fee/ at Remuneration Committee meetings. theCompany, including tax and pensions hourly advice. PwC also provides a range of Also provided information onmarket By the Company consultancy services. practice in relation to different aspects attherequest of of remuneration, market trends and theCommittee. The Committee is satisfied that the benchmarking oftheremuneration PwCLLP engagement partner and team, packages for theexecutive population. who provided remuneration advice to theCommittee, did not have connections with the Group, or the individual directors, that could impair their independence andobjectivity. PwC is a member of the Remuneration Consultants Group (RCG) and is a signatory tothe RCG’s code of conduct. Provides support in relation to By the Company. The nature of the advice provided to the £13,500 assessingthe TSR performance Committee is based on factual information Fee basis: Fixed fee | | updatesand vesting outcomes | | concerning the performance of the | | | --- | --- | --- | --- | --- | | | forin-flight awards granted under | | Company’s shares relative to the chosen | | | | theBAE Systems LTIP 2014. | | peer group(s). | | | Linklaters Provided legal services, principally | | By the Company | Only provides legal compliance, legal | £43,908 | | | adviceregarding remuneration policy, | with theapproval | draftingand reviewservices, and does | | Fee basis: Hourly reporting and remuneration awards. ofthe Committee. 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. BAE Systems plc Annual Report 2022 189 Governance / Directors’ report ## Directors’ remuneration policy ## This Directors’ remuneration policy (the Policy) will take effect from the ## conclusion of the 2023 Annual General Meeting (AGM) subject to shareholder ## approval at the 2023 AGM. The Remuneration Committee (the The Committee considers the remuneration ### Committee) is governed by Terms of policy annually to ensure that it remains Contents Reference which set out its roles and aligned with business needs and is Revisions compared to the policy responsibilities including how the appropriately positioned relative to the approvedatthe 2020 AGM 191 | Committee will be conducted and operate. | market. However, in the absence of | | | --- | --- | --- | | These are reviewed at least annually to | exceptional or unexpected circumstances | Executive directors’ policy table 193 | | ensure they remain appropriate and | which may necessitate a change to the | – Base salary 193 | | includerelevant corporate governance | Policy, there is currently no intention to | | – Annual incentive 194 andother guidance. The Terms of Reference revise the Policy more frequently than – Long-Term Incentives 195 are available on the Company’s website. everythree years. – Benefits 197 The Committee has appointed independent The Policy is to set base salary with – Pension 198 | external advisers to provide material | reference to the relevant market-competitive | | | --- | --- | --- | | independent assistance and advice. In | level. We use target performance to | Remuneration policy | | addition, to avoid any conflicts of interest | estimate and benchmark the total potential | for other employees 199 | | orappearance thereof, no director is | reward against reward packages paid by | | Performance measures and targets 199 | involved in deciding their own remuneration | BAE Systems’ competitors. Actual total | | | --- | --- | --- | | outcome with such items being discussed | direct reward reflects the performance of | Minimum Shareholding | | without their presence in the meeting. | the individual and the Company as a whole. | Requirement 199 | The aim is to deliver an overall remuneration Illustration of application package for executive directors which ofremunerationpolicy 200 provides an appropriate balance between short-term and long-term reward and Non-executive directors’ between fixed and variable reward as policy table 201 described more fully below. Recruitment 202 The Long-Term Incentive Plan provides the Service contracts and Committee with discretion over vesting letters of appointment 203 outcomes that affect the actual level of reward payable to individuals; as explained Policy on payment for loss of office 204 on page 195, such discretion would only Consideration of beused in exceptional circumstances and, employmentconditions ifexercised, disclosed at the latest in the elsewhere in the Company 205 report on implementation of the Policy (i.e.the Annual remuneration report) for Stakeholder considerations 205 theyear in question. ### Note References in this Policy to ‘UK executive directors’ are to UK-based executive directors andreferences to ‘US executive directors’ are to US-based executive directors. 190 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ### Revisions compared to the policy The Committee concluded that the policy Long-Term Incentives (LTI) approved at the 2020 AGM remains ### approved at the 2020 AGM • The structure of our LTI framework will effective and is appropriately aligned to the remain unchanged, with UK executive The Committee conducted a thorough Company’s strategy and shareholders’ directors continuing to receive Performance review of the Policy during 2022 against interests. As such, the 2023 Policy remains Shares only and US executive directors sixagreed core principles of Simplicity, broadly unchanged and contains no new eligible to receive a mix of Performance Motivational, Aligned with shareholder components which were not already in the Shares and Restricted Shares. interests, Globally competitive, Flexibility, Policy approved at the 2020 AGM. The key and reflects Environmental, Social and • There is no change to the grant levels changes proposed in the 2023 Policy, which Governance progress. With an overall ofPerformance Shares for the Chief are intended to improve flexibility and objective of securing top talent and Executive, the Group Finance Director competitiveness, are: rewarding sustainable long-term value andthe Chief Operating Officer. • Group Finance Director – Annual creation, the Committee focused on the • For the President and Chief Executive bonusopportunity; following areas: Officer, BAE Systems, Inc. the Committee • President and Chief Executive Officer, proposes to increase the Performance • Alignment to strategy: The overall Policy BAESystems, Inc. – Long-term incentive Share award from 298% to 440% of and incentive metrics were evaluated opportunity; and salary and maintain the Restricted Share against the Company’s strategy, purpose • revisions to long-term incentive metrics. award at150% of salary. and key priorities to ensure that the Policy | remains fit for purpose. This included | These are referenced below with further | • The Committee is acutely aware of the | | --- | --- | --- | | incorporating Environmental, Social and | context and commentary provided in the | unique context in which our US executive | | Governance measures into our incentives. | Remuneration Committee Chair’s report | director operates. The Committee has | | | onpages 160 to 163. | applied careful judgement to delicately | • Flexibility: In addition to having a balance the strategic importance of our transparent remuneration framework, Salary US business, the market practice of itwas important for the Policy to have • The overall process for determining salary relevant US aerospace and defence peers, flexibility in design construct and choice increases remains unchanged. and the corporate governance and best of metrics, as well as the ability for the • In general, increases will continue to be practice requirements that come with Committee to respond to exceptional no greater than the wider workforce. being an executive director of a UK plc. external factors. • Salary levels will continue to consider • Having reflected on the President and • Global competitiveness: The appropriate market comparisons and for Chief Executive Officer, BAE Systems, Inc.’s Committee assessed the Policy against UK executive directors this will include strong performance and successful relevant markets to ensure the Company subsets of the FTSE 100 including the leadership of our US business, and can attract and retain the key talented FTSE 50 and FTSE 30. following a detailed review of the individuals needed to deliver the strategy. totalremuneration package of relevant • Corporate governance best practice: Annual incentive plan (AIP) US aerospace and defence peers, the Throughout the review of the Policy, the • The overall structure of the AIP remains Committee determined that it was Committee considered governance best unchanged including the approach to appropriate to propose an increase practice and the views of institutional determining performance metrics and intheLTI opportunity. shareholders. This review considered thebonus deferral mechanism as the • The Committee will maintain its ability bestpractice in the US as well as the UK. Committee believes these remainfit todetermine performance measures, • Alignment with shareholder interests: forpurpose. weightings and targets for each LTI TheCommittee conducted an extensive • The maximum award levels for the award. As part of this, and to provide shareholder consultation in which views ChiefExecutive, the President and Chief greater flexibility around the most were sought on the key features of the Executive Officer, BAE Systems, Inc. and appropriate metrics and weightings, Policy focusing on any revisions. The Chief Operating Officer are unchanged. theminimum weighting of 20% being Committee Chair engaged with our applicable to the Total Shareholder Return • The maximum award level for the Group majorshareholders and welcomed their (TSR) metric will be removed. Finance Director will be 200%, increased feedback in formulating this Policy. | from 160% to fairly reflect the expansion | • Performance Shares granted from 2023 | | --- | --- | | ofhis managerial responsibilities and | willfeature an ESG metric in line with | | bring into line with other Group Finance | theCommittee’s previous commitment. | Directors in the FTSE 30. • For 2023, the ESG metric will have a 10% | • Confirmation that non-financial metrics | weighting and is based on the reduction | | --- | --- | | will continue to be based on a combination | of Group greenhouse gas (GHG) emissions | | of personal performance objectives | (Scope 1 and 2) aligned to a science- | | linkedto our strategic objectives, safety | based pathway. TSR will have a 15% | | measures, and diversity and inclusion | weighting; Earnings per Share and Cash | | targets. To support our focus on our | Flow will each have 30% weighting;with | | sustainability agenda, specific quantifiable | the remaining 15% measured on Return | | and appropriate Environmental, Social | on Capital Employed (replacing the | | and Governance (ESG) metrics will be | Strategic Progress metric). | included within the non-financial key strategic objectives (KSOs) element of theAIP for 2023. BAE Systems plc Annual Report 2022 191 Governance / Directors’ report / Directors’ remuneration policy Benefits Remuneration policy for other employees • Modest changes to benefits including | limited financial and tax advice support, | • Confirmation that LTI grants below | | --- | --- | | executive medical for the US executive | executive director level will continue | | director and, for UK executive directors, | tobemade in line with 2023 policy, | | the introduction of medical benefits and | reflecting the relevant geographies | | anincrease to the car allowance. | andwiththe following differences: | – Performance Shares will vest after three Pension years subject to meeting the required • As previously stated, the Committee performance conditions; and recognises the requirements of – share options will no longer be granted. institutional investors and the UK Corporate Governance Code to align Non-executive directors’ fees executive director pension contributions • Subject to election as Chair at the 2023 with the wider workforce level. As such, AGM, the current Chair designate’s fee the Chief Executive’s employer pension will be initially set at £700,000 (consistent contribution rate has been reduced to the with the fee for the current Chair). weighted average employer contribution rate of UK active members. • Non-executive directors receive a basic fee. An additional fee is paid for committee Recruitment membership (with the exception of the • Maximum opportunities on recruitment Nominations Committee), for those who for incentives (excluding buyouts of chair a committee and/or undertake the existing incentives) will be subject to role of Senior Independent Director. themaxima stated in the policy table. • From April 2023, the travel allowance hasbeen discontinued. Consideration of employment conditionselsewhere in the Company Further details provided in relation to building the Committee’s understanding ofreward arrangements applicable to thewider workforce. Stakeholder considerations Further details provided in relation to the Committee’s engagement with shareholders on the topic of executive remuneration. 192 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ## Executive directors’ policy table ### Base salary Purpose and link to strategy Recognise market value of role and individual’s skills, experience and performance to ensure the business can attract andretain talent. Operation Salaries are reviewed annually. Business and individual performance, skills, the scope of the role and the individual’s time in the role aretaken into account when setting and assessing salaries, as is market data for similar roles in the relevant market comparator group. The comparator groups for UK executive directors are comprised of subsets of the FTSE 100 including the FTSE 30 and FTSE 50. For the President and Chief Executive Officer, BAE Systems, Inc., the comparators are drawn from companies in the US aerospace and defence sectors, together with similar organisations in the general industry sector reflecting the size and geography of BAE Systems, Inc. Maximum opportunity When considering salary increases for the executive directors in their current roles, the Committee considers the general level of salary increase across the Group and in the relevant external market. Actual increases for the executive directors in their current roles will generally not exceed the average percentage increase for employees as a whole, taking account of the level of movement within the relevant UK/US comparator group. As a maximum, in exceptional circumstances (such as a material increase in job size or complexity while performing the same role, or a recently appointed executive director where the salary is positioned low against the market), the increase is not expected to exceed 10% inany single year for executive directors performing the same role. If an individual’s role changes then a salary increase above 10% may be awarded in any single year to position their salary appropriately in accordance with the base salary principles described under ‘Operation’ above. No new executive director role will have a salary greater than the Chief Executive at that time. Performance metrics, weighting and time period applicable None. BAE Systems plc Annual Report 2022 193 Governance / Directors' report / Directors' remuneration policy # Executive directors' policy table continued # Annual incentive # Purpose and link to strategy Drive and reward annual performance of individuals and teams on 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. # Operation The annual incentive is driven off in-year financial performance, corporate responsibility and other non-financial objectives measured at the Group and individual level. One-third of the total net annual incentive amount is subject to compulsory deferral for three years in BAE Systems shares without any matching. Cash dividends are payable to the participants on the shares held during this three-year deferral period. A malus/clawback mechanism may be applied to any bonus, and a malus mechanism may be applied to the deferred bonus shares until up to the end of the three-year deferral period, where: - the Company is entitled to terminate employment for cause or the participant has engaged in misconduct (including breach of policy) which gives rise to other disciplinary sanction; - the results of the Company and/or relevant business or businesses for any period have been restated or subsequently appear materially inaccurate or misleading; - any Group company or business unit has made a material financial loss; and/or - the measurement of any performance condition does not reflect the actual performance of the Company over the performance period. # Maximum opportunity Chief Executive: 225% of salary. Chief Operating Officer: 200% of salary. Group Finance Director: 200% of salary. President and Chief Executive Officer, BAE Systems, Inc.: 225% of salary. The payout for on-target performance is 50% of the payout for maximum performance (which is shown as the respective maximum opportunity percentages above). In respect of the financial metrics, the payout for achieving threshold performance is 20% of the payout for maximum performance, with no payout for performance less than threshold. Payout for performance between threshold, target and maximum is calculated on a straight-line basis. # Performance metrics, weighting and time period applicable Performance is assessed on an annual basis, using a combination of the Group's main performance indicators for the year and other objectives designed to support the Group's strategy. Metrics, which will include financial and non-financial metrics as well as the achievement of personal objectives, will be determined and weighted each year according to business priorities and may be structured as targets to be achieved, or underpins which, if not achieved, will reduce payouts. 75–80% of targets will relate to financial metrics aligned with long-term earnings and cash targets. The non-financial element will be based on a combination of personal performance objectives that provide a clear line of sight to our strategic objectives including those in relation to environmental, social and governance (ESG), safety measures, and diversity and inclusion (D&I)*. Metrics, targets and weightings to be determined annually. Metrics and weightings applicable in 2023: For UK executive directors: Group EPS – 45%. Group net cash/(debt) – 22.5%. Group order intake – 7.5%. For US executive director: Group EPS – 15%. Group net cash/(debt) – 7.5%. Group order intake – 2.5%. BAE Systems, Inc. EBIT – 30%. BAE Systems, Inc. net cash/(debt) – 15%. BAE Systems, Inc. order intake – 5%. Key strategic objectives (KSOs) designed to support the Group's strategy and with safety and D&I applying as a downward underpin on this element – 25%. *See notes 4 and 5 on page 199 regarding the selection and weighting of performance metrics. All bonus payments are at the discretion of the Committee, which will be based on an assessment of the individual's personal contribution to business performance over the relevant year and leadership behaviours demonstrated in making that contribution, relative to others. See note 6 on page 199 regarding the application of the reasonableness discretion. 194 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ### Long-Term Incentives (LTI) Operation Long-term incentives will operate under the BAE Systems Long-Term Incentive Plan which is subject to approval by shareholders at the2023AGM. The size of awards granted is based on a percentage of salary, which is divided by the share price around the time of the grant to determine the number of shares subject to the award. Dividend equivalents in respect of vested shares may be paid at the time of vesting (or exercise, in the case of options) and are not taken into account when determining individual limits. A malus and clawback mechanism may be applied, until two years after vesting, or if sooner, the fifth anniversary of grant, or the occurrence of certain corporate events to all awards granted on or after 25 March 2015 where: – the Company is entitled to terminate employment for cause or the participant has engaged in misconduct (including breach of policy) which gives rise to other disciplinary sanction; – the results of the Company and/or relevant business or businesses for any period have been restated or subsequently appear materially inaccurate or misleading; – any Group company or business unit has made a material financial loss; and/or – the measurement of any performance condition does not reflect the actual performance of the Company over the performance period. Awards and performance conditions can be adjusted to take account of variations of share capital and other transactions or events. On a change of control or similar transaction, awards generally will vest to the extent performance conditions are then satisfied (ifapplicable) and then be pro-rated to reflect the acceleration of vesting unless the Committee decides otherwise. Alternatively, awards may be exchanged for equivalent awards over shares in the acquiring company. The share plan rules may be amended from time to time by the Committee in certain circumstances including minor changes for administrative, tax or other regulatory purposes. Subject to this Policy, performance conditions of awards already granted may be amended in accordance with their terms or if anything happens which causes the Committee reasonably to consider it appropriate to do so. Maximum opportunity Over the lifetime of this Policy, the Committee will have discretion to vary the weighting of different types of awards within the frameworkset out below, but the overall LTI Expected Value (EV) will remain the same (assuming the LTI EV is calculated as 50% offacevalue for Performance Shares and 100% of face value for Restricted Shares): – UK executive directors’ awards will consist of Performance Shares only. – US executive directors’ awards will consist of a mix of Performance Shares and Restricted Shares (with the annual grant of Restricted Shares comprising nomore than 150% of salary), ensuring competitiveness of overall LTI opportunity in line with US market practice. Performance metrics, weighting and time period applicable The Committee will establish the targets for each measure at the start of each performance period based on Group projections and market expectations for the business. The performance conditions for previous awards are described in the Annual remuneration report. See below in relation to Performance Shares. In addition to the primary performance tests set out below, the Committee confirms and recognises its obligation to judge the overall reasonableness of the rewards received relative to the overall business actions and results achieved. When determining the final performance condition outcome under Performance Share awards, the Committee will have discretion overthe number of awards vesting in light of other important factors in the business (reasonableness discretion). The discretion may result in vesting of awards going upwards (subject to maximum 100% vesting of awards) as well as downwards. Any factors will be properly considered as they arise and any discretion to the calculated results will be applied in a highly disciplined manner and the rationale and impact will be reported transparently. See notes 4 and 5 on page 199 regarding the selection and weighting of performance metrics. BAE Systems plc Annual Report 2022 195 Governance / Directors' report / Directors' remuneration policy # Executive directors' policy table continued # Long-Term Incentives – Performance Shares # Purpose and link to strategy Direct financial measures based on the Key Performance Indicators (KPIs) that drive our financial ambitions for the Company, and measures linked to our key long-term strategic priorities including our sustainability agenda, aligned to the interests of our shareholders. # Operation For UK executive directors, awards, typically in the form of nil-cost options, will vest subject to performance and service conditions on the fifth anniversary of grant. These will be exercisable between the fifth and tenth anniversary of grant or such shorter period as may be specified by the Committee. For US executive directors, awards are delivered as conditional share awards. To maintain the competitiveness of the LTI offering in the US, awards will vest automatically in three equal tranches on the third, fourth and fifth anniversary of grant, subject to three-year performance conditions. No additional holding periods apply. # Policy maximum opportunity Award levels applicable to UK executive directors for normal annual grants are as follows: Chief Executive: 370% of salary. Chief Operating Officer: 350% of salary. Group Finance Director: 335% of salary. Award levels applicable to US executive directors for normal annual grants (assuming the current LTI EV weightings in Performance Shares and Restricted Shares) are as follows: President and Chief Executive Officer, BAE Systems, Inc.: 440% of salary. The minimum value that an executive director can receive is zero on the basis of nil vesting, for example either due to the performance conditions not being achieved, or as a result of the application of reasonableness discretion that determines nil vesting of the awards. Threshold performance under the financial performance measures is 25% of the maximum for that measure. # Performance metrics, weighting and time period applicable Metrics and weightings for the 2023 award will be as follows (subject to the Committee's ability to adjust as set out below): - 15% of award based on Total Shareholder Return (TSR) relative to one or more appropriate comparator groups over the three-year performance period as selected by the Committee at the time of grant: - Vesting for each comparator group is determined as: nil vesting if TSR ranked below median in the comparator group; 25% vesting if TSR ranked at the median; 100% vesting if TSR ranked in the upper quintile; pro-rata vesting for performance between median and upper quintile. - If more than one comparator group is used, vesting of the TSR portion of the award will be determined by the average of the vesting outcomes from each comparator group. - Award subject to a secondary financial measure as set out on pages 185 and 186. - 30% of award based on average annual Earnings per Share (EPS) growth over the three financial years starting with that in which the award is granted, with 25% vesting for threshold performance, 50% vesting for target performance and 100% vesting for stretch performance. Pro-rata vesting for intermediate performance between threshold, target and stretch. - 30% of award based on three-year cumulative cash generation metric over the three financial years starting with that in which the award is granted, with 25% vesting for threshold performance, 50% vesting for target performance and 100% vesting for stretch performance. Pro-rata vesting for intermediate performance between threshold, target and stretch. - 15% of award based on Return on Capital Employed (ROCE) over the three financial years starting with that in which the award is granted, with 25% vesting for threshold performance, 50% vesting for target performance and 100% vesting for stretch performance. Pro-rata vesting for intermediate performance between threshold, target and stretch. - 10% of award based on one or more robust and measurable ESG objectives. Note that awards granted to executive directors are subject to application of reasonableness discretion in light of other important factors in the business as described earlier. The Committee can adjust the weighting of the performance conditions, and, if considered appropriate, may introduce an alternate performance condition aligned to the Company's strategy, or remove a performance condition set out above. See notes 4 and 5 on page 199. 196 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ### Long-Term Incentives – Restricted Shares Purpose and link to strategy Provide long-term reward through time-vesting awards principally in the Company’s US market. Operation The shares are subject only to the condition that the participant remains employed by the Group on the vesting date (three years after theaward date). Directors are required to retain their shares for a further two-year period, except for any shares that need to be sold tocover tax liabilities due in respect of the shares. During that time, they are subject to clawback as described above. However, this holding requirement will not apply following a change of control. These awards are not subject to a performance condition as they aredesigned to address competitive market practice and retention issues principally in the US. Non US-based executive directors are noteligible. Policy maximum opportunity Award levels applicable to US executive directors for normal annual grants (assuming the current LTI EV weightings in Performance Sharesand Restricted Shares) are as follows: President and Chief Executive Officer, BAE Systems, Inc.: 150% of salary. Performance metrics, weighting and time period applicable None. See notes 4 and 5 on page 199. ### Benefits Purpose and link to strategy Provide employment benefits which ensure that the overall package is market competitive when these elements are taken into account. Operation Benefits include provision of a company car (or cash equivalent), life assurance and ill-health benefit cover which are provided directly orthrough membership of the Company’s pension schemes, and financial and tax advice support. The main benefits in the UK include a car allowance (currently £25,000 perannum for the Chief Executive and £20,000 per annum for theGroup Finance Director), private use of a chauffeur-driven car and annual medical screening, medical benefits, financial and tax advice support, plus life assurance and ill-health benefit coverprovided through membership of the Company’s pension schemes. Opportunity for UK executive directors to participate in the Share Incentive Plan, a tax approved all-employee plan. In the US, benefits include parking and private use of a chauffeur-driven car and company aircraft, financial and tax advice support, medical, executive medical and dental benefits, and insured life and disability benefits. Additional benefits, such as relocation assistance, may also be provided in certain circumstances if considered reasonable and appropriate by the Committee. Relocation assistance comprises reimbursement for direct items of expenditure, such as legal, estateagency, removals and temporary accommodation. Directors’ and Officers’ insurance cover is also provided for all executive directors. Maximum opportunity Benefits are set at a level which the Committee considers to be appropriate against comparable roles in companies of similar size in the relevant market. Benefits are as reported and itemised within the single total figure shown as part of the Annual remuneration report on page 177. The maximum cost of such benefits will reflect the associated market-competitive cost of provision. Relocation assistance is based on actual costs incurred which are linked to the size and value of the property, plus a maximum relocation allowance of £2,500. Participation limits for the Share Incentive Plan are those set by the UK tax authorities from time to time. Performance metrics, weighting and time period applicable None. BAE Systems plc Annual Report 2022 197 Governance / Directors' report / Directors' remuneration policy # Executive directors' policy table continued # Pension # Purpose and link to strategy Provide competitive post-retirement benefits or cash allowance equivalent. # Operation The Chief Executive is a member of the Mercer Master Trust – BAE Systems Retirement Savings Plan (BAESRSP) into which the DC section of the BAE Systems Executive Pension Scheme was transferred. Recognising the requirements of institutional investors and the UK Corporate Governance Code, since 1 December 2022, the Chief Executive's employer pension contribution rate has been reduced to the weighted average employer contribution rate of UK active members. In the UK, the Company has a number of defined benefit plans which are closed to new entrants, with new hires being offered membership of the BAESRSP, a defined contribution pension scheme. Employer contribution rates for the different schemes range from 6% to approximately 50% of salary. The level of employer contribution based on a weighted average of UK active members across all schemes is approximately 14% as at 30 September 2022. Since 1 December 2022, the employer contribution to the Chief Executive's pension has been aligned to 14% of salary, being the wider workforce figure. For any new externally appointed UK executive directors, or internally appointed UK executive directors, membership of the BAESRSP is offered as the default pension vehicle. Employer contributions are currently set at 8% of base salary for those members contributing 6% of salary, in line with that available to the wider UK workforce participating in the Company's UK defined contribution arrangements. In certain circumstances, individuals may elect instead to receive some or all of their employer contributions as a cash allowance. Consistent with the above, the Group Finance Director is a member of the BAESRSP with employer contributions of 8% salary. Where the Annual Allowance (AA) is exceeded, as is the case with the Chief Executive and the Group Finance Director, each individual will receive employer contributions up to the AA limit and the remaining employer contributions will be paid as a salary supplement. Where UK executive directors' pension entitlement or accrual is restricted to the Lifetime Allowance (LTA) and/or the AA, the Company may offer a salary supplement to offset the impact of these restrictions. Any new US executive directors, whether externally appointed or internally appointed, would be offered participation in the US Section 401(k) defined contribution plan. The same provisions and features of the plan currently apply to the majority of participating active employees, with the company (i.e. employer) matching contributions up to a maximum of 6% of salary, subject to US regulatory limits. For any internally appointed US executive directors they will be able to maintain any previous pension plan arrangement on the basis that the same provisions and features of the plan align with those available to the relevant workforce. The President and Chief Executive Officer, BAE Systems, Inc. participates in a Section 401(k) defined contribution arrangement, as detailed above, and is also a participant in the BAE Systems Employees' Retirement Plan (ERP, a qualified pension plan) and the BAE Systems 2007 Benefit Restoration Plan (BRP 2007, a non-qualified pension plan). The ERP and BRP 2007 provide for either a lump sum or annuitised payments based on the accrued values at the time of separation from employment. Annual additional accruals are currently limited to $1,000 in the ERP and $500 in the BRP 2007. The same provisions and features of the plans apply to the majority of participating active employees. # Maximum opportunity Since 1 December 2022, the BAESRSP provides a maximum employer contribution rate for the Chief Executive of 14% of salary (in addition to employee contributions of 6% of salary), which is aligned with the wider workforce figure based on the weighted average employer contribution rate of UK active pension scheme members. The maximum employer contribution for any new externally appointed UK executive directors, or internally appointed UK executive directors will be in line with the level available to new joiners to the wider UK workforce which is currently 8% (in addition to employee contribution of 6%) of base salary. This is the level set for the Group Finance Director. Where UK executive directors' pension entitlement or accrual is restricted to the LTA and/or the AA, the Company may offer a salary supplement to offset the impact of these restrictions. With limited exceptions, the US Section 401(k) defined contribution plan currently provides company (i.e. employer) matching contributions up to a maximum of 6% of base salary, subject to US statutory limits. For US executive directors who are eligible to participate in the ERP and the BRP 2007, these plans provide a cash sum or annuity at retirement equal to the present value of all prior annual accruals and credits from the initial year of service eligibility through to the present. Since the start of 2013, annual additional accruals have been set at $1,000 from the ERP and $500 from the BRP 2007. 198 BAE Systems plc Annual Report 2022 Strategic report Governance Financial statements ## Notes to the executive directors' policy table ### Remuneration policy for other employees 1. The Company's approach to annual salary reviews is consistent across the Group, with consideration given to the scope of the role, level of experience, performance and market data for similar roles in other companies. 2. All leaders may participate in an annual bonus scheme with similar metrics to those used for the executive directors. Other employees may participate in performance-based incentive plans which vary by organisational level and with relevant metrics for the particular area of the business. 3. LTI grants may be made to the most senior managers in the business (approximately 600 individuals globally). The nature of the awards depends on the individual's location, roles and responsibilities, in particular: - performance conditions and targets for Performance Share grants made to participants below executive director level are made in line with those applying to executive directors with the exception of the TSR metric which does not apply; - for US participants below Executive Committee level, performance conditions and targets for Performance Share grants are tailored to reflect the strategic context and focus of the US business; - Performance Shares applicable to participants below executive director level vest on the third anniversary subject to meeting the required performance conditions; - Restricted Share grants are currently made to the most senior managers in the US businesses and vest after three years. Targeted awards may also be made to selected executives in UK and Rest of World with Committee approval; - one quarter of the total annual incentive amount is subject to compulsory deferral for three years in BAE Systems shares without any matching for the majority of UK and Rest of World participants that receive LTI grants; and - Minimum Shareholding Requirements are in place for the majority of individuals globally that receive LTI grants. ### Performance measures and targets 4. The Committee selected the performance conditions because these are central to the Company's overall strategy and are the key metrics used by the executive directors to oversee the operation of the business. Any non-financial performance targets are determined by the Committee in consultation with the Environmental, Social and Governance Committee as appropriate. 5. The performance conditions, weightings and targets are determined annually by the Committee (within the parameters set out above), taking account of the Group's strategic objectives, the internal business plan and budgets, as well as external market expectations and general economic conditions. The Committee is of the view that the performance targets for the annual bonus are commercially sensitive and that it would be detrimental to the interests of the Company to disclose them before the start of the financial year. The targets will be disclosed retrospectively after the end of the relevant financial year. 6. Under the various scheme rules and under this Policy for the AIP and LTI, the Committee has discretion to override the formulaic outcome of performance measures if it determines that it is not reflective of underlying performance for that metric or for the business as a whole (reasonableness discretion). This discretion may apply upwards (subject to maximum 100% vesting) or downwards (subject to a minimum 0% vesting). Any factors will be properly considered as they arise and any discretion to the calculated results will be applied in a highly disciplined manner and the rationale and impact will be reported transparently. ### Minimum Shareholding Requirement (MSR) 7. The Committee has agreed a policy whereby the 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 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 (see below). 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 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 the MSR Initial Values and Subsequent Values for executive directors as a percentage of salary: | | Initial Value | Subsequent Value | | --- | --- | --- | | Chief Executive | 150% | 300% | | Chief Operating Officer | 100% | 200% | | Group Finance Director | 100% | 200% | | President and Chief Executive Officer, BAE Systems, Inc. | 212.5% | 425% | BAE Systems plc Annual Report 2022 199 Governance / Directors’ report / Directors’ remuneration policy ## Executive directors’ policy table continued Illustration of application of remuneration policy The charts below show the value of the package each of the executive directors would receive in the first year of operation of the Policy. There is currently no Chief Operating Officer in role so no chart is provided. The values are based on 2023 levels for base salaries, benefits and pension and assume that the office-holders at the date of this Policy coming into effect are employed throughout the first year of operation of the Policy. Annual and long-term incentives are based on awardsapplying in 2023. The charts assume the following scenarios: – minimum fixed pay includes salary, benefits and pension as provided in the single figure table on page 177 of the 2022 Annual Report andRestricted Shares award for the US executive director awarded at 150% salary (excluding share price growth); – on-target pay assumes on-target performance is met in respect of variable elements (annual and long-term incentives); – maximum pay assumes variable elements pay out in full; and – 50% share price appreciation assumes all variable elements pay out in full and there is 50% gain in share price over the relevant vestingperiod in respect of Performance Shares and Restricted Shares awards received, and excludes dividends. The minimum, on-target and maximum scenarios below exclude any share price appreciation and dividends. President and Chief Executive Officer, | Chief Executive (£’000) | | | | | | | BAE Systems, Inc. ($’000) | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | 0% share price | | | | | | | 0% share price | | | | | | | | 13% 25% 62% | | | | | 10,597 | | 28% 18% 54% | | | | 13,417 | | | 16% | 32% | | 52% | | 8,413 | | 29% | 24% | | 47% | 10,190 | | | 28% | 27% | 45% | | | 4,900 | | 44% | 19% | 37% | | 6,552 | | | 100% | | | | | 1,388 | | 100% | | | | 2,914 | | | 0 2,000 4,000 | | | | 6,000 8,000 12,00010,000 | | | 0 2,000 4,000 6,000 8,000 14,00012,00010,000 | | | | | | | | | | Value of package (£’000) | | | | | | Value of package ($’000) | | | Group Finance Director (£’000) 0% share price | 14% 24% 62% | | | | 6,117 | | --- | --- | --- | --- | --- | | 17% | 31% | | 52% | 4,860 | | 30% | 26% | 44% | | 2,854 | | 100% | | | | 847 | | 0 1,000 2,000 | | | 3,000 4,000 6,0005,000 | | Value of package (£’000) Fixed elements of remuneration Annual bonus Performance Shares | 5 5 5 | | | --- | --- | | appreciation appreciation appreciation | | | Maximum Maximum Maximum | | | On-target On-target On-target | | | Minimum Minimum Minimum | 200 BAE Systems plc Annual Report 2022 | Financial statementsStrategic report Governance ## Non-executive directors’ (NEDs) policy table ### Fees Purpose and link to strategy To attract NEDs who have a broad range of experience and skills to provide independent judgement on issues of strategy, performance, resources and standards of conduct. Operation NEDs’ fees are set by the Non-Executive Directors’ Fees Committee. NEDs receive a basic fee. An additional fee is paid for committee membership (with the exception of the Nominations Committee), forthose who chair a committee and/or undertake the role of Senior Independent Director. Fees are reviewed periodically, taking into account time commitment requirements and responsibility of the individual roles, andafterreviewing practice in other comparable companies. The Chair’s fees are set by the Committee and are reviewed periodically, taking into account time commitment requirements andresponsibility, and after reviewing practice in other comparable companies. Maximum opportunity Actual fee levels are disclosed in the Annual remuneration report for the relevant financial year. The current Chairman’s fee is £700,000 per annum and will not change during his remaining term of office. Sir Roger Carr is due to step down fromhis role as Chairman at the close of the 2023 AGM and be succeeded by the current Chair designate. The current Chair designate’s fee will be set at the same level and will not be reviewed earlier than the first anniversary of her appointment. The aggregate cost of fees and benefits paid to NEDs (including the Chair) will not exceed an annual limit of £3.0m and the cost offees and benefits paid to the Chair will not exceed £1.25m annually. Performance metrics, weighting and time period applicable None. ### Benefits Purpose and link to strategy Reimbursement for reasonable and documented expenses incurred in the performance of duties. Operation NEDs are not eligible to participate in any pension benefits provided by the Company, nor do they participate in any performance- relatedincentives. The Chairman is provided with a chauffeur-driven car. This may be used for non-Company business, but the cost of the benefit of suchusage shall be paid by the Chairman. The current Chair designate will also be provided with a similar benefit on her appointment asChair. The Company reimburses travel and subsistence costs (including payment of the associated tax cost) incurred by the director or his/her spouse whilst undertaking duties on behalf of the Company that may be assessed as a benefit for tax purposes. Directors’ and Officers’ insurance cover is also provided for all directors. Maximum opportunity See the aggregate limit under ‘Fees’ above. Prior commitments For the duration of this Policy, the Company will honour any commitments made in respect of executive director and non-executive director remuneration and benefits before the date on which either: (i) the Directors’ remuneration policy becomes effective; or (ii) an individual becomes a director, even where such commitments are not consistent with the policy set out in this report or prevailing at the time any suchcommitment was made or is fulfilled. BAE Systems plc Annual Report 2022 201 Governance / Directors’ report / Directors’ remuneration policy ## Recruitment Approach to recruitment remuneration The recruitment policy provides an appropriate framework within which to attract individuals of the required calibre to lead a company ofBAE Systems’ size, scale and complexity. The Committee determines the remuneration package for any appointment to an executive director position, either from within or outside BAE Systems. Operation The Committee will take into consideration all relevant factors, including overall total remuneration, the type of remuneration being offered and the jurisdiction from which the candidate was recruited, and will operate in order to ensure that arrangements are in the best interests of the Company and its shareholders without paying more than is necessary to secure the individual of the required calibre. The fees and benefits applicable to the appointment of any new non-executive directors will be in accordance with the policy tableonpage 201. Opportunity The Committee seeks to align the remuneration package offered with the policy set out in the executive directors’ policy table above recognising that participation under the policy above varies by geography. On appointment as executive director, maximum opportunities for participation in the annual incentive plan and long-term incentive awards (excluding buyouts, for which see below) will be subject to the maxima stated in the policy table. To facilitate recruitment, the Committee may additionally make awards on hiring an external candidate to ‘buy out’ existing incentives or,in exceptional circumstances, other elements of remuneration forfeited on leaving the previous employer. In doing so, the Committee will take account of relevant factors including any performance conditions attached to these awards, the form in which they were granted (e.g. cash or shares) and the time over which they would have vested. Buy-out awards would be capped to be no higher, on recruitment, than the expectedvalue of those forfeited. Full details will be disclosed in the next Annual remuneration report following recruitment which will include details of the need to grant a buy-out award. Fixed elements (base salary, retirement and other benefits) The salary level will be set in accordance with the principles for setting base salary described in the executive directors’ policy table above. The executive director shall be eligible to participate in applicable BAE Systems’ employee benefit plans in line with the agreed policy, including coverage under applicable executive and employee pension and benefit programmes in accordance with the terms and conditions of such plans, as may be amended by the Company in its sole discretion from time to time. In the case of promotion of an existing Group employee to an executive directorship on the Board, commitments made before such promotion will continue to be honoured whether or not they are consistent with the remainder of this Policy. However, in the case of pensions for a UK-based executive director, the individual will be offered provision in line with the agreed policy on page 198 and any previous arrangement will cease (unless it complies with the policy). Annual Incentive Plan The appointed executive director will be eligible to earn a discretionary annual bonus in accordance with the annual incentive construct asdescribed in the executive directors’ policy table above. The level of opportunity will be consistent with the policy disclosed in the executive directors’ policy table in this report and subject tothemaximums referred to therein and under ‘Opportunity’ above. Long-Term Incentive Plan The executive director will be eligible for equity awards in such amounts as the Committee may determine in its sole discretion, subject tothis Policy and the rules of the Long-Term Incentive Plan. The level of opportunity will be subject to the maximums referred to under ‘Opportunity’ above. Other For internal and external appointments, the Committee may agree that the Company will meet certain relocation expenses in accordance with the provisions described under the Benefits section of the policy table on page 197. 202 BAE Systems plc Annual Report 2022 Strategic report Governance Financial statements ## Service contracts and letters of appointment ### Executive directors #### Operation In accordance with long-established policy, all executive directors have rolling service agreements which may be terminated in accordance with the terms of these agreements. #### Dates of appointment for executive directors | Name | Date of appointment | Notice period | | --- | --- | --- | | Charles Woodburn^{1} | 1 July 2017 | 12 months either party | | Brad Greve | 1 April 2020 | 12 months either party | | Tom Arseneault^{2} | 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. #### Notice period The Committee's policy is that the notice periods in the service contracts of executive directors will not exceed 12 months. In exceptional circumstances, in relation to recruiting a new executive director operating in the US, the notice period may be extended to a maximum of 24 months and structured such that it reduces to no more than 12 months by no later than the end of the first complete year of service. #### Change of control No executive director has provisions in his service contract that relate to a change of control of the Company. ### Chairman Sir Roger Carr's appointment is documented in a letter of appointment and he is required to devote no fewer than two days a week to his duties as Chairman. His appointment as Chairman (which commenced on 1 February 2014) will automatically terminate if he ceases to be a director of the Company. The Company announced on 28 July 2022 that Sir Roger would retire as Chairman and director at the conclusion of the Company's 2023 Annual General Meeting (AGM) due to be held on 4 May 2023. ### Chair designate The Company announced on 28 July 2022 that Cressida Hogg would be appointed to the Board as a non-executive director with effect from 1 November 2022, and would succeed Sir Roger Carr as Chair at the conclusion of the Company's 2023 AGM due to be held on 4 May 2023. Cressida Hogg's appointment as Chair is documented in a letter of appointment and she will be required to devote no fewer than two days a week to her duties as Chair. 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 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 The non-executive directors do not have service contracts but do have letters of appointment detailing the basis of their appointment. The dates of their original appointment are shown below: | Name | Date of appointment | Expiry of current term | | --- | --- | --- | | Nick Anderson | 01.11.2020 | 31.10.2023 | | Crystal E Ashby | 01.09.2021 | 31.08.2024 | | Dame Elizabeth Corley | 01.02.2016 | 31.01.2024 | | Jane Griffiths | 01.04.2020 | 31.03.2026 | | Chris Grigg | 01.07.2013 | 31.12.2023 | | Cressida Hogg^{1} | 01.11.2022 | 04.05.2023 | | Ewan Kirk | 01.06.2021 | 31.05.2024 | | Stephen Pearce | 01.06.2019 | 01.06.2025 | | Nicole Piasecki | 01.06.2019 | 01.06.2025 | | Lord Sedwill | 01.11.2022 | 31.10.2025 | 1. Appointed non-executive director and Chair designate on 1 November 2022, as announced on 28 July 2022 she will succeed Sir Roger Carr as Chair at the conclusion of the Company's AGM due to be held on 4 May 2023 when her term as Chair will commence (see paragraph entitled 'Chair designate' above). 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 periods of notice. In accordance with the UK Corporate Governance Code, all directors are subject to annual election or re-election at the Company's AGM. BAE Systems plc Annual Report 2022 203 Governance / Directors’ report / Directors’ remuneration policy ## Service contracts and letters of appointment continued Policy on payment for loss of office Operation The policy on payment for loss of office provides a clear set of principles that govern the payments that will be made for loss of office, and take account of the need to ensure a smooth transition for leadership roles during times of change. The policy that will apply for a specific executive director’s payments for loss of office will be the policy that was in place at the point when the payments for loss of office were agreed for the executive director in question. Any termination payment made in connection with the departure of an executive director will be subject to approval by the Committee, having regard to the terms of the service contract or other legal obligations and the specific circumstances surrounding the termination, including whether the scenario aligns to an example under the approved leaver criteria, performance, service and health or other circumstances that may be relevant. In addition to payments described below, the Committee may pay such amounts as are necessary to settle or compromise any claim or byway of damages, where the Committee views it as in the best interests of the Company to do so. In the event of the termination of anexecutive director’s contract, it is the Committee’s policy to seek to limit any payment to not more than one year’s base salary. Where appropriate the Company may also meet a director’s reasonable legal expenses in connection with their termination of their appointment. Notice and pay in lieu of notice For executive directors, employment contracts will generally be on terms that allow them to be terminated on up to 12 months’ notice from either party or by way of payment of base salary in lieu of notice, at the Company’s discretion. Neither notice nor a payment in lieu ofnotice will be given in the event of gross misconduct. For US-based executive directors, employment contracts are typically for one-year periods and renew automatically unless one party givesat least 60 days’ notice of non-renewal. If the employment is (a) terminated by the Company (other than for cause as defined in thecontract) or (b) the executive director resigns for a ‘Good Reason’ (as defined in the contract), the executive director is entitled to atermination payment equal to (i) one year’s base salary and (ii) a bonus payable at target level pro-rated for service for the relevant financial year. Theywill also be entitled to a continuation of medical benefits for 18 months (or a cash payment in lieu). In all cases, the Committee seeks to include provisions in directors’ employment contracts to allow the Company to pay any notice orseverance payments on a phased basis and apply mitigation if the executive director secures alternative employment, to the extent thatthis is reasonably practicable taking into account local labour law, tax and other relevant considerations. Other than notice payments, the Company has no obligation to make any termination payments when the Chairman’s appointment terminates. Non-executive directors do not have periods of notice and the Company has no obligation to make any termination payments when their appointment terminates, other than to pay fees in accordance with the appointment letters. Retirement benefits As governed by the rules of the relevant pension plan. No enhancement for leavers will be made. Annual Incentive Plan Where an executive director’s employment is terminated after the end of a performance year but before the payment is made, theexecutive director will remain eligible for an annual incentive award for that performance year subject to an assessment based onperformance achieved over the period. No award will be made in the event of gross misconduct. The Committee may, as set out below, exercise its discretion to allow an annual incentive payment for the year of cessation as part ofthetermination package for executive directors. Where it does so, the exercise of the discretion and reason why the Committee considered such action appropriate will be disclosed. Where an executive director leaves during the relevant performance year by reason of death, ill-health, disability, retirement, a transfer ofbusiness, redundancy, or in such circumstances as the Committee determines, the Committee may use its discretion to determine that an executive director will remain entitled to receive abonus (subject to an assessment based on performance over the performance year and pro-rated for time) in respect of the financial yearin which the individual ceased employment. In all cases, one-third of the bonus willbe subject to compulsory deferral as set out previously, unless the Committee decides otherwise. The Committee’s policy is not to award an annual incentive for any portion of the notice period not served. The treatment set out above does not apply to the President and Chief Executive Officer, BAE Systems, Inc. and the applicable treatment isprovided inthe section on notice and pay in lieu of notice. 204 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance Long-Term Incentive Plans The treatment of outstanding share awards in the event that an executive director leaves is governed by the relevant share planrules. Under the Long-Term Incentive Plan, where an executive director leaves the Group by reason of ill-health, injury, disability, retirement with the agreement of the Company (other than in the case of Restricted Shares held by US executive directors), sale of a business or employing company, redundancy or leaving in such circumstances as the Committee determines (each an ‘approved leaver’), unvested awards and options generally continue and vest on the normal vesting date (or, in the case of Performance Shares held by US executive directors, the first normal vesting date or, if later, cessation), unless the Committee determines that the awards should vest on cessation. Any performance conditions will be applied at the time of vesting. On vesting, the number of shares under award will, unless the Committee decides otherwise, be reduced pro-rata to reflect the period in which the executive director was in employment as a proportion of the relevant vesting period (or, in the case of Performance Shares held by US executive directors, as a proportion of the initial three-year vesting period). In the event of death, awards generally vest at the time of death subject to the satisfaction of any performance conditions at that time. Awards are then pro-rated as set out above. Where an executive director’s employment is terminated for any other reason, his unvested awards and options will lapse. Options normally remain exercisable for six months after cessation (or vesting, if later) and 12 months after death. If the Committee exercises its discretion to treat a director as an approved leaver as permissible under the leaver provisions of the share plan rules, the exercise of the discretion and reason why the Committee considered such action appropriate will be disclosed. Where an executive director’s employment is terminated or an executive director is under notice of termination for any reason at the dateof award of any Long-Term Incentive awards, no Long-Term Incentive awards will be made. Consideration of employment conditions elsewhere in the Company The Committee has responsibility for reviewing remuneration and related policies applicable to the wider workforce. To support this, the Committee is provided with periodic in-depth sessions on a range of wider workforce remuneration topics that are designed to provide theCommittee with visibility of remuneration practices in the different sectors and geographies in which we operate and for the different populations within the wider workforce across the Company globally. This enables the Committee to take the wider workforce into account when setting the policy for executive remuneration. The Committee also receives insights from the broader employee population using an engagement survey. Whenconsidering salary increases for the executive directors, the Committee considers thegeneral level of salary increase across the Groupand in the external market. Whilst the Committee does not consult directly with employees as part of the process for reviewing executive pay, the annual report is theprincipal means through which we communicate and engage with employees on how executive remuneration aligns with that of the wider workforce. The Company’s employees who are shareholders in the Company receive communications with a direct link to the annual report on the Company’s website and an invitation to vote on the resolutions being put to the AGM, including those resolutions on executive remuneration. The results of employee shareholder voting on the AGM resolutions, including those relating to executive remuneration, are subsequently reported to the Board for discussion. Stakeholder considerations In line with our commitment to full transparency and engagement with our shareholders on the topic of executive remuneration, the Remuneration Committee Chair conducts an annual programme of consultation with our major shareholders and institutional investors. Thistypically involves setting out the changes planned for the following year, including seeking shareholder input and views on various executive remuneration matters including the development of, or potential changes to, remuneration policy or arrangements. The Remuneration Committee Chair values direct engagement with our shareholders and makes themself available for such meetings throughout the year to hear shareholders’ perspective on remuneration matters. BAE Systems plc Annual Report 2022 205 Governance / Directors’ report ## Statutory and other information Company registration Office of Fair Trading undertakings Share buyback BAE Systems plc is a public company limited As a consequence of the merger between During the year: by shares registered in England and Wales British Aerospace and the former Marconi – 24,253,065 ordinary sharesof 2.5p each with the registered number 1470151. Electronic Systems businesses in 1999, the were repurchased underthe buyback Company gave certain undertakings to the programme of up to£500m announced Directors Secretary of State for Trade and Industry on 29 July 2021 andsuch repurchased The current directors who served during (now the Secretary of State for Business, shares have been cancelled. The total the2022 financial year are listed on pages Energy and Industrial Strategy). In February consideration for the purchase of these 131 to 133. On 1 November 2022 Lord 2007, the Company was released from the shares, including commission and stamp Mark Sedwill was appointed to the Board majority of these undertakings and the duty, was £131,814,268; and asa non-executive director and Cressida remainder have been superseded and varied – 82,997,065 ordinary shares of 2.5p each Hogg was appointed to the Board as a by a new set of undertakings. Compliance were repurchased under the buyback non-executive director and Chair designate. with the undertakings is monitored by a programme of up to £1.5bn announced Dame Carolyn Fairbairn and Ian Tyler also compliance officer. Further information on 28 July 2022 and such repurchased served on the Board until 5 May 2022. regarding the undertakings and the contact shares have been cancelled. The total details of the compliance officer may be On 28 July 2022, the Company announced consideration for the purchase of these obtained through the Company Secretary that Sir Roger Carr would retire from the shares, including commission and stamp atthe Company’s registered office or Board and as Chairman at the conclusion of duty, was £663,842,889. through the Company’s website. the Company’s Annual General Meeting on The percentage of called upshare capital 4 May 2023, and that Cressida Hogg would Profit forecast (excluding treasury shares) as at succeed him as Chair at the conclusion of In its Annual Report issued on 30 March 31 December 2022, which the shares that meeting. 2022, the Group made the following repurchased in 2022 represents, is 3.65%. Dividend statement in respect of the year ending Treasury shares 2021, which is regarded as a profit forecast An interim dividend of 10.4p per share for the purposes of the Financial Conduct As at 1 January 2022, the number of shares waspaid on 30 November 2022. The Authority’s Listing Rule 9.2.18: held in treasury totalled 236,807,031 directors propose a final dividend of 16.6p (having a total nominal value of £5,920,176 per ordinary share. Subject to shareholder “While the Group is subject to geopolitical and representing 7.0% of the Company’s approval, the final dividend will be paid and other uncertainties, the following called up share capital at 31 December on1 June 2023 toshareholders on the guidance is provided on current expected 2021). During 2022, the Company used shareregister on21 April 2023. operational performance. Guidance is 16,720,072 treasury shares (having a total provided on the basis of an exchange rate Annual General Meeting (AGM) nominal value of £418,002 and representing of $1.38:£1, which is in line with the actual The Company’s AGM will be held on 0.5% of the Company’s called up share 2021 exchange rate, therefore guidance is 4 May2023. capital at 31 December 2022) to satisfy the same for both reported and constant awards under the Free and Matching Certain information in the Strategic report exchange rates. elements of the Share Incentive Plan The following items are set out in the For the year ending 31 December 2022, (4,944,130 shares in aggregate), awards Strategic report on pages 1 to 127: | | underlying EBIT is expected to increase in | under the Free and Matching elements of | | --- | --- | --- | | – disclosures in relation to the use | the range of 4% to 6%. Underlying | the International Share Incentive Plan | | offinancial instruments; | earnings per share is expected to increase | (560,098 shares in aggregate), awards | | | inthe range of 4% to 6%.” | vested under the Performance Shares | – particulars of important events affecting element of the Long-Term Incentive Plan the Group which have occurred since Underlying EBIT was £2,479m in 2022. (4,277,781 shares), awards vested under 31 December 2021; Underlying earnings per share was 55.5p theRestricted Shares element of the – an indication of likely future developments in2022. Long-Term Incentive Plan (1,560,388 in the business of the Group; Political donations shares)and options exercised under the – an indication of the activities of the Group Share Options element of the Long-Term No political donations were made in 2022. in the field of research and development; Incentive Plan and Executive Share Option Issued share capital | – actions taken to introduce, maintain or | | Plan (5,377,675 shares). The treasury shares | | --- | --- | --- | | develop arrangements aimed at employees; | As at 31 December 2022, BAE Systems’ | utilised in respect of the Share Incentive | | | issued share capital of £82,445,460 | Plan, the International Share Incentive Plan, | – greenhouse gas emissions; comprised 3,297,818,342 ordinary shares and the Performance and Restricted Shares – employee engagement (including regard of2.5p each and one Special Share of £1. elements of the Long-Term Incentive Plan to employee interests and encouraging This figure includes 901,301 ordinary shares were disposed of by the Company for nil employees to be shareholders); purchased under the share buyback consideration. The 5,377,675 shares – fostering business relationships with programme immediately prior to the year disposed of by the Company in respect suppliers, customers and others; and end, but not yet settled at that point, which ofthe Share Options element of the – policy in relation to employment of the Company deems to have been cancelled Long-Term Incentive Plan and the Executive disabled persons. on purchase. Share Option Plan were disposed of by the Company for an aggregate consideration of £27,207,673. Asat 31 December 2022, 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 at 31 December 2022). 206 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance The rights to treasury shares are restricted The holder of the Special Share has the The Company is not aware of any inaccordance with the Companies Act rightto require the Company to redeem the arrangements between its shareholders and,in particular, the voting and dividend Special Share at par or convert the Special thatmay result in restrictions on the rights attaching to these shares are Share into one ordinary share at any time. transferof shares and/or voting rights. automatically suspended. Restrictions on transfer of securities Significant direct and indirect holders Rights and obligations of ordinary shares ofsecurities The restrictions on the transfer of shares On a show of hands at a general meeting inthe Company are as follows: As at 31 December 2022, the Company had every holder of ordinary shares present in been advised of the following significant – the Special Share may only be issued person and entitled to vote shall have one direct and indirect interests in the issued to,held by and transferred to the Special vote, and every proxy entitled to vote shall ordinary share capital of the Company: Shareholder or his successor or nominee; have one vote (unless the proxy is appointed – the directors shall not register any Percentage by more than one member in which case Name of shareholder notified allotment or transfer of any shares to a the proxy has one vote for and one vote Barclays PLC 3.98% foreign person, or foreign persons acting against if the proxy has been instructed by in concert, who at the time have more than BlackRock, Inc. 9.90% one or more members to vote for the 1 a 15% voting interest in the Company, or The Capital Group Companies, Inc. 14.18% resolution and by one or more members to who would, following such allotment Invesco Limited 4.97% vote against the resolution; or if the proxy ortransfer, have such an interest; Silchester International Investors LLP 3.01% has been instructed by one or more – the directors shall not register any person shareholders to vote either for or against 1. As at the date of this report, The Capital Group as a holder of any shares unless they have aresolution and by one or more of those Companies, Inc.’s percentage notified to the received: (i) a declaration stating that shareholders to use his discretion how to Company stood at 12.88%. upon registration, the share(s) will not vote). On a poll, every member present in beheld by foreign persons or that upon person or by proxy and entitled to vote shall Exercise of rights of shares in employee registration the share(s) will be held by have one vote for every ordinary share held. share schemes aforeign person or persons; (ii) such Subject to the relevant statutory provisions The trustees of the employee trusts do evidence (if any) as the directors may and the Company’s Articles of Association, notseek to exercise voting rights on shares require of the authority of the signatory holders of ordinary shares are entitled to held in the employee trusts other than on of the declaration; and (iii) such evidence adividend where declared or paid out of the direction of the underlying beneficiaries. or information (if any) as to the matters profits available for such purposes. Subject No voting rights are exercised in relation to referred to in the declaration as the to the relevant statutory provisions and shares unallocated to individual beneficiaries. directors consider appropriate; theCompany’s Articles of Association, Restrictions on voting deadlines | onareturn of capital on a winding-up, | – the directors may also refuse to register | | | --- | --- | --- | | holders of ordinary shares are entitled, | any instrument of transfer of shares | The notice of any general meeting | | afterrepayment of the £1 Special Share, | unless the instrument of transfer is in | shallspecify the deadline for exercising | | toparticipate in such a return. There are | respect of only one class of share and it | voting rights and appointing a proxy | | noredemption rights in relation to the | islodged at the place where the register | orproxies to vote in relation to resolutions | | ordinary shares. | of members is kept, accompanied by a | to be proposed at the general meeting. | | | relevant certificate or such other evidence | Thenumber of proxy votes for, against | Rights and obligations of the Special Share as the directors may reasonably require orwithheld in respect of each resolution The Special Share is held on behalf of the toshow the right of the transferor to arepublicised on the Company’s website Secretary of State for Business, Energy and make the transfer; after the meeting. Industrial Strategy (the ‘Special Shareholder’). – the directors may refuse to register an Appointment and replacement Certain provisions of the Company’s Articles allotment or transfer of shares in favour ofdirectors of Association cannot be amended without ofmore than four persons jointly; the consent of the Special Shareholder. Subject to certain nationality requirements – where a shareholder has failed to These provisions include the requirement mentioned below, the Company may by providethe Company with certain that no foreign person, or foreign persons ordinary resolution appoint any person information relating to their interest acting in concert, can have more than a tobe a director. inshares, the directors can, in certain 15% voting interest in the Company, the The directors also have the power to make circumstances, refuse to register a requirement that the majority of the appointments to the Board at any time. transferof such shares; directors are British, and the requirement Anyindividual so appointed will hold that the Chief Executive and any executive – certain restrictions may from time to officeuntil the next AGM and shall then Chairman are British. timebe imposed by laws and regulations beeligible for re-election. (for example, insider trading laws); The holder of the Special Share is entitled The majority of directors holding office – restrictions may be imposed pursuant to toattend a general meeting, but the Special must be British. Otherwise, the directors the Listing Rules of the Financial Conduct Share carries no right to vote or any other who are not British shall vacate office Authority whereby certain of the Group’s rights at any such meeting, other than to insuch order that those who have been employees require the Company’s speak in relation to any business in respect inoffice for the shortest period since approval to deal in shares; and of the Special Share. Subject to the relevant theirappointment shall vacate their office statutory provisions and the Company’s – awards of shares made under the first, unless all of the directors otherwise Articles of Association, on a return of Company’s Long-Term Incentive Plan agree among themselves. Any director capital on a winding-up, the holder of the 2014, Deferred Bonus Plan, Share Incentive whoholds the office of either Chairman Special Share shall be entitled to repayment Plan, International Share Incentive Plan, (inan executive capacity) or Chief Executive of the £1 capital paid up on the Special Group All-Employee Free Shares Plan and shall also be British. Share in priority to any repayment of capital International Profit Sharing Scheme are to any other members. subject to restrictions on the transfer of shares prior to vesting and/or release. BAE Systems plc Annual Report 2022 207 Governance / Directors’ report / Statutory and other information | The Company must have not less than | At the 2022 AGM, the directors were | Change of control – significant | | --- | --- | --- | | sixdirectors holding office at all times. | giventhe power to issue new shares up | agreements | | Ifthenumber is reduced to below six, | toanominal amount of £26,218,927. | | The following significant agreements thensuch number of persons shall be Thispower will expire on the earlier of the contain provisions entitling the appointed as directors as soon as is conclusion of the 2023 AGM or 30 June counterparties to exercise termination, reasonably practicable to reinstate the 2023. Accordingly, a resolution will be alteration or other similar rights in the event number of directors to six. The Company proposed at the 2023 AGM to renew of a change of control of the Company: may by ordinary resolution from time to theCompany’s authority to issue further – The Group entered into a £2bn Revolving time vary the minimum number of directors. new shares. Credit Facility dated 12 December 2013 All directors will stand for election or Conflicts of interest which was amended and restated on re-election in 2023 as required by the 27 October 2021. The facility provides As permitted under the Companies Act Company’s Articles of Association and that, in the event of a change of control 2006, the Company’s Articles of Association incompliance with the UK Corporate of the Company, the lenders are entitled contain provisions which enable the Board Governance Code. to renegotiate terms, or if no agreement to authorise conflicts or potential conflicts that individual directors may have. is reached on negotiated terms within Amendment of the Company’s Articles acertain period, to call for the repayment of Association To avoid potential conflicts of interest the or cancellation of the facility. The Revolving The Company’s Articles of Association may Board requires the Nominations Committee Credit Facility was undrawn as at only be amended by a special resolution at to check that any individuals it nominates 31 December 2022. a general meeting of shareholders. Where for appointment to the Board are free of – The Company has entered into a Restated class rights are varied, such amendments potential conflicts. In addition, the Board’s and Amended Shareholders Agreement must be approved by the members of each procedures and the induction programme with European Aeronautic Defence class of shares separately. for new directors emphasise a director’s andSpace Company EADS N.V. (EADS) personal responsibility for complying with In addition, certain provisions of the Articles and Finmeccanica S.p.A. (Finmeccanica) the duties relating to conflicts of interest. of Association cannot be amended without relating to MBDA S.A.S. dated The procedure adopted by the Board for the consent of the Special Shareholder. 18 December 2001 (as amended). In the theauthorisation of conflicts reminds These provisions include the requirement event that control of the Company passes directors of the need to consider their duties that no foreign person, or foreign persons to certain specified third-party acquirors, as directors and not grant an authorisation acting in concert, can have more than the agreement allows EADS and unless they believe, in good faith, that this a15% voting interest in the Company, Finmeccanica to exercise an option to would be likely to promote the success therequirement that the majority of the terminate certain executive management ofthe Company. As required by law, directors are British, and the requirement level nomination and voting rights, and thepotentially conflicted director cannot that the Chief Executive and any executive certain shareholder information rights vote on an authorisation resolution or be Chairman are British. ofthe Company in relation to the MBDA counted in the quorum. Any authorisation joint venture. Following the exercise of Powers of the directors granted may be terminated at any time this option, the Company would have the andthe director is informed of the The directors are responsible for the right to require the other shareholders to obligation to inform the Company without management of the business of the purchase its interest in MBDA at fair delay should there be any material change Company and may exercise all powers market value. in the nature of the conflict or potential ofthe Company subject to applicable conflict so authorised. – The Company and EADS have agreed legislation and regulation, and the thatif Finmeccanica acquires a controlling Articlesof Association. Directors’ indemnities interest in the Company, EADS will | At the 2022 AGM, the directors were | The Company has entered into deeds of | increase its shareholding in MBDA to 50% | | --- | --- | --- | | giventhe power to buy back a maximum | indemnity with all its current directors and | by purchasing the appropriate number | | number of 314,658,597 ordinary shares | those persons who were directors for any | ofshares in MBDA at fair market value. | | ataminimum price of 2.5p each. | part of 2021 which are qualifying indemnity | | – The Company, BAE Systems, Inc., Themaximum price was the higher of provisions for the purpose of the Companies BAESystems (Holdings) Limited and (i)anamount equal to 105% of the average Act 2006. BAESystems Holdings Inc. entered into of the middle market quotations of the The directors of BAE Systems Pension arenewed Special Security Agreement, Company’s ordinary shares as derived from FundsTrustees Limited, BAE Systems 2000 effective date of 5 January 2023, with the London Stock Exchange Daily Official Pension Plan Trustees Limited, BAE Systems theUS Department of Defense regarding List for the five business days immediately Executive Pension Scheme Trustees Limited the management of BAE Systems, Inc. preceding the day on which such ordinary and Alvis Pension Scheme Trustees Limited inorder to comply with the US shares are contracted to be purchased, benefit from indemnities in the governing government’s national security and(ii) the higher of the price of the last documentation of the BAE Systems Pension requirements. In the event of a change independent trade and the highest Scheme, the BAE Systems 2000 Pension ofcontrol of the Company, the currentindependent bid on the London Plan, the BAE Systems Executive Pension Agreement may be terminated or altered Stock Exchange. | | Scheme and the Alvis Pension Scheme, | by the USDepartment of Defense. | | --- | --- | --- | | This power will expire at the earlier of the | respectively, which are qualifying indemnity | | | conclusion of the 2023 AGM or 30 June | provisions for the purpose of the Companies | | | 2023. A special resolution will be proposed | Act 2006. | | at the 2023 AGM to renew the Company’s All such indemnity provisions are in force authority to acquire its own shares. asat the date of this Directors’ report. 208 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance | – In June 2017, BAE Systems Surface Ships | construction, testing and commissioning | and the SCOD, if there is a change of | | --- | --- | --- | | Limited entered into a contract with the | of Boat 6 of the Astute Class Programme. | control of ASC Shipbuilding Pty Limited | | UK Ministry of Defence (MoD) for the | In March 2018, BAE Systems Marine | orBAE Systems Australia Limited, | | manufacture of the first batch of three | Limited entered into a contract with the | consentis required from the Australian | | Type 26 frigates. This contract was | MoD for the design, construction, testing | Commonwealth Government prior to | | amended and restated in November 2022 | and commissioning of Boat 7 of the | anychange of control occurring. If there | | to include the manufacture of the second | Astute Class Programme. Where the | isa change of control without notice | | batch of five Type 26 frigates. Where the | MoDconsiders that a proposed change | ornotwithstanding an objection, the | | MoD considers that a proposed change | ofcontrol of BAE Systems Marine Limited | Commonwealth may terminate the Head | | ofcontrol of BAE Systems Surface Ships | would be contrary to the defence, national | Contract, take any action to mitigate an | | Limited would be contrary to the defence, | security or national interest of the UK, then | actual or potential threat to Australia’s | | national security or national interest of | the change of control shall not proceed | national security interests, or exercise its | | the UK or where the change of control | until agreement is established with the | call option under the SCOD and regain | | would result in increased costs to the | MoD. In the event that there is a change | ownership of ASC Shipbuilding Pty Limited. | | MoD under the contract, then the | of control of BAE Systems Marine Limited, | – In March 2022, the Hawk Integrated | | changeof control shall not proceed until | notwithstanding the objection of the MoD | Support contract was entered into | | agreement with the MoD is established. | on such grounds, the MoD shall be entitled | between BAE Systems (Operations) | | Ifthere is a change of control without | to terminate the agreements immediately. | Limited and the MoD for the provision | | notice or notwithstanding the objection | – In December 2011, BAE Systems Marine | ofsupport services to the Royal Air Force’s | | of the MoD on such grounds, then the | Limited entered into a contract with the | fleet of Hawk fast jet trainer aircraft and | | MoD may terminate the contract with | MoD for the design of the Dreadnought | the Royal Air Force Aerobatic Team | | immediate effect. | submarines. Where the MoD considers | Aircraft. Where the MoD has any | | – The FMSP Ships Engineering | that a change of control of BAE Systems | concerns about the actual or proposed | | Managementand Delivery agreement | Marine Limited would be contrary to | change of control of BAE Systems | | between BAE Systems Surface Ships | thedefence, national interest or national | (Operations) Limited (which may include, | | Limited and the MoD was entered into | security of the UK, then the change of | but not limited to, potential threats of | | on31 March 2021 for the provision of | control shall not take place until agreement | national security), then the UK shall | | surface ship engineering management | is reached with the MoD on how to | advisethe Contractor inwriting of any | | and delivery services relating to HM Naval | proceed. In the event that there is a | concerns it may have. The MoD may | | Base Portsmouth. Where the MoD | change of control notwithstanding the | terminate the Contract within six months | | considers that a proposed change of | objection of the MoD on such grounds, | of the Authority being notified by | | control of BAE Systems Surface Ships | the MoD shall be entitled to terminate | theContractor. | | Limited would be contrary to the defence, | thecontract with immediate effect. | – In June 2021, BAE Systems Australia Limited | | national security or national interest of | – In September 2016, BAE Systems Marine | entered into a contract providing the | | the UK, then the change of control shall | Limited entered into a contract with the | framework for the provision of in-service | | not proceed until agreement with the | MoD for the initial phase of manufacturing | support for the Hawk aircraft until June | | MoD is established. If there is a change of | activities for the Dreadnought Class | 2031. If there is a change of control of | | control without notice or notwithstanding | programme. This contract was extended | BAE Systems Australia Limited or | | the objection of the MoD, the MoD shall | and amended in March 2022 to include | BAESystems plc without consent from the | | be entitled to terminate the agreement. | continuation of manufacturing and | Australian Commonwealth Government, | | – In November 2020, BAE Systems Global | associated activities on all four boats | the Australian Commonwealth may | | Combat Systems Munitions Limited | inthe class. Where the MoD considers | terminate the contract. | | andthe MoD entered into a 15-year | that a proposed change of control of | | In addition, the Company’s share plans agreement for the provision of BAESystems Marine Limited would be contain provisions as a result of which ammunition to UK forces (the Next contrary to the defence, national security options and awards may vest and become Generation Munitions Solution (NGMS) or national interest of the UK, then the exercisable on a change of control of the agreement) from 2023 to 2037. Where change of control shall not proceed until Company in accordance with the rules of the MoD has any concerns regarding agreement is established with the MoD. the plans. | aproposed change of control of | Inthe event that there is a change of | | --- | --- | | BAESystems Global Combat Systems | control of BAE Systems Marine Limited, | | Munitions Limited and such concerns | notwithstanding the objection of the | | arenot resolved, then if the change | MoD on such grounds, the MoD shall | | ofcontrol proceeds, the MoD may | beentitled to terminate the agreements | | terminate the contract. | immediately. | | – In November 2012, BAE Systems Marine | – In December 2018, BAE Systems’ | | Limited entered into a contract with the | subsidiary, ASC Shipbuilding Pty Limited, | | MoD for the design, construction, testing | entered into a contract providing the | | and commissioning of Boat 4 of the | framework for the design and | | Astute Class programme. In November | manufacture of Hunter Class Frigates | | 2015, BAE Systems Marine Limited | forthe Royal Australian Navy (Head | | entered into a contract with the MoD | Contract). As part of the acquisition | | forthe design, construction, testing | ofASC Shipbuilding Pty Limited from | | andcommissioning of Boat 5 of the | theAustralian Commonwealth, | | Astute Class programme. In March 2016, | BAESystems Australia Limited entered | | BAE Systems Marine Limited entered into | into a Sovereign Capability and Option | | a contract with the MoD for the design, | Deed (SCOD). Under the Head Contract | BAE Systems plc Annual Report 2022 209 Governance / Directors’ report / Statutory and other information Auditor The directors are responsible for keeping ### adequate accounting records that are Responsibility statement of the Deloitte LLP has indicated its sufficient to show and explain the parent ### willingnesstobe re-appointed as the directors in respect of the Annual company’s transactions and disclose Company’s auditor and a resolution ### Report and financial statements withreasonable accuracy at any time the proposing its re-appointment will financial position of the parent company Each of the directors listed belowconfirms beputtothe 2023 AGM. and enable them to ensure that its financial that to the best oftheir knowledge: Statement of directors’ responsibilities statements comply with the Companies Act – the financial statements, prepared in inrespect of the Annual Report and 2006. They are responsible for such internal accordance with the applicable set thefinancial statements control as they determine is necessary ofaccounting standards, give a true The directors are responsible for toenable the preparation of financial andfair view of the assets, liabilities, preparingthe Annual Report, and the statements that are free from material financialposition and profit or loss Group and parent company financial misstatement, whether due to fraud oftheCompany, and the undertakings statements in accordance with applicable orerror, and have general responsibility included in the consolidation taken as law and regulations. fortaking such steps as are reasonably awhole; and opento them to safeguard the assets Company law requires the directors – the Strategic report and Directors’ report, oftheGroup and to prevent and detect toprepare Group and parent company taken together, include a fair review of fraud and other irregularities. financial statements for each financial thedevelopment and performance of the year.Under that law, they are required Under applicable law and regulations, business, and the position of the Company toprepare the Group financial statements thedirectors are also responsible for and the undertakings included in the inaccordance with International Financial preparing a strategic report, directors’ consolidation taken as a whole, together Reporting Standards as adopted by the report, directors’ remuneration report with a description of the principal risks UK(IFRS) and applicable law, and have andcorporate governance statement that and uncertainties that they face. elected toprepare the parent company comply with that law and those regulations. In addition, each of the directors considers financial statements in accordance with The directors are responsible for the that the Annual Report, taken as a whole, UKaccounting standards, including maintenance and integrity of the corporate isfair, balanced and understandable, Financial Reporting Standard (FRS) 101, and financial information included on andprovides the information necessary Reduced Disclosure Framework. thecompany’s website. Legislation in forshareholders to assess the Company’s Under company law, the directors must theUK governing the preparation and position and performance, business notapprove the financial statements unless dissemination of financial statements may modeland strategy. they are satisfied that they give a true and differ from legislation in other jurisdictions. Sir Roger Carr Chairman fair view of the state of affairs of the Group Statement of disclosure of information Charles Woodburn Chief Executive and parent company, and of their profit toauditor Tom Arseneault President and Chief orloss for that period. In preparing each The directors who held office at the date Executive Officer ofthe Group and parent company financial ofBAESystems, Inc. ofapproval of this Directors’ report confirm statements, the directors are required to: that, so far as they are each aware, there is Brad Greve Group Finance Director – select suitable accounting policies no relevant audit information of which the Nick Anderson Non-executive director andthen apply them consistently; Company’s auditor is unaware; and each Crystal Ashby Non-executive director – make judgements and estimates director has taken all the steps that he/she Dame Elizabeth Corley Non-executive director thatarereasonable, relevant, reliable ought to have taken to make himself/herself Jane Griffiths Non-executive director andprudent; aware of any relevant audit information Chris Grigg Non-executive director – for the Group financial statements, andto establish that the Company’s Cressida Hogg Non-executive director statewhether they have been prepared auditoris aware of that information. Ewan Kirk Non-executive director inaccordance with IFRSs as adopted bythe UK; Stephen Pearce Non-executive director Nicole Piasecki Non-executive director – for the parent company financial statements, state whether applicable Lord Sedwill Non-executive director UKaccounting standards have been followed, subject to any material On behalf of the Board departures disclosed and explained in | theparent company financial statements; | Sir Roger Carr | | --- | --- | | – assess the Group and parent company’s | Chairman | | ability to continue as a going concern, | 22 February 2023 | 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 | Directors’ report | | --- | --- | | operations, or have no realistic alternative | The Directors’ report was approved by the Board of directors on 22 February 2023. | | but to do so. | David Parkes | Company Secretary 210 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ## Independent Auditor’s report ## to the members of BAE Systems plc only ### Report on the audit of the financial statements ### 1. Opinion We have audited the financial statements 3. Summary of our audit approach which comprise: Key audit matters In our opinion: – the consolidated income statement; The key audit matters that we identified – the financial statements of – the consolidated and Parent Company inthecurrent year were: BAESystems plc (the Parent Company) statements of comprehensive income; – revenue and margin recognition andits subsidiaries (the Group) give – the consolidated and Parent Company onlong-termcontracts; atrue and fair view of the state of the statements of changes in equity; – carrying value of goodwill; and Group’s and of the Parent Company’s – the consolidated and Parent Company affairs as at 31 December 2022 and – valuation of post-employment balance sheets; ofthe Group’s profit for the year benefitobligations. thenended; – the consolidated cash flow statement; Within this report, key audit matters are – the Group financial statements have – the related notes 1 to 37 in the identified as follows: been properly prepared in accordance consolidated Group financial statements, including the associated accounting Increased level of risk with United Kingdom adopted international accounting standards; policies; and Similar level of risk – the Parent Company financial – the related notes 1 to 13 in the Parent Decreased level of risk statements have been properly Company financial statements, including prepared in accordance with the associated accounting policies. Materiality UnitedKingdom Generally Accepted The financial reporting framework that The materiality that we used for the Group Accounting Practice, including Financial hasbeen applied in the preparation of the financial statements was £87.5m which Reporting Standard 101 Reduced Group financial statements is applicable law wasdetermined on the basis of profit Disclosure Framework; and and United Kingdom adopted international before tax adjusted for adjusting items – the financial statements have been accounting standards. The financial aswell as fair value and foreign exchange prepared in accordance with the reporting framework that has been applied adjustments on financial instruments as requirements of the Companies in the preparation of the Parent Company described further in section 6 below. Act2006. financial statements is applicable law and Scoping United Kingdom Accounting Standards, | including FRS 101 Reduced Disclosure | Twenty-seven components were subject | | --- | --- | | Framework (United Kingdom Generally | toaudit procedures (2021: thirty-one | | Accepted Accounting Practice). | components). Of these, six components | (2021: the same six components) were ### 2. Basis for opinion subject to a full-scope audit. Of the | We conducted our audit in accordance | remaining twenty-one components, | | --- | --- | | withInternational Standards on Auditing | nineteen (2021: twenty-one, with four | | (UK) (ISAs (UK)) and applicable law. | different components now within this | | Ourresponsibilities under those standards | scope) were subject to an audit of specified | | are further described in the auditor’s | account balances and two (2021: four | | responsibilities for the audit of the financial | withtwo now removed from scope) were | | statements section of our report. | subject to specified audit procedures. | | We are independent of the Group and | The components, which were either subject | | theParent Company in accordance with | to a full-scope audit or audit of specified | | theethical requirements that are relevant | account balances, contribute 89% of | | toouraudit of the financial statements in | revenue (2021: 87%), 86% of profit before | | the UK, including the Financial Reporting | tax (2021: 84%) and 91% of total assets | | Council’s (the FRC’s) Ethical Standard as | (2021: 92%). The remaining components | | applied to listed public interest entities, | were subject to other procedures, including | | andwe have fulfilled our other ethical | conducting analytical reviews, making | | responsibilities in accordance with these | enquiries, and evaluating and testing | | requirements. The non-audit services | management’s Group-wide controls. | provided to the Group and Parent Company Significant changes in our approach for the year are disclosed in note 2 to the There have been no significant changes financial statements. We confirm that we inourapproach from the prior year. have not provided any non-audit services prohibited by the FRC’s Ethical Standard tothe Group or the Parent Company. We believe that the audit evidence we haveobtained is sufficient and appropriate to provide a basis for our opinion. BAE Systems plc Annual Report 2022 211 Governance / Auditor’s report / Independent Auditor’s report ### 4. Conclusions relating 5. Key audit matters In order to identify the key contracts wherethere is a significant risk of material ### togoingconcern Key audit matters are those matters that, misstatement, we undertook a contract risk In auditing the financial statements, we inour professional judgement, were of assessment process at each component have concluded that the directors’ use of most significance in our audit of the utilising data analytics, the latest contract the going concern basis of accounting in financial statements of the current period information, our understanding of the thepreparation of the financial statements and include the most significant assessed business, the results of prior audits and is appropriate. risks of material misstatement (whether review of external information about market ornot due to fraud) that we identified. Our evaluation of the directors’ assessment and geo-political conditions which might These matters included those which had of the Group’s and Parent Company’s ability impact certain contracts. We held meetings thegreatest effect on: the overall audit to continue to adopt the going concern with key finance and contract managers, strategy; the allocation of resources in basis of accounting included: attended quarterly business review meetings theaudit; and directing the efforts of and other key management meetings, – obtaining an understanding of relevant theengagement team. readand understood underlying contract controls over the going concern models These matters were addressed in the documentation, and obtained management prepared by management, including the context of our audit of the financial support for key contract judgements. In review of the inputs and assumptions statements as a whole, and in forming addition, we looked for contracts that might used in those models; ouropinion thereon, and we do have higher levels of judgement associated – testing the accuracy of management’s notprovidea separate opinion on with the risk of schedule delivery or technical models, including agreement to the thesematters. complexity, fixed price contracts which mostrecent Board approved budgets increase the risk of contract losses and andforecasts; 5.1. Revenue and margin recognition otherindicators such as any potential onlong-term contracts – challenging the key assumptions of these climate-related risks, that could increase Refer to page 145 (Audit Committee report) forecasts by: therisk of a material impact on the andNote 1 (accounting policy andfinancial – reading analyst reports, industry financialstatements. disclosures) dataand other external information As a result of our risk assessment, we Revenue: and comparing these with identified two contracts where we consider £21,258m (2021: £19,521m) management’s estimates; there to be the highest degree of judgement – comparing forecast revenue with required in estimating the outturn margin Key audit matter description theGroup’s order book and position. These are: The estimation of both overall lifetime historicalperformance; – Type 26 frigates; and contract margin and the appropriate level – evaluating the historical accuracy of ofrevenue and profit to recognise in any – Armored Multi-Purpose Vehicles forecasts prepared by management; | | single accounting period requires the | (AMPV),specifically Low-Rate Initial | | --- | --- | --- | | – considering potential macro- | exercise of judgement. Within BAE Systems’ | Production 2 (LRIP2). | | economicimpacts on the forecasts | contract portfolio there are a number of | | We consider the level of risk associated asaconsequence of the current programmes where the estimates required withthis key audit matter has remained geo-political environment; in reaching these judgements are complex consistent with the prior year due to a – assessing the sensitivity of the and could lead to a material error within the similar level of judgement existing and headroom and management’s financial statements if reached incorrectly. nosignificant changes to the forecast forecasts; and Consequently, we consider that revenue and revenues on the contracts. margin recognition represent a significant – assessing the sufficiency of the risk to our audit and a key audit matter. How the scope of our audit Group’sdisclosure concerning thegoingconcern basis. respondedto the key audit matter We focus a greater proportion of audit effort on a number of contracts where we Our contract testing approach included: Based on the work we have performed, consider there to be the highest degree of Testing the relevant controls wehave not identified any material judgement required and design contract uncertainties relating to events or conditions – We obtained an understanding of specific procedures to mitigate the that, individually or collectively, may cast andtested relevant manual and IT associated risks. significant doubt on the Group’s and Parent controls within management’s Lifecycle Company’s ability to continue as a going Management (LCM) Framework and concern for a period of at least twelve project accounting processes which months from when the financial statements management have established to ensure are authorised for issue. that contracts are appropriately forecast, managed, challenged and accounted for. In relation to the reporting on how the Group has applied the UK Corporate – As part of this, we observed the controls Governance Code, we have nothing in operation by attending a sample of material to add or draw attention to in project contract status review meetings, relation to the directors’ statement in the quarterly business review meetings and financial statements about whether the Group-level meetings to validate the directors considered it appropriate to adopt various levels of challenge applied to the going concern basis of accounting. theforecasts. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. 212 BAE Systems plc Annual Report 2022 Strategic report Governance Financial statements ## Challenging assumptions and estimates To gain assurance over the contract judgements and estimates made, our work included: - making inquiries of contract project teams and other personnel to obtain an understanding of the performance of the project throughout the year and at year-end; - analysing historical contract performance and understanding the reason for in-year movements or changes; - conducting production site visits to inform our challenge of the cost to complete estimate and understanding of contract status; - testing the underlying calculations used in the contract assessments for accuracy and completeness, including the estimated costs to complete the contract alongside associated contingencies. As part of this we considered historical forecasting accuracy of costs, including on similar programmes, and challenged future cost expectations with reference to those data points; - examining external correspondence to assess the timeframe for delivery of the product or service and any judgements made in respect of these; - examining external evidence to assess contract status and estimation of variable consideration (including associated recoverability of contract balances), such as customer correspondence and, for certain contracts, meeting with the customer directly; - enquiring with in-house and external legal counsel regarding contract-related litigation and claims; - considering the potential impact of the Ukraine conflict and supply chain issues, such as inflation, on the cost to complete estimate for significant contracts; and - 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 The results of our testing were satisfactory. Through our testing of the contracts in relation to this key audit matter we consider the judgements made by the Group in recognising revenue and profit to be reasonable. ## 5.2. Carrying value of goodwill Refer to page 145 (Audit Committee report) and Note 8 (accounting policy and financial disclosures) Goodwill: £11,819m (2021: £10,910m) ### Key audit matter description The Group holds material goodwill balances, the majority of which are in the US. Management performs an impairment review of the carrying value of each Cash Generating Unit (CGU) on an annual basis in line with the requirements of IAS 36. The impairment assessment involves judgement in considering whether the carrying value of the CGU is recoverable. Determining the recoverable amount involves significant estimation including: - forecasting future cash flows; - determining the discount rate; and - determining long-term growth rates. As outlined in Note 8, in the current year, the Group has changed the basis on which goodwill is monitored and assessed for impairment, alongside the reorganisation of the Group's segments and changes made to its internal processes. As a result, in the current year the key audit matter has focused on the change in basis for assessing goodwill for impairment in addition to the annual impairment assessment performed. ### Change in basis for assessing goodwill for impairment Determining the level in the Group's reporting structure at which goodwill is assessed for impairment requires judgement and changes should only be made when there has been a change in the way in which the Group is organised or managed and/or when there has been a change in the processes and responsibility for monitoring goodwill for impairment at a particular level in the Group. We therefore determined there to be an increased risk surrounding two aspects of this change: 1) that the basis for the change is not appropriate based on the relevant facts and circumstances; and 2) in making the change, there is a risk that an impairment that would otherwise have been identified on the previous basis could be overlooked. We pinpointed this specific aspect of the risk to the Land Munitions CGU. This was as a result of the lower headroom in comparison to the other CGUs during 2021. An impairment assessment was performed by management prior to the transition to the new basis, to assess whether an impairment would have arisen for the Land Munitions CGU. The Land Munitions CGU held £427m of goodwill at 31 December 2021 and 30 June 2022, the latter date being the point at which management changed the basis of assessing goodwill for impairment. ### Annual goodwill impairment assessment Through our risk assessment, we determined there to be a heightened level of impairment risk in relation to the carrying value of goodwill, amounting to £3,753m associated with the Platforms & Services (P&S) CGU. The basis on which management is assessing this goodwill for impairment has not changed. Through our risk assessment, we determined that the key drivers of future cash flows in the P&S CGU were future demand, long-term contract margin and operating cash flow assumptions, predominantly within the Combat Mission Systems business. In addition, given the macro-economic environment, we identified that both the Land Munitions and P&S CGUs were sensitive to movements in the discount rate and long-term growth rate. The size of the balance, level of judgement applied, both in revising the basis on which goodwill is assessed for impairment and also in carrying out the annual impairment review, combined with the audit effort involved in challenging these risk areas means we consider this to be a key audit matter. BAE Systems plc Annual Report 2022 213 Governance / Auditor's report / Independent Auditor's report ### How the scope of our audit responded to the key audit matter We have performed a series of specific audit procedures to address the key audit matter identified above. #### Change in basis for assessing goodwill for impairment In respect of the change in the level at which goodwill is assessed for impairment, we performed the following to address the two risks noted above: - we obtained a detailed understanding of the changes made by management to the Group's operating segments, and also to relevant financial processes and responsibilities for monitoring goodwill and assessing it for impairment. This included challenging the underlying rationale behind the changes and the impact of these changes on the way the sectors and lines of business are managed, and goodwill is monitored; - we challenged management on the timing of changes and the appropriate date at which amendments to the level at which goodwill is assessed should become effective, in particular given this impacted the point at which the Land Munitions CGU was considered for impairment on the previous basis and thus which discount rate to apply; - we challenged management's impairment assessment of the Land Munitions CGU on the previous basis in the same way as outlined for the annual goodwill impairment assessment below; - we considered available contradictory evidence and whether an impairment should first be recorded under the previous basis before transition to the current basis of assessment; and - we assessed the extent of disclosures provided in the financial statements with respect to the rationale behind the change and its overall impact on goodwill impairment assessment. ### Annual goodwill impairment assessment A number of procedures were performed in relation to the annual impairment assessment of the P&S CGU and in considering whether there was any impairment at the date of change in basis for assessing goodwill of the Land Munitions CGU. These included the following: - we obtained a detailed understanding of management's process and tested key controls for performing the CGU impairment assessment. Specific focus was given to understanding management's process and controls over forecasting future cash flows, forecasting for the impact of climate-change and determination of the key assumptions as detailed above; - we challenged forecast performance with reference to the recent and historical performance of the CGU, historical forecasting accuracy and external industry benchmarks. This included performing sensitivity analysis to evaluate the impact of changing a range of assumptions including suppressed growth, lower margin assumptions, changes in the discount rate and impacts of the higher inflationary environment; - we assessed the risks and opportunities identified by management in their forecasts and modelled different scenarios to understand the impact of both adverse and positive changes to the future forecasts and the level of associated headroom; - we challenged the long-term growth rate assumption with reference to market, industry and economic data combined with an evaluation of the underlying key contracts that underpin the future growth assumptions; - in the case of P&S, where management's forecasts have assumed significant contract renewals or an extension to existing contracts (i.e. moving from initial to full rate of production), we challenged those judgements with operational management and, where relevant, correspondence with the customer over contract renewal; - operating cash flow and working capital assumptions were challenged, including the impact of climate change-related risks, with reference to our revenue contract audit work for key programmes, as well as historical trends for each line of business; - we tested the integrity of management's impairment model used to derive the recoverable amount; and - we involved our valuation specialists to support our challenge of the applicable discount rate. ### Key observations We have undertaken audit procedures on the forecasts for the P&S and Land Munitions businesses and are satisfied that the assumptions are reasonable and justifiable based on available evidence, both internal and external. We completed our assessment of the change in basis of monitoring and assessing goodwill for impairment and concluded that the approach taken is appropriate and reflects underlying changes to the business, including specifically the level at which goodwill is monitored for performance purposes internally. We are also satisfied that a material impairment would not have arisen for the Land Munitions CGU on the previous basis of assessment, prior to the change. The Group concluded that no reasonably possible change in a key assumption would lead to impairment, and we concur with that conclusion. #### 5.3. Valuation of post-employment benefit obligations Refer to page 145 (Audit Committee report) and Note 25 (accounting policy and financial disclosures) Group's share of the net IAS 19 surplus after allocation to equity accounted investments (EAI): £646m (2021: £2,124m net deficit) Valuation of post-employment benefit obligation assets before allocation to equity accounted investments: £25,343m (2021: £31,580m) Valuation of post-employment benefit obligation liabilities before allocation to equity accounted investments: £23,868m (2021: £33,866m) #### Key audit matter description The principal post-employment benefit schemes are held in the UK and US and are funded defined benefit schemes, with assets held in separate trustee-administered funds. We identified the following areas which were the focus of our procedures in auditing the Group's net post-employment benefit surplus as a key audit matter: 214 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance Net surplus position How the scope of our audit Liabilities A number of the Group’s post-employment respondedto the key audit matter In relation to post-employment benefit benefit schemes have moved from a net Net surplus position obligations, we have performed the deficit position to a net surplus position following procedures: In relation to the recognition of the net during 2022. As outlined in note 25, – we obtained a detailed understanding surplus position, and the related tax theability to recognise the net surplus and performed walkthroughs of treatment, we have performed the onthe balance sheet is dependent on the management’s process, with specific following procedures: legalrights of the scheme employer and focus on understanding key controls – in conjunction with our legal andactuarial thepractical ability of the Group to recover relating to the valuation of the post- experts we inspected the legal agreements the surplus, which then determines the employment benefit obligation including for the relevant pension schemes and the necessary tax treatment. The surplus is a maintenance of membership data; legal advice received bythe Company as function of the value of the scheme assets, to its right to recover the surplus; – in conjunction with our actuarial less the value of the defined benefit specialists, we challenged the obligation liability. – we challenged management’s assessment assumptions used in the IAS 19 valuation, of the basis on which the net surplus Assets including assessing and challenging the could be recovered by the Group in the reasonableness of the assumptions Given the size and nature of the scheme future including with input from our legal against available market data and assets there is significant audit effort and actuarial experts; and benchmarking against peers; required in ensuring the valuation of assets – in conjunction with our tax specialists, is appropriate. – we gave specific focus to challenging weevaluated the tax treatment of the thebasis on which the Group determined Certain asset classes are inherently more pension surplus taking into account the the inflation rate actuarial assumptions judgemental to value and have a higher above assessment and the rationale for forthe UK and US Schemes, with level of associated valuation risk, namely: which the withholding tax charge has been reference to our own determined ranges, netted off against the surplus position – private equity investments; and other market data sources; rather than being recognised gross. – pooled investment vehicles without – we considered the adjustment made published market prices; Assets bymanagement to the CMI (Continuous – private placements; In relation to asset valuations, we have Mortality Investigation) 2021 mortality performed the following procedures with tables to apply a weighting factor to – longevity swap derivatives; and increased focus on those assets with a reflect its assessment of the potential – property assets. | | higher valuation risk as noted above: | COVID-19 mortality impact, with | | --- | --- | --- | | Liabilities | – we obtained a detailed understanding | referenceto advice the Group has | | | and performed walkthroughs of | received from its actuaries; | The key judgements relating to the post-employment benefit obligation management’s process and reviewed – we assessed the relevant control liabilities include: relevant internal controls reports from environment of the third-party service providers, with specific focus administrators who maintain membership – inflation assumptions for the UK schemes, onunderstanding key controls relating data on behalf of the Group through including the basis for determining the tothe valuation of certain asset classes. review of their ISAE 3402 controls inflation risk premium; We then tested the pension asset valuation reporting, including considering and – discount rates; and controls for a number of the asset classes responding to any findings therein; – mortality assumptions. operated both by management and – we agreed a sample of cash contributions relevant service providers; Given the significant size of the post- made into the pension funds; and employment benefit obligations at year-end, – we sought and obtained third party – we assessed the competence, capabilities small changes to these input assumptions confirmation from asset managers and/or and objectivity of the actuaries engaged can lead to material changes in the net custodians or other supporting evidence by management to perform the IAS19 surplus. Assumptions are also made as appropriate; valuations of the schemes. in the determination of the Group’s share – in conjunction with our actuarial ofassets and liabilities of multi-employer specialists, we challenged the fair value Key observations schemes in which it participates and the assumptions used to value the longevity We concluded our testing of the corresponding amounts attributed to swaps including the future projected assetsandare satisfied that they are otherparticipating employers, including mortality rates and discount rate; appropriately valued. BAESystems plc on a company-only – we assessed publicly-available information When taken together, we consider the basisand MBDA, as an EAI. on the assets (including fact sheets and discount rate, inflation andother key Whilst new risks have emerged in the prospectuses), comparing to internal and pension assumptions used in calculating current year as regards the need to consider external benchmarks (i.e. market prices, thepost-employment benefit obligation the recognition of a surplus and the related relevant indices or comparably priced tobe withinour independently developed tax treatment, we consider the overall level instruments) and reconciling inputs used reasonable range. of risk associated with this key audit matter by management to determine the asset values; and We are satisfied that the judgement taken is consistent with the prior year. on the relevant tax rate to apply to the – in the case of specialist asset classes, pension surplus and the net presentation suchas properties, we involved relevant ofthe surplus position is appropriate. specialists to challenge the third-party valuations performed with reference torecent market transactions, rental yields, and movements in the MSCI RealEstate index. BAE Systems plc Annual Report 2022 215 Governance / Auditor’s report / Independent Auditor’s report ### 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 Parent Company financial statements | Materiality | £87.5m (2021: £82.5m) £34.2m (2021: £39.5m) | | | --- | --- | --- | | Basis for determining | 4.3% of adjusted profit before tax of £2,034m | 0.7% of net assets of £4,712m (2021: 0.9% | | materiality | (2021: 4.7% of adjusted profit before tax | ofnet assets of £4,341m). | of£1,769m). This reflects adjusting itemsof £91m and fair value adjustments andforeign exchange movements on financial instruments of £136m, detailed in notes 1and 5 of the financialstatements. Rationale for the Adjusted profit before tax was considered to be We consider net assets the key benchmark benchmark applied themost relevant benchmark as it is considered usedby members of the Parent Company themost stable and comparable profit metric. inassessing financial performance. Theadjustments relate to items we consider one-offin nature and not reflective of the underlyingperformance of the business. We consider the measure suitable having also considered the other relevant benchmarks of profitbefore taxation, where our materiality equatesto 4.4%, or net assets, where our materialityequates to 0.8%. Component The work performed on components identified in our Group audit scope (excluding the Parent Company) materiality was completed to a component materiality level between £20.0m and £33.7m (2021: £20.4m and £31.7m). | | Adjusted | Group | | --- | --- | --- | | profit before tax | | materiality | | | £2,034m | £87.5m | Component materiality range £20.0m to £33.7m Audit Committee reporting threshold 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 Parent Company financial statements Performance 70% (2021: 70%) of Group materiality 70% (2021: 70%) of Parent Company materiality materiality Basis and rationale In determining performance materiality, we considered the following factors: fordetermining – the quantum and nature of the uncorrected misstatements identified in the prior year audit; performance materiality – 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£4.375m (2021: £4.125m), 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. 216 BAE Systems plc Annual Report 2022 £4.375m Financial statementsStrategic report Governance ### 7. An overview of the scope As each of the business units maintains Revenue separate financial records, we have ### ofouraudit C engagedcomponent auditors from the A 7.1. Identification and scoping Deloitte member firms in the US, UK, ofcomponents Kingdom of Saudi Arabia and Australia We performed our scoping of the Group toperform procedures at all the wholly- audit by obtaining an understanding of owned components under our direction theGroup and its environment, including and supervision. This approach also allows B Group-wide controls, and assessing the us to engage local auditors who have audit risks. This exercise has considered appropriate knowledge of local regulations therelative size of each reporting unit’s to perform the audit work, under a contribution to revenue, profit before tax common Deloitte audit approach. A Full audit scope 45% and adjusted profit before tax, alongside B Specified account balances 44% In respect of MBDA, we have engaged further financial or contractual risks, which C Specified audit procedures and 11% withthe entity’s non-Deloitte auditors we consider to be present. reviewatGroup level toperform a full-scope audit under our We have considered units that contribute direction, supervision and review. more than 10% of the Group’s revenue or The Parent Company is located in the adjusted profit before tax to be ‘financially Profit before tax United Kingdom and audited directly significant’ and requiring a full scope audit. bytheGroup audit team. C In addition, as part of our risk assessment A procedures and using our knowledge of the The twenty-five components within business, we assess where else we consider eitherfull or specified account balance it appropriate to perform a full scope audit. scope contribute the following proportions This resulted in full scope audits for six to total Group results. components located in the UK, the 7.2. Our consideration of the control B Kingdom of Saudi Arabia and the US, and environment included the Group’s largest joint venture, Matra BAE Dynamics Alenia (MBDA). The Group operates a range of IT systems which underpin the financial reporting A Full audit scope 48% Additionally, our audit planning identified process. These vary by business and/or by B Specified account balances 38% twenty-one non-financially significant geography. For all components that were C Specified audit procedures and 14% components, located in the UK, the subject to either a full scope or audit of reviewatGroup level Kingdom of Saudi Arabia, Australia, and specified balances, we identified relevant theUS, where we consider there to be ITsystems for the purpose of our audit areasonable possibility of material work. These were typically the principal misstatement in specific balances within the Total assets Enterprise Resource Planning (ERP) systems financial statements. As a result of our risk for each business that underpin thegeneral assessment procedures and the detailed A ledger and contract accounting balances, scoping exercise performed at the planning and in some cases also included ancillary/ stage of our audit, we determined that it feeder systems into the main ERP. was appropriate to rotate certain non- financially significant components in and In the current year our controls approach out of our Group audit scope in the current was principally designed to inform our risk year. We have directed component auditors assessment and also to allow us to test the to perform an audit of specified account operating effectiveness of certain relevant balances or specified audit procedures on revenue controls. We also assessed relevant the respective income statements and general IT controls. The Group continues A Full audit scope 53% balance sheets for thesecomponents. toinvest in its IT systems and there is an B Specified account balances 38% ongoing programme of remediating any C Specified audit procedures and 9% For all components designated financially control findings where they are identified reviewatGroup level significant or subject to an audit of specified through its own assurance framework, account balances, revenue was determined including Internal Audit, or through the to be in scope for the audit. external audit. As part of our controls work | For all other reporting units not included | in the prior and current year, we identified | | --- | --- | | infull-scope, specified account balance | certain control deficiencies that management | | scope or specified audit procedure scope, | is in the process of remediating as disclosed | | we performed centrally directed analytical | in the Audit Committee report on page 145. | | review procedures to confirm our conclusion | In the current year this included identifying | | that there was no significant risk of material | a new change management segregation of | | misstatement in the residual population. | duties deficiency within the ERP system of | one of the Group’s overseas businesses. We also audited the consolidation Where deficiencies have been identified and processand performed audit procedures the remediation activity remained ongoing oncentrally managed balances including during the current year, or the remediated treasury, post-employment benefit controls were not in place for a sufficient C obligations, litigation and claims, goodwill, enough period prior to the year-end, we did tax, and head office costs. not seek to place reliance on those relevant IT systems for the purpose of our audit. B BAE Systems plc Annual Report 2022 217 Governance / Auditor’s report / Independent Auditor’s report The majority of the focus of our controls In relation to the Group’s future forecasts, Additionally, all teams were involved in our assessment is in relation to the Group’s we considered the appropriateness of annual planning workshop, which was led contract accounting processes, the Lifecycle amounts included by management in by the Group audit team. Visits to meet Management Framework (LCM). For each relation to climate change in the context with component teams in the UK, US, component where revenue is in scope, we ofthe underlying businesses’ specific needs Australia and Kingdom of Saudi Arabia obtain an understanding of key contract and existing asset base, including engaging were also conducted by either the lead controls, such as with respect to the with segment management to understand audit partner or senior members of estimation of contract costs and the the process undertaken to identify required theengagement team (including at a amountof contract revenue to recognise activities to achieve the Group’s Net Zero partner or director level). inthe period. In the current year we have ambition. In considering the disclosures The BAE Systems, Inc. business units in the also sought to test certain relevant revenue presented as part of the Strategic Report, US are subject to a Department of Defence controls. At each business unit we also we engaged our climate specialists to Special Security Arrangement (SSA), which consider key controls relevant to other assesscompliance with the Task Force on is a government requirement setting out income statement and balance sheet items Climate-Related Financial Disclosures (TCFD) specific protocol that foreign controlled where they are considered relevant to our and the recommendations made by both companies must comply with in order to audit for risk assessment purposes. the Task Force and FRC as set out in their beable to undertake government defence thematic reviews. We have also assessed We have also considered head office contracts. As part of this there is restriction whether these disclosures reflect our controls relating to central balances and on the flow of information outside of the understanding of the Group’s approach processes such as pension accounting, US. Therefore, for the US components there toclimate. With respect to the financial consolidation and financial reporting, are restrictions around access to the audit statements, we considered whether the treasury, tax, and the Group’s planning file and specific workpapers for non-US current assessed impact of climate change andbudgeting process. nationals. As such, and consistent with required further or enhanced disclosure as previous years, we have designed alternative During the course of our audit, we placed part of critical accounting estimates. procedures, including involvement of an reliance on a number of relevant contract However, we concluded the current additional independent US national partner, accounting controls and certain valuation presentation as a factor within the estimate to ensure appropriate oversight of the controls in relation to pension assets. of revenue and goodwill, rather than a UScomponent team. material driver of these estimates, is 7.3. Our consideration of climate- proportionate to the relative risk of the ### relatedrisks 8. Other information Group and current assessed potential We have engaged with both the central The other information comprises the financial impact. | finance and sustainability functions to gain | | information included in the annual report, | | --- | --- | --- | | an understanding of BAE’s assessment of, | For further information regarding our | other than the financial statements and our | | and the process undertaken to both identify | assessment of revenue recognition on | auditor’s report thereon. The directors are | | and quantify, the Group’s climate-related | long-term contracts and the carrying value | responsible for the other information | | risks. We have engaged our climate | of goodwill, please refer to sections 5.1 | contained within the annual report. | | specialists in our assessment to consider | and5.2 above. | | Our opinion on the financial statements broader industry and market-wide practice. | | 7.4. Working with other auditors | does not cover the other information and, | | --- | --- | --- | | We completed an independent climate- | Our oversight of component auditors | except to the extent otherwise explicitly | | based risk assessment in order to consider | included directing the planning of their | stated in our report, we do not express | | the potential impact of climate change | audit work and understanding their risk | anyform of assurance conclusion thereon. | | onthe Group’s financial statements | assessment process to identify key areas | | Our responsibility is to read the other incorporating both business specific ofestimates and judgement, as well as information and, in doing so, consider knowledge and wider industry awareness. supervising the execution of their audit work. whether the other information is materially We used this to assess the completeness We issued detailed referral instructions to inconsistent with the financial statements, ofthe Group’s identified risks. In addition, the component auditors, reviewed and or our knowledge obtained in the course component teams have considered the supervised their work through a number ofthe audit, or otherwise appears to be localregulatory and legal environment, ofvisits to each of the component auditors materially misstated. | andtherefore the likelihood of unidentified | during the planning and performance stages | | | --- | --- | --- | | environmental claims arising. As set out by | of our audit, alongside frequent remote | If we identify such material inconsistencies | | management in pages 222 and 223 to the | communication. Further, we challenged the | or apparent material misstatements, we are | | financial statements, the areas of financial | related component inter-office reporting | required to determine whether this gives | | reporting principally impacted are those | and findings from their work, reviewed | rise to a material misstatement in the | | reliant on future forecasts or future | underlying audit files, attended component | financial statements themselves. If, based | | performance, notably recoverability of | audit closing meetings in person, or | on the work we have performed, we | | goodwill and revenue recognition on | virtuallywhere in person attendance was | conclude that there is a material | | long-term contracts. | not possible, and held regular remote | misstatement of this other information, | | | communication to interact on any related | weare required to report that fact. | audit and accounting matters which arose. We have nothing to report in this regard. 218 BAE Systems plc Annual Report 2022 Financial statementsStrategic report Governance ### 9. Responsibilities of directors 11.1. Identifying and assessing potential statements. The key laws and regulations risks related to irregularities we considered in this context included the As explained more fully in the directors’ UK Companies Act, Listing Rules, pension responsibilities statement, the directors In identifying and assessing risks of material legislation, and taxation legislation. areresponsible for the preparation of the misstatement in respect of irregularities, financial statements and for being satisfied including fraud and non-compliance with In addition, we considered provisions that they give a true and fair view, and laws and regulations, we considered ofother laws and regulations that do forsuch internal control as the directors thefollowing: nothavea direct effect on the financial determine is necessary to enable the – the nature of the industry and sector, statements but compliance with which preparation of financial statements that control environment and business maybe fundamental to the Group’s ability arefree from material misstatement, performance including the design of the to operate or to avoid a material penalty, whether due to fraud or error. Group’s remuneration policies, key drivers including in respect of export controls, for directors’ remuneration, bonus levels defence contracting and anti-bribery and In preparing the financial statements, and performance targets; corruption legislation. thedirectors are responsible for assessing the Group’s and the Parent Company’s – the Group’s own assessment of the risks 11.2. Audit response to risks identified ability to continue as a going concern, that irregularities may occur either as a As a result of performing the above, we disclosing as applicable, matters related to result of fraud or error; identified revenue and margin recognition going concern and using the going concern – results of our enquiries of management, on long-term contracts as a key audit basis of accounting unless the directors internal legal counsel, internal audit, matter related to the potential risk of either intend to liquidate the Group or the directors and the Audit Committee about fraud.The key audit matters section of Parent Company or to cease operations, or their own identification and assessment ourreport explains the matter in more have no realistic alternative but to do so. of the risks of irregularities; detail and also describes the specific – any matters we identified having obtained procedures we performed in response ### 10. Auditor’s responsibilities for the and reviewed the Group’s documentation tothat key audit matter. ### audit of the financial statements of their policies and procedures relating to: In addition to the above, our procedures Our objectives are to obtain reasonable – identifying, evaluating and complying torespond to risks identified included assurance about whether the financial with laws and regulations and whether thefollowing: statements as a whole are free from they were aware of any instances of – reviewing the financial statement material misstatement, whether due to non-compliance; disclosures and testing to supporting fraud or error, and to issue an auditor’s – detecting and responding to the risks documentation to assess compliance report that includes our opinion. Reasonable offraud and whether they have withprovisions of relevant laws and assurance is a high level of assurance but knowledge of any actual, suspected regulations described as having a direct isnot a guarantee that an audit conducted oralleged fraud; effect on the financial statements; in accordance with ISAs (UK) will always – the internal controls established – enquiring of management, the Audit detect a material misstatement when it tomitigate risks of fraud or non- Committee, in-house legal counsel and exists. Misstatements can arise from fraud compliance with laws and regulations, where appropriate, circularising external or error and are considered material if, including obtaining an understanding legal counsel, concerning actual and individually or in the aggregate, they could of the Group’s bribery and corruption potential litigation and claims; reasonably be expected to influence the and whistleblowing policies; economic decisions of users taken on the – performing analytical procedures to basis of these financial statements. – the matters discussed among the audit identify any unusual or unexpected engagement team including significant relationships that may indicate risks A further description of our responsibilities component audit teams and involving ofmaterial misstatement due to fraud; for the audit of the financial statements relevant internal specialists, including tax, – reading minutes of meetings of those islocated on the FRC’s website at: valuations, pensions and IT specialists charged with governance, reviewing www.frc.org.uk/auditorsresponsibilities. regarding how and where fraud might internal audit reports, and reviewing Thisdescription forms part of our occur in the financial statements and correspondence with relevant regulatory auditor’sreport. anypotential indicators of fraud. authorities; and ### 11. Extent to which the audit was As a result of these procedures, we – in addressing the risk of fraud through ### considered capable of detecting management override of controls, testing considered the opportunities and incentives ### irregularities, including fraud that may exist within the organisation for the appropriateness of journal entries and fraud and identified the greatest potential other adjustments; assessing whether the Irregularities, including fraud, are for fraud in the level of judgement involved judgements made in making accounting instancesof non-compliance with laws in estimating costs to complete on estimates are indicative of a potential andregulations. We design procedures in long-term contracts and the subsequent bias;and evaluating the business rationale line with our responsibilities, outlined above, impact on revenue and margin recognition. of any significant transactions that are to detect material misstatements in respect In common with all audits under ISAs (UK), unusual or outside the normal course of irregularities, including fraud. The extent we are also required to perform specific ofbusiness. to which our procedures are capable of detecting irregularities, including fraud procedures to respond to the risk of We also communicated relevant identified isdetailed below. management override. laws and regulations and potential fraud We also obtained an understanding of the risks to all engagement team members legal and regulatory frameworks that the including internal specialists and significant Group operates in, focusing on provisions of component audit teams and remained alert those laws and regulations that had a direct to any indications of fraud or non- effect on the determination of material compliance with laws and regulations amounts and disclosures in the financial throughout the audit. BAE Systems plc Annual Report 2022 219 Governance / Auditor’s report / Independent Auditor’s report ### Report on other legal and regulatory requirements ### 12. Opinions on other matters 16. Use of our report – the board’s confirmation that it has | prescribed by the Companies | carried out a robust assessment of | This report is made solely to the Company’s | | --- | --- | --- | | Act2006 | theemerging and principal risks set | members, as a body, in accordance with | | | out on page 126; | Chapter 3 of Part 16 of the Companies Act | | In our opinion the part of the directors’ | | 2006. Our audit work has been undertaken | – the section of the annual report that remuneration report to be audited has so that we might state to the Company’s describes the review of effectiveness been properly prepared in accordance members those matters we are required to of risk management and internal with the Companies Act 2006. state to them in an auditor’s report and for control systems set out on page no other purpose. To the fullest extent In our opinion, based on the work 138;and permitted by law, we do not accept or undertaken in the course of the audit: – the section describing the work of the assume responsibility to anyone other than – the information given in the strategic Audit Committee set out on page 145. the Company and the Company’s members report and the directors’ report for the as a body, for our audit work, for this ### financial year for which the financial 14. Matters on which we are required report, or for the opinions we have formed. statements are prepared is consistent ### to report by exception As required by the Financial Conduct with the financial statements; and 14.1. Adequacy of explanations received Authority (FCA) Disclosure Guidance and – the strategic report and the and accounting records Transparency Rule (DTR) 4.1.14R, these directors’report have been prepared Under the Companies Act 2006 we are financial statements will form part of the in accordance with applicable required to report to you if, in our opinion: European Single Electronic Format (ESEF) legalrequirements. prepared Annual Financial Report filed on – we have not received all the information In the light of the knowledge and the National Storage Mechanism of the UK and explanations we require for our understanding of the Group and the FCA in accordance with the ESEF Regulatory audit;or Parent Company and their environment Technical Standard (ESEF RTS). This auditor’s – adequate accounting records have not obtained in the course of the audit, report provides no assurance over whether been kept by the Parent Company, or wehave not identified any material the annual financial report has been returns adequate for our audit have not misstatements in the strategic report prepared using the single electronic format been received from branches not visited orthe directors’ report. specified in the ESEF RTS. We have been by us; or engaged to provide assurance on whether – the Parent Company financial statements the annual financial report has been ### 13. Corporate Governance Statement are not in agreement with the accounting prepared using the single electronic format The Listing Rules require us to review the records and returns. specified in the ESEF RTS and will publicly directors’ statement in relation to going report separately to the members on this. concern, longer-term viability and that part We have nothing to report in respect of the Corporate Governance Statement ofthese matters. John Adam relating to the Group’s compliance with the Senior Statutory Auditor provisions of the UK Corporate Governance 14.2. Directors’ remuneration Code specified for our review. For and on behalf of Under the Companies Act 2006 we are also Deloitte LLP Statutory Auditor required to report if in our opinion certain Based on the work undertaken as part disclosures of directors’ remuneration have London, United Kingdom ofour audit, we have concluded that not been made or the part of the directors’ 22 February 2023 each of the following elements of the remuneration report to be audited is not in Corporate Governance Statement is agreement with the accounting records materially consistent with the financial andreturns. statements and our knowledge obtained during the audit: We have nothing to report in respect ofthese matters. – the directors’ statement with regards to the appropriateness of adopting the ### going concern basis of accounting and 15. Other matters which we are any material uncertainties identified ### required to address set out on page 127; 15.1. Auditor tenure – the directors’ explanation as to its Following the recommendation of the assessment of the Group’s prospects, AuditCommittee, we were appointed the period this assessment covers and bythe members on 10 May 2018 to audit why the period is appropriate set out the financial statements for the year ending on page 126; 31 December 2018 and subsequent financial – the directors’ statement on fair, periods. The period of total uninterrupted balanced and understandable set engagement including previous renewals outon page 148; and reappointments of the firm is five yearscovering 31 December 2018 to 31 December 2022. 220 BAE Systems plc Annual Report 2022