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BAE Systems PLC Annual Report 2025
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Annual Report
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| BAE Systems plc Annual Report 2025 |
|
| In this report |
We partner with governments,
industry peers and companies
large and small to design, build
and maintain advanced defence and
security solutions. Investing in these
partnerships means that, for decades,
we have been trusted by governments
to develop the next generation of
defence and security capabilities.
| 1 | ||||||
| 2 | BAE Systems plc Annual Report 2025 |
| Our business at a glance |
We are supporting our customers so that they can stay ahead of evolving
threats across land, sea, air, cyber and space.
| Our financial highlights | ||||||
| Financial performance measures as defined by the Group1 | ||||||
| Sales | Underlying earnings before interest and tax (EBIT) |
Underlying earnings per share (EPS) |
||||
| £30.7bn | £3,322m | 75.2p | ||||
| 10% growth2 | 12% growth2 | 12% growth2 | ||||
| 2024 £28.3bn / 2023 £25.3bn | 2024 £3,015m / 2023 £2,682m | 2024 68.5p / 2023 63.2p | ||||
| Free cash flow | Order intake | Order backlog | ||||
| £2,158m | £36.8bn | £83.6bn | ||||
| £347m lower | £3.1bn increase | £5.8bn increase | ||||
| 2024 £2,505m / 2023 £2,593m | 2024 £33.7bn / 2023 £37.7bn | 2024 £77.8bn / 2023 £69.8bn | ||||
| Financial performance measures as derived from IFRS 3 | ||||||
| Revenue | Operating profit | Basic EPS | ||||
| £28.3bn | £2,925m | 68.8p | ||||
| 8% growth | 9% growth | 6% growth | ||||
| 2024 £26.3bn / 2023 £23.1bn | 2024 £2,685m / 2023 £2,573m | 2024 64.9p / 2023 61.3p | ||||
| Net cash flow from operating activities |
Order book | Dividend per share | ||||
| £3,432m | £63.1bn | 36.3p | ||||
| £493m lower | £2.7bn increase | 10% growth | ||||
| 2024 £3,925m / 2023 £3,760m | 2024 £60.4bn / 2023 £58.0bn | 2024 33.0p / 2023 30.0p | ||||
-
The definition and purpose of all performance measures defined by the Group is provided in the Alternative performance measures section on page 216.
-
Growth rates for Sales, Underlying EBIT and Underlying EPS are on a constant currency basis (i.e. calculated by translating results from entities in functional
currencies, other than pounds sterling, for the year ended 31 December 2024 to pounds sterling at the average exchange rate of such currencies for the year
ended 31 December 2025). The comparatives have not been restated. All other growth rates and year-on-year movements are on a reported currency basis.
- International Financial Reporting Standards.
| Strategic report | Governance | Financial statements | Additional information | 3 | ||
We are a workforce of 111,4001 highly skilled people in more than 40 countries.
Working with our customers and local partners, we develop, engineer, manufacture
and support products and systems that deliver military capability, protect national
security and keep critical information and infrastructure secure.
Our purpose is to serve, supply and protect those who serve and protect
us, in a corporate culture that is performance driven and values led.
Through careful long-term management and governance of our
business, we will continue to create value for our stakeholders.
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.
At BAE Systems, everything we do is steered by
our three core values: trusted, innovative, bold.
We maintain leading positions in major defence and security markets around
the world – including the US, UK, Europe, the Kingdom of Saudi Arabia and Australia –
as well as established positions in a number of other international markets.
g
Sales2 by destination
| US | 43% |
| UK | 27% |
| Europe | 12% |
| Kingdom of Saudi Arabia | 9% |
| Australia | 4% |
| Other international markets | 5% |
g
Employees1 by location
| US | 32% |
| UK | 48% |
| Europe | 7% |
| Kingdom of Saudi Arabia | 6% |
| Australia | 6% |
| Other | 1% |
2025 Sales2
£30,662m
Total Employees1
111,400
-
As at 31 December 2025 and including share of equity accounted investments.
-
Sales is defined in the Alternative performance measures section on page 216. Total figure includes HQ and eliminations, see page 37.
| 4 | BAE Systems plc Annual Report 2025 |
| Our sectors |
We focus our operations in five1 key sectors:
| Electronic Systems | |
| Electronic Systems comprises the Group’s US- and UK-based electronics business and the US-based Space & Mission Systems business. Key capabilities span electronic warfare systems, navigation systems, electro-optical sensors, military and commercial avionics, precision guidance solutions and communications systems, as well as space electronics, spacecraft, ground and tactical systems. |
|
| Read more on Page 38 |
| Sales2 £7,528m |
|
| Employees3 22,400 |
|
| Platforms & Services | |
| Platforms & Services, with operations in the US, Sweden and the UK, manufactures and upgrades combat vehicles, weapons and munitions, and delivers services and sustainment activities, including US naval ship repair and the management and operation of two government-owned, contractor-operated ammunition plants. |
|
| Read more on Page 40 |
| Sales £5,039m |
|
| Employees 12,100 |
|
| Air | |
| Air comprises the Group’s UK‑based aircraft build and support activities for European and international markets, US programmes, development of our Future Combat Air System and FalconWorks®, alongside our business in the Kingdom of Saudi Arabia and interests in our joint ventures: Edgewing, Eurofighter and MBDA. |
|
| Read more on Page 42 |
| Sales £9,299m |
|
| Employees 30,600 |
|
| Maritime | |
| Maritime comprises the Group’s UK‑based maritime and land activities, including ship build and support activities, major submarine build programmes, as well as our Australian business and interest in our RBSL joint venture. |
|
| Read more on Page 44 |
| Sales £6,797m |
|
| Employees 31,900 |
|
| Cyber & Intelligence | |
| Cyber & Intelligence comprises the US‑based Intelligence & Security business and UK-headquartered Digital Intelligence business and includes the Group’s cyber security activities for national security, central government and government enterprises. |
|
| Read more on Page 46 |
| Sales £2,397m |
|
| Employees 10,500 |
|
- The Group has five sectors which, together with HQ, make its six operating segments as defined
by IFRS 8 Operating Segments.
-
Sales is defined in the Alternative performance measures section on page 216.
-
As at 31 December 2025 and including share of equity accounted investments. Total figure
| Platforms & Services photo credit: US Army |
of 111,400 includes HQ employees of 3,900.
| Strategic report | Governance | Financial statements | Additional information | 5 | ||
| Our key programmes and franchises |
At BAE Systems, we provide some of the world’s most advanced,
technology-led defence, aerospace and security solutions:
Aircraft
Prime contracting, systems integration,
rapid engineering, manufacturing,
maintenance, repair and upgrade, and
military training for advanced combat
and trainer aircraft, including Typhoon
and workshare of the F-35 Lightning II
programme.
Combat vehicles
Build and upgrade of tracked combat
vehicles, including the Bradley fighting
vehicles, M109 self-propelled howitzers,
Armored Multi-Purpose Vehicles (AMPVs),
CV90, BvS10, Beowulf and M88 recovery
vehicles and Amphibious Combat Vehicles
(ACVs). Through our interest in RBSL, design
and manufacture of military vehicles.
Space
Leading capabilities in the design,
build and operation of satellites and
satellite systems, space electronics
and instrument payloads.
Weapon
systems and munitions
Design and manufacture of naval gun
systems, munitions, energetics and
propellants, torpedoes, radars, naval
command and combat systems, artillery
systems, missile launchers and, through
our 37.5% interest in MBDA, missiles
and missile systems.
Submarines
Design and manufacture of seven
Astute Class nuclear-powered attack
submarines and four Dreadnought Class
nuclear‑powered submarines for the Royal
Navy. Design and mobilisation activities on
the SSN-AUKUS programme to deliver a
replacement for the Astute Class.
Complex warships
Design and manufacture of eight Type 26
frigates for the Royal Navy and the first three
(Batch 1) Hunter Class frigates for the Royal
Australian Navy. Provider of the warship
design for the Canadian Surface
Combatant programme.
Intelligence
and cyber security
Delivery of a broad range of intelligence,
security and synthetic training services to
enable military, intelligence and civilian
branches of international governments to
recognise, manage and defeat threats.
Naval ship
repair and support
Provision of naval ship repair and
modernisation services in the US and
UK, together with support to the navies
of the US, UK and Australia, at home
and on deployment.
Uncrewed and future
air system capabilities
Development of future air system capabilities,
including joint investment with the UK
Government and industry in a next-
generation combat air system under the
Tempest programme. Comprehensive
portfolio of military uncrewed air systems
(UAS) and counter-UAS.
Commercial
avionics equipment
Design, manufacture and support of avionics
equipment across multiple commercial
aircraft platforms, including engine and flight
controls, and cabin and cockpit systems, as
well as aftermarket support services.
Embedding
environmental considerations
Provision of electric drive systems for
low- and zero-emission propulsion systems
with an extensive installed base on urban
transit buses.
Air support and training
Provision of support to operational capability,
including maintenance, upgrade, support
and training for Typhoon, Tornado, Hawk
and support for the F-35 Lightning II fleet
around the globe.
Defence electronics
Design, manufacture and support of
electronic systems across a range of
military programmes, including a
leadership position in the electronic
warfare market.
Eurofighter
Typhoon
Typhoon is known
for being a high-
performance
advanced fighter jet,
in operation with
nine air forces across
the world, and has
a reputation for its
performance,
reliability, availability
and survivability.
| Max. Speed: Mach 2+ (approx. 2,495 km/h) |
| Max. Altitude: 55,000 ft |
| Length: 15.96 metres |
| Wingspan: 10.95 metres |
| Height: 5.28 metres |
| Engines: Two Eurojet EJ200 turbojets |
| Thrust: 180 KN (with afterburner) |
| 6 | BAE Systems plc Annual Report 2025 |
| Chair’s letter |
| On every site visit, we create an opportunity for the Board to meet informally with colleagues at all levels. This is an excellent way for the Board to develop a deeper understanding of corporate culture and how management are addressing issues. Cressida Hogg CBE Chair |
|||
Dear Shareholders
As you will see from the results presented in
this Annual Report, this has been another
busy year for your company, with strong
operational and financial performance.
During the year, against a backdrop of
geopolitical uncertainty, there has been
heightened news flow and commentary
around national security and defence issues.
While governments’ plans to increase
national spending on defence may create
supportive market conditions for our sector
looking forward, this year the performance
of the Group has largely been underpinned
by existing contracts and the long-term
programmes that we have with key
customers.
The Board has been especially pleased that
several major initiatives and international
programmes have reached significant
milestones. In October, the UK Government
announced an agreement with the
Government of Türkiye for the purchase
of 20 Typhoon aircraft and an associated
weapons and integration package. We are
proud that Türkiye will become the tenth
country to become part of the Eurofighter
Typhoon programme.
The decision by Norway to select the Type 26
frigate for its armed forces is an exciting step
in our warship programme, underpinning our
manufacturing operations in Scotland for
years to come. This will add another country
to this global programme, following orders
from the UK and Australia, while Canada
has selected the design for its River Class
destroyer programme. In Europe, our
Hägglunds business has been increasing
capacity to manage production for several
orders for CV90 armoured vehicles, which
continue to show the durability and
popularity of this product.
In the US, BAE Systems, Inc. has secured
significant new orders. It was especially
pleasing for our Space & Mission Systems
business, which we acquired in 2024, to
secure a $1.2bn (£0.9bn) US Space Systems
Command contract for the Resilient Missile
Warning & Tracking – Medium Earth Orbit
Epoch 2 programme. Our US colleagues are
working closely with others in the defence
industry as momentum continues to build
regarding the US Government's plan for
the Golden Dome missile defence system.
As Chair, I always enjoy joining our
colleagues and customers to celebrate
production milestones.
This year, we celebrated important progress
in key programmes. In March, we celebrated
the keel laying for HMS Dreadnought. In May,
we held the naming ceremony for HMS
Glasgow, the first in class of the UK’s Type 26
programme and, in September, we marked
the commissioning of HMS Agamemnon, the
UK’s newest attack submarine, into the Royal
Navy in Barrow-in-Furness. We welcomed
many guests and partners to the three
ceremonies, who had a chance to engage
with the colleagues and community
representatives who are so important to the
delivery of our key programmes.
Our strategy
Our strategy, to be a leading defence and
security company providing products and
services to customers in our home markets
and internationally, remains unchanged.
As a business, we continue to be proud that
through our work we protect those who
protect us.
A central part of the Board agenda during
the year is crafted around discussing the
Company’s ongoing strategy. For example,
the Board has a structured programme for
developing its understanding of market and
competitor dynamics.
| Strategic report | Governance | Financial statements | Additional information | 7 | ||
As the future of defence and security evolves,
and the impact of Artificial Intelligence (AI)
increases, our product portfolio needs to be
fit for the future. The evolution of defence
strategy and the pace of product innovation
mean that our key markets are evolving.
The Group’s success has been built on
delivering core programmes for customers
while, at the same time, being prepared to
offer products for future needs. Our deep
relationships with our core customers are
central to the collaborative development
of future capabilities.
This year, we augmented our boardroom
sessions on strategy with visits to several of
our sites, including a drone manufacturing
facility. This gave directors the opportunity
to see product innovation in practice.
We also conducted two in-depth sessions
on cyber security and technology, a key part
of the Group’s operational resilience. Such
sessions are helpful in augmenting the in-
depth strategy discussions that the Board
holds twice a year, in preparation for
approving the Company’s Integrated
Business Plan (IBP).
Our people and culture
Our early careers programmes continue to
be a central part of our skills and workforce
planning, ensuring we have the necessary
skills required for the future.
Since 2020, we’ve recruited more than
10,000 apprentices, graduates and
undergraduates in the UK and invested over
£1bn in education and skills, playing a key
role in strengthening the national industrial
skills base, while contributing to local and
national economic development. Board visits
always include the opportunity to meet with
some of the new joiners and I am consistently
impressed and excited by the quality of
people we recruit.
On every site visit, we create an opportunity
for the Board to meet informally with
colleagues at all levels to discuss topical
issues and hear a range of views. This is an
excellent way for the Board to develop a
deeper understanding of corporate culture
and how management are addressing issues.
It also helps our colleagues better understand
the work of the Board and our governance
framework.
Capital allocation
This year the Board has continued its focus on
capital allocation. Capital allocation is a key
part of the IBP approved by the Board each
year, a necessary balance between the
amount of re-investment and capital
expenditure needed for our programmes,
ongoing research and development (R&D)
and capital returned to shareholders. Over
the last year, we have invested around £1.0bn
in capital expenditure and £0.4bn
in self-funded R&D. The Board has
recommended a final dividend of 22.8p per
share, bringing the total dividend for 2025 to
36.3p. This is an increase of 10%% on last
year, and the 22nd year of dividend growth for
your company. During the year, we have also
continued our share buyback programme,
which has been well received by shareholders.
Governance
New reporting requirements included within
the 2024 UK Corporate Governance Code
prompted a review of the frameworks used
to provide the Board with confidence that the
governance systems and material controls are
effective. As part of its standing annual
agenda, the Board reviewed and approved
updates to the core policies and processes
that underpin these frameworks to ensure
that they reflect the requirements outlined
within Provision 29 of the Code.
As discussed in more detail in the
Governance report on page 103, we are
evolving how the Board reviews technology
and IT. The fast-moving environment and
increasing importance of technology to our
business means that we are including the
whole Board in key discussions going
forward and disbanding our Innovation
and Technology Committee, replacing
it with deeper full Board discussions on a
regular basis.
Board changes
Towards the end of the year, Dame Elizabeth
Corley stood down from the Board after
nearly ten years as a director. The Board
will miss her intellect, deep corporate
understanding, common sense and
personality. As a member of the Board
and many of its committees, she has made
a great contribution to the development and
governance of your company. We wish her
well in future roles.
In September 2025, we announced the
appointment of John Pettigrew CBE to the
Board. He joins on 23 February 2026. John
brings a depth of experience as a recently
retired long tenure FTSE 20 chief executive.
His understanding of long-term projects
and government relationships, and his
international experience, will be especially
valuable and we look forward to working
with him.
In closing, I would like to thank my
colleagues across the Group for their work
in 2025. This has been a very strong year for
your company, underpinned by the focus,
commitment and culture of our colleagues.
I would like to thank everyone across the
business for their contribution.
Cressida Hogg CBE
Chair
| 8 | BAE Systems plc Annual Report 2025 |
| Chief Executive’s review |
| By focusing on operational excellence and innovation, we have consistently delivered cutting-edge technologies, helping our customers stay ahead of evolving threats. Charles Woodburn CBE Chief Executive |
|||
Overview
Around the world, threats to national security
continue to grow. This is driving governments
to increase defence spending, as they seek to
ensure armed forces are equipped to protect
their nations and deter future aggression.
For decades, governments have placed trust
in us to deliver their defence and security
capabilities. By focusing on operational
excellence, innovation and developing
our people, we have consistently delivered
cutting-edge technologies, helping our
customers stay ahead of evolving threats
across land, sea, air, cyber and space.
This approach helped us achieve another
year of strong operational and financial
performance in 2025. Our highly relevant
portfolio means we are well positioned to
continue supporting our customers.
Higher defence spending commitments
across NATO are leading to increased
demand across most of our markets and
domains. So, we are investing in our business
to ensure we have the capacity and capability
to meet our customers’ evolving needs.
Our achievements in 2025 are a testament to
the dedication of our people, whose focus on
protecting those who protect us remains at
the core of everything we do.
ORDER BACKLOG
£83.6bn
2024 £77.8bn / 2023 £69.8bn
Delivering for our customers
We design, build and maintain cutting-edge
defence and security capabilities for our
customers.
Our relentless focus on operational excellence
supports consistent delivery on critical long-
term programmes like submarines, frigates,
combat aircraft, combat vehicles and
electronic warfare systems, which form the
backbone of our customers’ defence
capabilities.
Notable achievements this year include the
keel laying of HMS Dreadnought and
supporting the Royal Navy’s Carrier Strike
Group deployment, as well as delivery of the
final two Typhoon aircraft to the Qatar Emiri
Air Force and the 500th AMPV to the US Army.
| Strategic report | Governance | Financial statements | Additional information | 9 | ||
We made good progress on key strategic
international collaborations. Together with
our industry partners in Italy and Japan, we
launched our new joint venture, Edgewing,
to design and develop next-generation
combat aircraft under the Global Combat Air
Programme (GCAP). Working alongside
ASC Pty Ltd, we also started initial
mobilisation activities to support the delivery
of the SSN-AUKUS fleet of conventionally
armed, nuclear-powered submarines for the
Royal Australian Navy.
Our financial performance
We delivered a strong financial performance,
exceeding the upgraded guidance we gave
at the half year across our underlying EBIT,
underlying EPS and free cash flow targets.
Sales came in at the higher end of our
guidance range.
On a constant currency basis, we grew sales
by 10% to a record £30.7bn, while increasing
underlying EBIT by 12%, generating a return
on sales of 10.8%. We delivered £2,158m of
free cash flow, taking our three-year
cumulative free cash flow to more than £7bn,
comfortably ahead of our three-year guidance
of £6bn for the period from 2023 to 2025.
It was a very active year for discussions with
customers to address their evolving defence
needs. Order intake momentum was positive,
with £36.8bn of work secured, lifting our
order backlog to £83.6bn. This reflects strong
demand for the portfolio of cutting-edge
technologies and services we offer and
enhances the forward visibility of our
business.
We ended 2025 with a strong balance sheet,
with net debt (excluding lease liabilities)
falling 22% to £3,844m, which equates to
0.9x underlying EBITDA.
We continue to invest in our business to
support organic growth and capacity
expansion for key programmes. Our strong
financial position allows us to implement all
parts of our capital allocation policy.
RETURNS TO SHAREHOLDERS
£1,529m
2024 £1,492m / 2023 £1,418m
Investing in tomorrow
Investing in our people, technologies and
facilities is essential to ensure we maintain
the agility needed to anticipate and address
the evolving threats our government
customers face.
We grew our global workforce by 4,000,
including more than 2,500 early careers
employees in our key markets to sustain
our talent pipeline.
Type 26 frigate
In a significant development for European
collaboration, Norway selected our Type
26 frigate in August for its future warship
procurement programme.
The £10bn government-to-government
agreement paves the way for the UK’s
largest ever warship export deal by value.
Providing a major boost for UK shipbuilding,
this landmark achievement will sustain
thousands of jobs in Scotland and across the
UK supply chain well into the next decade.
The agreement followed the official opening
of the Janet Harvey Hall earlier in the year.
Enabling the simultaneous construction
of two Type 26 vessels side-by-side under
cover, this state-of-the-art facility enhances
production efficiency and enables us to
deliver advanced warships at pace for the
UK and its allies.
As announced, under the defence
cooperation agreement, Norway will
operate at least five Type 26 ships alongside
the Royal Navy’s eight vessels. Hailing the
deepening of a long-term strategic
relationship between the UK and Norway,
the combined fleet of 13 anti-submarine
warfare frigates will detect, classify, track
and defeat hostile submarines – significantly
reinforcing NATO’s northern flank.
| 10 | BAE Systems plc Annual Report 2025 |
| Chief Executive’s review continued |
We increased our self-funded R&D to
£407m and continue to collaborate with
partners and academia to drive innovation
that will keep our customers ahead of
evolving threats. Key areas of focus include
technologies like electronic warfare,
uncrewed systems, counter drone systems,
laser-guided weapons, synthetic training,
electrification applications and space
solutions. Highlights include developing a
low-cost, drone-based strike capability using
precision-guided munitions in just four
months and deploying the same platform
to transport vital supplies between UK
carrier strike group ships, demonstrating
its versatility.
After record capital expenditure in 2024, we
maintained our high levels of investment and
spent around £1.0bn in the year to improve
our systems and facilities to enhance efficiency
and capacity to meet the elevated global
demand. Notable investments included our
new shiplift and land-level repair complex at
our shipyard in Jacksonville, Florida, our new
ship build assembly hall in Glasgow and
a new artillery factory in Sheffield, all of
which became operational in the year.
We recognise there is always more that can
be done and we are continuing to focus on
boosting production capacity, while driving
productivity improvements and cost
efficiencies, to ensure we deliver for our
customers now and into the future.
Our capital distribution
Our disciplined approach to capital allocation,
underpinned by the Group’s strong
performance and positive outlook, has
enabled us to continue delivering returns
to shareholders. After investments in our
people, technologies and capital expenditure,
we returned £1,529m to shareholders during
the year. The Board has proposed a final
dividend of 22.8p, subject to shareholder
approval at the 2026 Annual General
Meeting (AGM), bringing the total dividend
for 2025 to 36.3p — an increase of 10% over
the prior year.
Our market differentiation
Our business has a unique combination
of highly innovative capabilities, a diverse
geographic footprint and a multi-domain
portfolio. We believe our advanced
technologies, deep domain expertise and
global reach position us as an industry
leader, enabling us to support customers
in addressing the heightened threat
environment today and into the future.
This breadth remains a core strength and
a differentiator for our business.
Looking ahead, our key growth drivers are
spread across major markets and include
multi-national endeavours, such as GCAP
and AUKUS, which highlight the scale,
global reach and longevity of our operations.
Combined with our focus on faster-paced
disruptive technologies and the seamless
integration of these systems, we are well
positioned for growth for many years
to come.
Typhoon
In October, the Typhoon programme
reinforced its standing as one of the UK’s
most successful defence exports when
Türkiye announced it would become
the aircraft’s tenth operator.
The deal, anticipated to be worth
£4.6bn to BAE Systems, marks a new
chapter in our longstanding relationship
with this important NATO ally.
Ensuring UK Typhoon production continues
into the 2030s, the contract provides a vital
bridge towards production of Tempest, the
UK’s next-generation fighter jet, which we
are developing with our GCAP partners.
Under the agreement with the UK
Government, Türkiye will acquire
20 Typhoon aircraft, boosting NATO
interoperability as it joins the UK, Germany,
Spain, Italy, Austria, Oman, Qatar, Kuwait
and the Kingdom of Saudi Arabia as an
operator of this world-class aircraft.
Typhoon production sustains more than
20,000 jobs across the UK and delivers
substantial economic returns, with the
original £12bn government investment,
having already generated more than
£30bn for the UK economy.
| Strategic report | Governance | Financial statements | Additional information | 11 | ||
US missile defence priority
Space superiority has emerged as a critical
component in global defence strategies,
prompting decision-makers to focus on the
rapid development of advanced space-
based capabilities to deter and counter
evolving threats. The US Government has
prioritised the deployment of a next-
generation missile defence shield to
achieve a strategic advantage in space
and maintain national security.
In May, we secured a $1.2bn (£0.9bn) prime
contract for the US Space Forces’ Resilient
Missile Warning and Tracking Medium
Earth Orbit Epoch 2 programme. Under this
landmark award, we will deliver a
constellation of satellites to provide
comprehensive, space-based missile
warning and tracking capabilities around
the world to empower swift and effective
decisions in high-stakes scenarios.
By using the Trek variant of our ElevationTM
product line, the satellites can be produced
more affordably and at scale with high-
performance manoeuvrability and onboard
data processing. By developing the
spacecraft bus and payloads, and managing
ground support, operations and
sustainment, we are leveraging our
capabilities to deliver end-to-end mission
solutions for the military space market.
Responsible business
We support our government customers in
their primary responsibility to keep citizens
safe, while contributing to the economic
and social development of the communities
where we operate.
Our people are central to everything we do,
making it essential that we attract and retain
top talent to meet our customers’ needs and
support our long-term growth. We invest in
the development of our people’s skills at
every stage of their careers and relentlessly
focus on their safety, health and wellbeing.
Across all our operations, maintaining the
highest standards of conduct is at the core of
how we do business, enabling us to operate
in a highly regulated environment with strict
regulations and applicable trade controls.
Summary
As you will see throughout this report, we
delivered strong operational and financial
performance in 2025, achieving significant
milestones in advancing cutting-edge
defence and security solutions.
Throughout the year, we remained focused
on supporting our customers and the
communities we serve, while navigating a
rapidly changing global landscape.
Our commitment to innovation, collaboration
and delivering value to our stakeholders has
never been stronger.
I want to thank our talented teams around
the world, along with our partners, suppliers
and trade unions, for their dedication to
delivering for our customers. These efforts
ensure we remain at the forefront of
technological advancements that protect
and empower nations.
I also thank our shareholders for your
continued support of the Group. We look
forward to another productive year in 2026.
As we reflect on our achievements, we look
ahead to 2026 with confidence, ready to
embrace future opportunities and challenges,
while remaining focused on our mission to
protect those who protect us.
Charles Woodburn CBE
Chief Executive
| 12 | BAE Systems plc Annual Report 2025 |
| Feature |
Merging
mobility
and might
We designed the CV90 with a clear
vision: to create a vehicle that provides
high tactical and strategic mobility,
air defence, anti-tank capability, high
survivability and protection across
terrains and tactical environments.
Our CV90120 is an innovation that
combines the CV90’s mobility and
versatility with the firepower of a main
battle tank. Designed to enhance combat
capability while simplifying logistics
through a common platform, it offers
a powerful, cost-effective solution
with increased firepower, protection
and mobility.
Today’s militaries need vehicles that
combine heavy firepower with tactical
mobility for rapid deployment and
complex manoeuvres. The CV90120MkIV
rises to the challenge by integrating
Rheinmetall’s 120mm L44A1 Low Recoil
weapon system onto our advanced, agile
CV90MkIV chassis.
The 120mm gun delivers exceptional
performance and is compatible with
all NATO-standard rounds, including
programmable high-explosive and
enhanced kinetic energy munitions.
The CV90 platform features an upgraded
engine, heavy-duty transmission, active
damping and an Active Protection System,
ensuring speed, survivability and firepower.
For nations already operating CV90s, the
common platform simplifies training,
logistics and maintenance, delivering
both strategic and economic advantages.
We have 17 contracted variants
of the CV90 in service across 10 nations:
Denmark, Estonia, Finland, Norway,
Sweden, Switzerland, the Netherlands,
Czechia, Slovakia and Ukraine.
| Vehicles sold +1,900 |
| R&D hours invested 8 million |
| Different CV90 variants currently in service 17 |
| Strategic report | Governance | Financial statements | Additional information | 13 | ||
| 14 | BAE Systems plc Annual Report 2025 |
| Our business model |
Our strengths and resources provide the foundations to our business model:
| Our people |
|||
| Read more on Page 50 |
|||
| Our technology |
|||
| Read more on Page 24 |
|||
| Our partners and key suppliers |
|||
| Read more on Page 85 |
|||
| Our governance framework |
|||
| Read more on Page 82 |
|||
| A. Identifying customer needs |
| – We have established positions on long-term programmes. – We build strong and collaborative relationships with our customers. – Our position as a trusted supplier allows us to pro-actively identify emerging trends and opportunities for growth ahead of published customer requirements. |
| B. Research & development |
| – Technology and innovation underpin our strategic direction, the evolution of current franchises and the development of new products and services. – We partner with academic and industry leaders to develop new technologies that differentiate these products and services. – We invest in the development of new products to meet our customers’ current and future operational needs. |
| C. Bidding and contracting |
| – We focus on value for our customers while effectively managing risk. – We maintain a record of delivery on complex projects. – We develop relationships with a network of suppliers supporting economic prosperity and development. |
| D. Design and developing |
| – We provide engineering expertise in developing cutting-edge products and services. – We work with our customers to consider the operational resilience of our products. – Our products are designed and developed in a way that provides for future flexibility with the ability to upgrade in an agile manner. |
| E. Advanced manufacturing, commissioning and integration |
| – We focus on operational excellence with safety as a priority. – We continuously invest in advanced manufacturing techniques and facilities. – We manage complex projects and collaborations across global supply chains. |
| F. Services, sustainment and upgrade |
| – We provide competitive services that add value for our customers. – We leverage technical expertise, which is acquired through product design and development, to differentiate our service offerings. – We use flexibility and responsiveness to maximise the lifecycle availability of our customers’ equipment. |
| Our business model works alongside our strategy, which runs through our core activities and provides areas of focus to deliver value to our stakeholders. |
| Read more on Page 16 |
| Strategic report | Governance | Financial statements | Additional information | 15 | ||
Creating value
| Disciplined capital allocation We operate with a value-enhancing model, undertaking our core business activities with a clear, consistent and careful capital allocation to ensure operational performance and retain balance sheet strength. |
||
| Investment in our business is critical to our success As a responsible business, we prioritise investments in our technology, people, partners and facilities. We seek successful outcomes for our customers, while fuelling technological innovation and creating value for all our stakeholders, including within the communities and environment in which we operate. |
||
| Research, design and development activities Creating the next generation of defence and security capabilities that are needed to keep our customers safe. |
Capital investment Enabling us to deliver new facilities to provide world-class work environments that support innovation, production and teamwork to deliver cutting-edge technology to our customers. |
Investment in our people We support high-value jobs in our business and in our supply chains. This includes direct employment as well as indirect employment in our supply chain and jobs supported by the consumer spending of our employees and supply chain. |
|||||||||
| R&D spend1 £3.2bn |
Capital Expenditure £ 1.0bn |
Apprentices, undergraduates and graduates in the UK 6,800 |
|||||||||
| 2024 £2.7bn 2 | 2024 £1.0bn | 2024 6,500 | |||||||||
| Leading to consistent and solid cash conversion | |||
| Free cash flow £ 2,158 m |
|||
| 2024 £2,505m | |||
| Dividends We have a strong track record of delivering financial returns for investors. We plan to pay dividends in line with our policy of long-term sustainable cover of around two times underlying earnings. |
Mergers and acquisitions In the period from 2020 to 2025, we invested over £6.0bn in M&A, including the £4.4bn acquisition of Ball Aerospace in 2024. |
Share buybacks We have continued with the up to £1.5bn share buyback programme, which was announced in August 2023, with 9% of share capital acquired. |
|||||||||||
| Total dividend per share 36.3 p |
M&A investment £6.0bn |
Value of shares purchased £ 502m |
|||||||||||
| 2024 33.0p | 2024 £555m | ||||||||||||
-
Customer and company-funded.
-
2024 value restated. See note 3 of the Financial Statements on page 154.
| 16 | BAE Systems plc Annual Report 2025 |
| Our strategic framework |
| Our vision To be the premier international defence, aerospace and security company. |
Our mission To provide a vital advantage to help our customers to protect what really matters. |
Our values Trusted, innovative and bold. |
||||
| Our strategy Centred on maintaining and growing our core franchises and securing growth opportunities through advancing our three strategic priorities while demonstrating our Company Behaviours in all that we do. |
||||||
| Advance and integrate our sustainability agenda Emphasise the vital role we play in protecting countries and civilians and supporting our communities. Progress the delivery of our decarbonisation strategy. |
| Enhance financial performance and deliver enduring growth in shareholder value Seek opportunities to drive efficiency, standardisation and synergies. Identify opportunities for higher‑margin offerings. |
Sustain and grow
our defence business
Deliver on our commitments
effectively and efficiently.
Develop our offerings to
meet the future defence
and security needs.
Our strategy
is comprised of
six long-term areas
of focus that help us
deliver our vision
and mission.
Inspire and develop our
workforce to drive success
Ensure we harness the full
potential of all our people.
Create an environment in
which our people will thrive.
| Continue to grow our business in adjacent markets Take our capabilities into adjacent attractive markets. Develop dual-use opportunities delivering civil solutions to leverage back to meet challenges for our defence customers. |
| Develop and expand our international business Mature our international activities, broadening our offerings to our established customers. Develop relations with additional customers. |
| Supported by our strategic priorities | ||||||
| Providing the link between our longer-term strategy and near-term business objectives for all our employees. | ||||||
| Drive operational excellence |
Continuously improve competitiveness and efficiency |
Advance and further leverage our technology |
||||
| Strategic report | Governance | Financial statements | Additional information | 17 | ||
| Our strategy in action |
Accelerating possibilities
FalconWorks® is our advanced research and
technology hub leading the Group’s UAS
strategy within our Air sector. As one of the
leading designers, developers and suppliers
of military UAS in Europe, our FalconWorks
division has developed a comprehensive and
fast-evolving range of cutting-edge
uncrewed capabilities.
Our UAS portfolio is a testament to the
power of collaboration and innovation.
Leveraging our expertise, R&D investment
and strategic acquisitions, along with
academic, SME (small and medium-sized
enterprise) and specialist supplier
collaborations, we have created a range of
core vehicle categories designed to offer
customers cost-effective choice and variable
payloads.
By bringing specialist companies like
Malloy Aeronautics, Prismatic and Callen-Lenz
into our portfolio, we are accelerating the
development of next-generation capabilities
that will help shape the future of air power.
We seek to retain their agility and creativity,
while unlocking access to our engineering
expertise, manufacturing know-how and
funding support to help them achieve their
full growth potential.
Prismatic specialises in solar-electric High
Altitude Pseudo Satellite UAS, offering a cost-
effective and persistent alternative to
conventional satellite, airborne sensing and
communication systems.
Callen-Lenz designs, develops and
manufactures novel UAS. Drawing on over
18 years of extensive experience across
military and civil domains, Callen-Lenz
delivers innovative technical solutions and
plays a leading role in advancing
autonomous technology.
Malloy Aeronautics is a leading developer
and manufacturer of all-electric Vertical Take-
Off and Landing heavy-lift UAS, including
demonstrated strike capability.
FalconWorks is delivering innovative, agile
and cost-effective solutions that meet the
evolving needs of our customers.
| 18 | BAE Systems plc Annual Report 2025 |
| Our key performance indicators |
Our key performance indicators (KPIs) are aligned to business
strategy and are used to actively monitor performance.
Links to executive remuneration
Executive directors’ annual and long-term
incentives are assessed using a combination
of the Group’s KPIs and other objectives
designed to meet the Group’s strategy.
Metrics, which are both financial and non-
financial, are determined and weighted
according to business priorities and may
be structured as targets to be achieved,
or underpins to targets which, if not
achieved, would reduce payouts. 75% of
annual incentive targets relate to financial
metrics aligned with long-term earnings
and cash targets.
The non-financial element is based on
a combination of personal performance
objectives that provide a clear line of sight
to our strategic objectives, including those
in relation to environmental initiatives, safety
and workforce culture.
| Remuneration report Page 112 |
Financial1
| Sales | Underlying EBIT | Underlying EPS | Free cash flow | ||||||||||
| Purpose Enables management to monitor the revenue of both the Group’s own subsidiaries as well as recognising the strategic importance in its industry of its equity accounted investments, to ensure programme performance is understood and in line with expectations. |
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. |
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. |
Purpose Provides a measure of cash generated by the Group’s operations after servicing debt and tax obligations, available for use in line with the Group’s capital allocation policy. |
| 2023 | 2024 | 2025 |
| 2023 | 2024 | 2025 |
| 2023 | 2024 | 2025 |
| 2023 | 2024 | 2025 |
| Progress in 2025 Sales increased 10%, on a constant currency basis, with all our operating segments seeing growth in the year. Both our Platforms & Services and Maritime segments recorded double-digit growth at 17% and 11%, respectively. Our Air segment rose by 9% and Electronic Systems grew by 8%. Finally, our Cyber & Intelligence segment recorded growth of 2%. |
Progress in 2025 Underlying EBIT increased 12%, on a constant currency basis, and our return on sales of 10.8% represented 20bps of expansion. The largest gains in underlying EBIT came from our Platforms & Services segment, with 30% growth. Electronic Systems, Air and Cyber & Intelligence all recorded double- digit growth in underlying EBIT. The decrease of 3% in underlying EBIT in our Maritime segment reflected the early-stage maturity of the portfolio. |
Progress in 2025 Underlying EPS increased 12%, on a constant currency basis, after accounting for the Group’s underlying net finance costs and tax. |
Progress in 2025 Free cash flow of £2,158m reflected strong operational cash conversion combined with material cash advances being received late in the year, offset by high investment in capital expenditure and R&D. |
||||||||||
| Our financial review Page 30 |
| For more detail on the movement in underlying EPS in the year see Page 33 |
- The definition and purpose of all performance measures defined by the Group are provided in the Alternative performance measures section on page 216.
| Strategic report | Governance | Financial statements | Additional information | 19 | ||
Links to strategy
| Sustain and grow our defence business | |
| Continue to grow our business in adjacent markets | |
| Develop and expand our international business | |
| Inspire and develop our workforce to drive success | |
| Enhance financial performance and deliver sustainable growth in shareholder value | |
| Advance and integrate our sustainability agenda |
| Our strategic framework Page 16 |
Non-financial
| Order intake | Net debt (excluding lease liabilities) |
Recordable accident rate (per 100,000 employees) |
Percentage change in Scope 1 and 2 greenhouse gas (GHG) emissions |
|||||||||||
| 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. |
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. |
Purpose We are focused on strengthening our safety management programme. Our accident rate is used to assess workplace safety improvements and ensure our safety efforts are aligned to the working environment. |
Purpose Our decarbonisation strategy supports our near-term absolute GHG reduction target across our operations (Scopes 1 and 2) by 2030 and is underpinned by an annual target to reduce operational GHG emissions by 4.2%. |
| 2023 | 2024 | 2025 |
| 2023 | 2024 | 2025 |
| 2023 | 2024 | 2025 |
| 2023 | 2024 | 2025 |
| Progress in 2025 Order intake was strong in 2025 , maintaining the positive performance of recent years and reflects the continued relevance of our diverse geographic footprint and multi-domain capabilities. |
Progress in 2025 During the year, net debt (excluding lease liabilities) decreased by £1,101m to £3,844m, with the key drivers being free cash generated of £2,158m, offset by £1,529m of shareholder returns. The significant increase in 2024 primarily reflected the $5.5bn (£4.4bn) acquisition of Ball Aerospace, which was funded through debt finance and existing cash reserves. |
Progress in 2025 The overall safety performance of our operations improved with our recordable accident rate decreasing by 6%. |
Progress in 2025 In 2025 , we achieved a GHG emissions reduction of 8.9%. |
||||||||||
| For details of significant orders in the year see Page 33 |
| For further details of the movement in net debt (excluding lease liabilities) see Page 34 |
| Safety, health and wellbeing Page 52 |
| Climate and the environment Page 56 |
| 20 | BAE Systems plc Annual Report 2025 |
| Our investment proposition |
We focus on careful long-term management and governance of our business to
deliver value for all our stakeholders. We have a strong track record of delivering
financial returns for investors. We are poised for long-term growth in sales and
profitability based on robust end markets, our operating model and the strategic
actions we are taking, presenting a compelling investment case for current and
prospective investors.
Our seven key advantages
| 1 | 2 | 3 | 4 | ||||||||
| We provide customers with world-class defence products and capabilities across multiple markets . |
We undertake multi-decade programmes with long-term embedded value. Our contract order backlog provides a high level of sales visibility, driven by multi-year programmes. |
We have a growing global opportunity pipeline. Our diverse geographic footprint supports us in pursuing excellent opportunities across all sectors as countries around the world face up to the multi-faceted threat environment. |
We foster a high-performance innovative culture and consistently invest in R&D to build on existing world-leading capabilities and generate new innovative and disruptive technologies . |
||||||||
| Read more Page 22 | Read more Page 21 | Read more Page 21 | Read more Page 24 | ||||||||
| 5 | 6 | 7 | |||||||||
| We have an intense focus on operational excellence, with strong, consistent programme performance. We are focused on creating value for our investors and customers. |
Sustainability is embedded in our business. It forms part of our strategic framework and underpins our purpose. |
We operate a value-enhancing operating model, undertaking our core business activities with clear, consistent and careful capital allocation . |
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| Read more Page 14 | Read more Page 16 | Read more Page 14 | |||||||||
| Lockheed Martin | ||||||||||
| RTX | ||||||||||
| Northrop Grumman | ||||||||||
| General Dynamics | ||||||||||
| BAE Systems | ||||||||||
| Boeing | ||||||||||
| L3Harris Technologies | ||||||||||
| Thales | ||||||||||
| Leonardo | ||||||||||
| Airbus | ||||||||||
Top global defence contractors’ revenue ($bn)
Source: Defense News Top 100 for 2025 (based on 2024 numbers). Excludes defence contractors in markets not accessible to BAE Systems.
Exchange rate applied to BAE Systems is $1.29/£1.
We provide defence products and capabilities across multiple sectors (2025 Sales1)
| Electronic Systems | Platforms & Services | Air | Maritime | Cyber & Intelligence |
- Sales is defined in the Alternative performance measures section on page 216.
| Strategic report | Governance | Financial statements | Additional information | 21 | ||
| Our contract order backlog and growing global opportunity pipeline provide a high level of sales visibility1,2 |
||||
| Our diversity of capabilities, products and programmes means we are not heavily reliant on a small number of key programmes or franchises. Our order backlog provides high revenue visibility as it includes only orders received from customers that have agreed funding. In addition, many of our programmes are well positioned to extend for many years beyond their current funded backlog and, in some cases, multiple decades. |
Total order backlog £84 bn |
|||
| Electronic Systems (ES) | ||||||||||||||||||||
| £14bn | ||||||||||||||||||||
| Electronic combat (including F-35) | ||||||||||||||||||||
| ES defence other | ||||||||||||||||||||
| ES commercial | ||||||||||||||||||||
| SMS | ||||||||||||||||||||
| Platforms & Services | ||||||||||||||||||||
| £15bn | ||||||||||||||||||||
| M109 | ||||||||||||||||||||
| AMPV | ||||||||||||||||||||
| ACV | ||||||||||||||||||||
| Maritime Solutions | ||||||||||||||||||||
| US ordnance & weapons | ||||||||||||||||||||
| Hägglunds & Bofors | ||||||||||||||||||||
| Air | |||||||||||||||||||||
| £33bn | |||||||||||||||||||||
| Future Combat Air Systems | |||||||||||||||||||||
| F-35 build and support | |||||||||||||||||||||
| Typhoon production | |||||||||||||||||||||
| UK Typhoon support | |||||||||||||||||||||
| Kingdom of Saudi Arabia support | |||||||||||||||||||||
| MBDA | |||||||||||||||||||||
| Maritime | |||||||||||||||||||||||
| £21bn | |||||||||||||||||||||||
| Dreadnought | |||||||||||||||||||||||
| SSN-AUKUS | |||||||||||||||||||||||
| Type 26 | |||||||||||||||||||||||
| Australia Hunter Class | |||||||||||||||||||||||
| Munitions (UK) | |||||||||||||||||||||||
| Dates reflect position at 1 January each year |
2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2040 |
| Order backlog | Pipeline/incumbent position | Opportunity | ||||||||||||
| 1. Backlog for Cyber & Intelligence is generally for one year with an incumbency position following. 2. Projections are based on internal management estimates and reflect management’s current assumptions, including assumed receipt of future orders over the medium term. |
||||||||||||||
| 22 | BAE Systems plc Annual Report 2025 |
| Our markets |
We have leading positions in major defence markets around the world, including
the US, UK, Europe, Middle East and Asia Pacific . We are not only one of the world’s
largest defence and security companies, but also one of the most geographically
diverse, providing us with a competitive advantage.
Background on our markets
and market position
Across the Group, our portfolio aligns well
with the national defence strategies of
our customers, and the recently announced
spending increases across NATO provide
a very supportive backdrop for growth
over the medium term. We expect significant
opportunities across our business, including
space systems, missile and air defence
systems, electronic warfare, combat aircraft,
combat vehicles, frigates, submarines, UAS
and counter-UAS, among others.
Factors likely to impact future
business performance
Business risks facing the Group are
reported in the principal risks section of
this report (page 65). In relation to our
market positions and future performance,
the major risks are in relation to
government customer defence budgets,
market stability (political and geopolitical)
and competition. At the operational level,
performance of products and services
and adherence to delivery schedules
could impact our market positions with
customers. Competitor pricing or new
entrants could also have an impact.
| US and Canada | ||
| $895bn defence market |
||
| 44% 2025 Sales1 |
||
| The US is the single largest defence market in the world. We are a top ten defence prime contractor in the US. In Canada, we have a long history of supporting the Canadian Armed Forces. |
||
| Proven BAE Systems expertise – Electronic warfare – Precision strike – C4ISR – Space – Ship repair – Combat vehicles – Munitions Defence priorities and future opportunities – Space – Missile defence – Missiles and munitions – UAS and counter-UAS – Naval modernisation and expansion |
||
| UK | ||
| $84bn defence market |
||
| 27% 2025 Sales |
||
| We are the largest defence company in the UK, which is the sixth largest defence market in the world. We have strong and enduring relationships with the UK Ministry of Defence and our domestic supply chains. |
||
| Proven BAE Systems expertise – Submarine design and build – Naval ship build and support – Combat aircraft build and support – UAS and counter-UAS – Munitions – Cyber intelligence Defence priorities and future opportunities – Space – Cyber intelligence – Missiles and missile defence systems – Current and next-generation combat aircraft – UAS and counter-UAS |
||
| Strategic report | Governance | Financial statements | Additional information | 23 | ||
- Sales is defined in the Alternative
performance measures section on page 216.
- Includes NATO countries and Ukraine,
but excludes the UK as shown separately.
- Includes Japan, India, Indonesia, Malaysia,
New Zealand, Philippines, Singapore,
South Korea, Taiwan, Thailand and Vietnam.
- Includes Egypt, Kuwait, Oman, Qatar, the
Kingdom of Saudi Arabia and United Arab
Emirates.
Source: Jane’s GPS defence budgets (based
on 2025 total defence budgets).
| Europe2 | ||
| $479bn defence market |
||
| 12% 2025 Sales |
||
| Many European countries have committed to significantly increasing their spending on defence. We have a strong, established position in Europe and our range of products and services aligns well to the capability requirements of these nations. |
||
| Proven BAE Systems expertise – Combat aircraft – Missiles and missile defence systems – Combat vehicles/artillery – UAS and counter-UAS – US foreign military sales Defence priorities and future opportunities – Combat vehicles/artilery – Missiles and missile defence systems – Current and next-generation combat aircraft – UAS and counter-UAS |
||
| Middle East4 | ||
| $127bn defence market |
||
| 10% 2025 Sales |
||
| The Kingdom of Saudi Arabia is the seventh largest defence market in the world and a leading military power in the Middle East. We also support other customers in Oman and Qatar. |
||
| Proven BAE Systems expertise – Kingdom of Saudi Arabia support – Qatar Typhoon and Hawk Defence priorities and future opportunities – Typhoon – Support and training – Upgrades and defence infrastructure programmes – Cyber intelligence – UAS and counter-UAS |
||
| Asia Pacific3 | ||
| $266bn defence market |
||
| 2% 2025 Sales |
||
| In the Asia Pacific region, we are a supplier to a number of armed forces, both directly and through joint ventures. During the year we strengthened our links with Japan following the incorporation of Edgewing. |
||
| Proven BAE Systems expertise – US foreign military sales Defence priorities and future opportunities – GCAP – US foreign military sales – Electronic Systems – US foreign military sales – combat vehicles/ artillery/precision weapons – Cyber intelligence – MBDA exports |
||
| Australia | ||
| $40bn defence market |
||
| 4% 2025 Sales |
||
| Australia has committed to increase its spending on defence in the coming years. We are the largest defence company in Australia, with a strong presence across all domains. |
||
| Proven BAE Systems expertise – Hunter Class frigate – US foreign military sales – Combat aircraft support – Naval ship support – Combat vehicles – C4ISR Defence priorities and future opportunities – SSN-AUKUS – MBDA exports – Cyber intelligence – Australian defence exports – US foreign military sales – Electronic Systems – US foreign military sales – combat vehicles, artillery, precision weapons |
||
| 24 | BAE Systems plc Annual Report 2025 |
| Our investment in technology |
As the threat environment becomes more dynamic and military budgets need
to work harder, we are continuing to invest in key technology areas to support the
complex requirements of our customers.
Our key technology areas of focus include
electronic warfare, autonomy and uncrewed
systems, counter drone, laser-guided
weapons, synthetic training, electrification
applications and space solutions. We also
continue to develop the digital technologies
that can help our customers manage large
complex platforms more efficiently,
maximising uptime and reducing
maintenance costs.
We drive innovation through a multi-
faceted approach, which includes evolving
our portfolio through technology-focused
acquisitions, increasing our self-funded
R&D and leveraging collaborations with
partners and academia. This strategy
enables us to rapidly develop and deliver
new technology to our customers today.
We also invest in research that could
provide step-changes in future capability
and identify technology that can help us
become more efficient.
These are our core areas:
Technology to protect today
Pioneering future innovation
Technology for efficiency
Technology to protect today
Our customers have an urgent need for
advanced military equipment, driven by
rapidly evolving threats and technological
advancements, which is why we are focused
on making this technology available at pace.
In 2025, we made advances in key areas and
deployed our technology at the heart of
customer operations around the world.
Uncrewed systems – drones – are increasingly
vital, but becoming harder to operate due to
electronic warfare disrupting communications.
We are addressing this challenge, providing
enhanced autonomy, enabling systems to
continue missions without maintaining
constant communication, while also
making communications more resistant to
interference. AI also plays an integral role in
both autonomy and electronic warfare
advancements.
We made significant progress in autonomy.
For example, in our Maritime sector, we
demonstrated the P38 autonomous boat
in a pursuit role and a human-approved
live firing. Using our platform-agnostic
Nautomate™ autonomy system, the
third-party boat pursued a target vessel
autonomously and required human
operator input only to authorise firing at a
target. This reduced the reliance on human
operator resource needed for controlling of
the vehicle, while maintaining human
oversight of force deployment.
We bolstered our electronic warfare
capabilities, which are critical to maintain
communications between our customers’
assets and allies, especially for autonomous
assets operating at range.
With more than 100,000 radios deployed
globally, we installed our latest software-
defined radios on the US Army’s rotary-wing
fleet. These radios dynamically adapt their
waveforms to resist jamming and
maintain battlefield communications.
Additionally, we developed a new command
and control system to automate intelligence
gathering on enemy communications,
integrate radar and other sensor data and
then detect and classify drones. Next, we plan
to integrate it with both electronic and kinetic
countermeasures for rapid deployment.
Integrating intelligence and control across
land, sea, air and space domains is central
to our strategy. Our INTeACT™ Combat
Management System helps the Royal Navy
defend against drone and missile threats
by connecting ship sensors, including radars,
and external sensors, like data from F-35
and Typhoon aircraft, then identifying
and prioritising threats before directing
countermeasures to respond. The latest
INTeACT™ version provides a more
collaborative way of working with third-party
developers – we are exploring possible new
AI-based enhancements with UK-based SMEs.
| Strategic report | Governance | Financial statements | Additional information | 25 | ||
Upgraded firepower
with digital capability
The conflict in Ukraine has demonstrated
the critical importance of digitally enabled
conventional military equipment. For
instance, where drones are used to spot
targets and share data across a network,
digitally enabled artillery like our ARCHER
platform can receive this intelligence then
fire within moments. Once ARCHER receives
a fire mission, it automatically generates a
firing solution and can fire with no further
input than the push of a button.
We are also increasing the range and
precision of artillery, like the 155mm
Scorpio-XR rounds developed by our US
business in partnership with the US Army.
A key technological innovation at the round
itself allows the Scorpio-XR to achieve
precision strikes at ranges that dramatically
exceed those of existing munitions.
Unlocking new UAS capability
A major step was achieved through the
launch of a precision-guided munition from
a multi-rotor drone to shoot down another
drone. This brought together a modified
version of our T-150 UAS with munitions
upgraded with our Electronic Systems
APKWS® laser-guidance kit. In just four
months, we moved from the idea stage
to successful live firing trials, as we aim to
provide our customers the ability to deploy
a range of options for strike capability,
including precision-guided weapons, closer
to the front line without putting crewed
vehicles closer to danger.
The T-150 UAS also supported the Royal
Navy Carrier Strike Group, carrying supplies
between ships, a role typically conducted by
crewed helicopters that are significantly less
cost effective.
Beyond building drones, we are innovating
to make them easier for our customers to
deploy as an integral part of combat teams.
This year, we demonstrated the use of Large
Language Models (LLMs) and generative AI
to operate drones. This delivers two key
benefits. For the operators, this means that
non-expert users can command the drones
using natural language, which drastically
reduces training and operator workload.
For the drone, it increases flexibility, as the
drone can understand the intent of the
operator and use generative AI to reconfigure
itself to perform unexpected tasks like search
and rescue or identifying specific enemy
activities. Throughout these activities, the
system ensures that appropriate operator
oversight is maintained.
As part of our drive to understand how
drones can best integrate into combat
teams, we are developing a synthetic
environment, OdySSEy™, that goes beyond
training to allow teams to rehearse missions
with collaborative autonomous platforms.
This will help us rapidly refine drone control
interfaces, understand how they function
as part of the team and feed insights back
into their design.
Intelligence directly to the front line
We launched our Azalea satellite cluster,
comprising three BAE Systems-built radio-
based satellites and a synthetic aperture
radar-focused satellite from Finnish firm,
ICEYE. We have been working closely with
ICEYE to develop co-sense capability.
Unlike conventional intelligence satellites,
Azalea uses on-board edge processors
that will analyse radio and radar data in orbit,
delivering global insights and intelligence
faster by reducing the gap between data
gathering and actionable intelligence.
| 26 | BAE Systems plc Annual Report 2025 |
| Our investment in technology continued |
Pioneering future innovation
Many of our customers want affordable,
attritable uncrewed products to complement
their force mix, working seamlessly with both
crewed and more advanced uncrewed
assets while requiring minimal logistical
effort.
We have long been developing systems that
can share data, intelligently plan and execute
missions with minimal human control.
Having already demonstrated autonomous
vehicles on land, sea and air, we continue
to innovate, aiming to deliver powerful, easy-
to-operate platforms that integrate with both
our own and third-party systems. We have
established a common autonomy and control
architecture to underpin this goal.
We have joined forces with Forterra in the US
to develop an autonomous AMPV prototype,
integrating disruptive technologies onto
proven platforms without compromising
speed or survivability. Using a modular design
approach supports compatibility across the
US Army’s Armored Brigade Combat Team
platforms, including the Bradley A4 and the
M109A7 Paladin Self-Propelled Howitzer.
In the maritime domain, we unveiled
concepts for future vessels, including an
air warfare command ship and a family of
deployed sensor effector platforms. These
designs aim to deliver combat mass with
minimal crew, optimise military budgets
and carry large missile payloads to counter
growing threats.
We continue to advance our Herne extra-
large autonomous underwater vessel
through a 10-year exclusive agreement
with Canada’s Cellula Robotics, targeting
a highly capable product offering to
customers by the end of 2026. Herne is
designed to support anti-submarine warfare,
covert surveillance missions and seabed
infrastructure protection.
Integrating disruptive technologies
into the overall force mix is critical to our
customers’ success.
We are testing a new underwater
communications network using optical and
acoustic transmission to maintain high
bandwidths over longer distances, enabling
surface vessels to receive information from
underwater fleets and command them.
As hypersonic missile threats grow, we
enhanced our simulation capabilities to
model attacks involving multiple missile types
and drones – a tactic expected to become
more common. These simulations,
underpinned by our deep understanding of
the operational context, will enable us to
deliver differentiated performance from our
future maritime vessel concepts.
Our FAST Labs™ team signed a three-year
Cooperative Research and Development
Agreement with the US Air Force Research
Laboratory to advance quantum sensing and
networking. This collaboration aims to refine
and integrate cutting-edge technologies into
quantum sensors and networks to enhance
future security for defence and civilian
applications.
| Strategic report | Governance | Financial statements | Additional information | 27 | ||
Technology for efficiency
While global defence budgets are increasing
in response to growing threats, so are the
demands. So, it is incumbent on industry
to maximise efficiency in development,
production and operational costs, while
innovating faster, delivering more quickly
and strengthening supply chain resilience.
We work with a range of partners, including
the Digital Catapult and Advanced
Manufacturing Research Centre in the UK,
so that improvements in our own processes
can also benefit others.
Some efficiencies could also result in
performance improvements, offering
greater product endurance or even speed.
In collaboration with Strathclyde University
and the University of Southampton,
we harnessed AI-assisted design tools to
develop more efficient naval hulls. Testing
physical models of these cutting-edge hull
forms suggested that a 130m-length ship
could travel an extra 1,000 miles on the
same amount of fuel, representing more
than a 10% boost in range.
Our Australian research and development
centre is focused on cutting build times for
Hunter Class frigates by embracing new
technologies like flying quality inspection
drones that can navigate confined or
elevated spaces, robotic welding to support
our skilled production workforce and trialling
digital tracking of production parts in the
shipyard.
With decades of experience managing every
stage of the lifecycle for complex military
assets, we transformed this experience into
our own asset management application,
PropheSEA®. Already trusted by the
Royal Navy and NATO allies, PropheSEA®
generates insights to help make informed,
quick decisions on maintenance, upgrades
and mission readiness. We are now working
with Czech systems integrator, PragoData,
to bring this game-changing technology to
the Czech defence sector.
| See our feature on Global Combat Ships on Page 28 |
| 28 | BAE Systems plc Annual Report 2025 |
| Feature |
Building
the future
Our Global Combat Ship is designed to be a
highly capable and versatile multi-mission
warship, equipped with cutting edge-technology,
including advanced anti-submarine warfare
and sophisticated air defence systems. The fleet
will support defence operations anywhere on
the world's oceans.
Working with international customers and
partners, we are developing a ship that is bringing
nations together with future opportunities to
share training, operational experience and skills.
Versatility is embedded into the Global Combat
Ship’s philosophy, with each ship capable of
undertaking a wide range of roles from high-
intensity conflict to humanitarian assistance,
operating independently or as a key asset
within a task group. All variants will share a
common acoustically quiet hull and will take full
advantage of modular design and open systems
architecture to facilitate through-life support
and upgrades as new technology develops.
This aims to ensure that the Global Combat Ship
remains relevant to future maritime demands
and delivers an adaptable design with the
ability to accommodate sub-systems to meet
individual country needs.
Programmes
City Class frigate - The UK programme to
develop the Type 26 ship for the Royal Navy
is well underway, with construction of the
first five of eight ships in progress at our
Glasgow shipyards.
Hunter Class frigate - Our Australia business is
leading the largest ever surface ship project in
Australia’s defence history, by value, with more
than half of the units on the first of six Hunter
Class frigates for the Royal Australian Navy now
in production.
River Class destroyer - Canada selected our
Global Combat Ship design for its 15-ship River
Class destroyer programme, the first of which is
now in production at the Prime Contractor’s
facilities in Halifax, Nova Scotia.
Norway - announced in August that it has
selected our UK-designed Type 26 frigate for its
future anti-submarine warfare platform, with at
least five to be built at our Glasgow shipyards.
| City Class frigate |
| Length 151.4 metres |
| Displacement ~8,200 tonnes |
| Top speed +26 knots |
| Range >7,000 nmi |
| Strategic report | Governance | Financial statements | Additional information | 29 | ||
| 30 | BAE Systems plc Annual Report 2025 |
| Our financial review |
2025 full-year performance
summary
We have delivered record sales of £30.7bn, a
10% increase, on a constant currency basis,
while building our order backlog to an all-
time high of £84bn.
Our focus on efficient delivery contributed
to the 12% growth in underlying EBIT, on
a constant currency basis, and we posted
a double-digit increase in underlying EPS
of 12%.
Return on sales was up at 10.8%, meaning
we have delivered 100bps of margin
expansion since 2020.
| We hold a record order backlog of £84bn and our strong order intake for the year demonstrates the continued relevance of our diverse geographic footprint and multi- domain capabilities. Brad Greve Chief Financial Officer |
Free cash flow delivered was well above our
estimate for the year, at nearly £2.2bn, with the
benefit of customer advances coming late in
the year. This free cash flow was after double-
digit increases in R&D and continued high
levels of capital expenditure.
After our increased internal investments, we
returned £1.5bn to shareholders in line with
our disciplined capital allocation policy.
All these numbers highlight the health
and effectiveness of our value compounding
model (read more on page 14).
2025 full-year performance
against guidance
| Sales |
| Underlying EBIT |
| Underlying EPS |
| Free cash flow |
| Actual 2025 financial results | ||
| 2025 guidance range based on guidance provided at the Half-yearly results in July 2025, at an exchange rate of $1.28:£1 |
||
| Strategic report | Governance | Financial statements | Additional information | 31 | ||
| Financial highlights | |||||||||
| Financial performance measures as defined by the Group 1 | Financial performance measures as derived from IFRS | ||||||||
| Sales £30,662m 10% growth2 |
Revenue £28,336m 8% growth |
||||||||
| 2023 | 2024 | 2025 | 2023 | 2024 | 2025 | ||||
| Underlying EBIT £3,322m 12% growth 2 |
Operating profit £2,925m 9% growth |
||||||||
| 2023 | 2024 | 2025 | 2023 | 2024 | 2025 | ||||
| Underlying EPS 75.2p 12% growth2 |
Basic EPS 68.8p 6% growth |
||||||||
| 2023 | 2024 | 2025 | 2023 | 2024 | 2025 | ||||
| Free cash flow £2,158m £ 347m lower |
Net cash flow from operating activities £3,432m £ 493m lower |
||||||||
| 2023 | 2024 | 2025 | 2023 | 2024 | 2025 | ||||
| Order backlog £83.6bn £ 5.8bn increase |
Order book £63.1b n £ 2.7bn increase |
||||||||
| 2023 | 2024 | 2025 | 2023 | 2024 | 2025 | ||||
| Order intake £36.8bn £ 3.1bn increase |
Dividend per share 36.3 p 10% growth |
||||||||
| 2023 | 2024 | 2025 | 2023 | 2024 | 2025 | ||||
| 75% of the UK executive directors’ annual bonuses are based on the achievement of financial KPIs (see page 18). References to KPIs throughout the Annual Report. |
-
The definition and purpose of all performance measures defined by the Group are provided in the Alternative performance measures section on page 216.
-
Growth rates for Sales, Underlying EBIT and Underlying EPS are on a constant currency basis (i.e. current year compared with prior year translated at current
year exchange rates). The comparatives have not been restated. All other growth rates and year-on-year movements are on a reported currency basis.
| 32 | BAE Systems plc Annual Report 2025 |
| Our financial review continued |
| Group income statement | Underlying – as defined by the Group |
Statutory – as derived from IFRS |
||||
| 2025 | 2024 | 2025 | 2024 | |||
| £m | £m | £m | £m | |||
| Sales/Revenue | 30,662 | 28,335 | 28,336 | 26,312 | ||
| Underlying EBIT/Operating profit | 3,322 | 3,015 | 2,925 | 2,685 | ||
| Finance income | 81 | 117 | 135 | 135 | ||
| Finance costs | (465) | (513) | (488) | (488) | ||
| Net finance costs | (384) | (396) | (353) | (353) | ||
| Profit before tax | 2,938 | 2,619 | 2,572 | 2,332 | ||
| Tax expense | (596) | (469) | (421) | (291) | ||
| Profit for the year 1 | 2,342 | 2,150 | 2,151 | 2,041 |
| Return on Sales/Revenue | 10.8% | 10.6% | 10.3% | 10.2% |
| Reconciliation of underlying EBIT to operating profit | 2025 | 2024 | ||||
| £m | £m | |||||
| Underlying EBIT | 3,322 | 3,015 | ||||
| Adjusting items | 40 | 23 | ||||
| Amortisation of programme, customer-related and other intangible assets, and impairment of equity accounted investments and intangible assets |
(414) | (344) | ||||
| Net finance income and tax of equity accounted investments | (23) | (9) | ||||
| Operating profit | 2,925 | 2,685 |
As defined by the Group
Sales for the year were £30.7bn (2024
£28.3bn) representing growth, on a constant
currency basis, of 10% (2024 14%). On an
organic basis sales grew by 9% on a constant
currency basis.
Electronic Systems recorded sales of £7.5bn
(2024 £7.2bn), equating to growth of 8%
(2024 35%) on a constant currency basis,
which included the full 12-month benefit of
our SMS business and reflects increased
demand in the Electronic Combat and
Countermeasure & Electromagnetic Attack
solutions businesses.
Platforms & Services posted sales of £5.0bn
(2024 £4.4bn), with growth of 17% (2024
15%) on a constant currency basis, as the
sector works to deliver on the recent
increased demand for combat vehicles both
in the US, through our Combat Mission
Systems business which was up 15%, and in
Europe, through our Hägglunds and Bofors
businesses where growth was 32%.
Our Air sector recorded sales of £9.3bn (2024
£8.5bn), representing growth of 9% (2024
7%) on a constant currency basis. We
continued to see increased activities on the
design and development of our Future
Combat Air Programme, as well as 17%
growth in MBDA, through the year.
Maritime recorded sales of £6.8bn (2024
£6.2bn), with growth of 11% (2024 12%) on
a constant currency basis, with increased
activities across the sector. Construction has
continued across major programmes
including Dreadnought, Type 26 and Hunter
Class frigates, and design work for SSN-
AUKUS is progressing.
Sales in the Cyber & Intelligence sector were
£2.4bn (2024 £2.4bn), an increase of 2%
(2024 6%) on a constant currency basis,
predominantly from counter-UAS sales.
Underlying EBIT was up 12% (2024 14%),
on a constant currency basis, to £3,322m
(2024 £3,015m), resulting in an increased
return on sales for the year of 10.8% (2024
10.6%). On an organic basis underlying EBIT
grew 11% on a constant currency basis.
Our Electronic Systems sector grew
underlying EBIT to £1,162m (2024 £1,071m),
an increase of 12% (2024 25%) on a constant
currency basis, and generated a return on
sales of 15.4% (2024 14.9%). The growth in
underlying EBIT benefitted both from an
increase in sales and a full 12-month
contribution from SMS.
Platforms & Services reported underlying EBIT
of £576m (2024 £448m), an increase of 30%
(2024 29%) on a constant currency basis,
with return on sales increasing to 11.4%
(2024 10.2%). The growth reflected the
demand for combat vehicles in the US and
Europe as production ramped up across
Bradley, CV90 and AMPV.
Our Air sector reported underlying EBIT of
£1,108m (2024 £1,007m), an increase of 10%
(2024 7%) on a constant currency basis,
maintaining a strong return on sales of 11.9%
(2024 11.8%), which reflected good
operational performance.
Maritime reported underlying EBIT of
£457m (2024 £474m), a decrease of 3%
(2024 increase of 12%) on a constant
currency basis. The return on sales of 6.7%
(2024 7.7%) reflected the early-stage
maturity of the portfolio with several first-in-
class programmes trading at relatively low
margins as we invest in additional capacity
and capability both within our shipyards and
the supply chain to support programme
delivery.
Finally, Cyber & Intelligence reported
underlying EBIT of £223m (2024 £199m),
with a return on sales of 9.3% (2024 8.3%),
with a full-year contribution from Kirintec.
Adjusting items totalled a net gain of £40m
(2024 £23m). During the year, the Group
realised a net profit of £51m for pension-
related gains, largely in relation to a review of
US pension arrangements (£58m), and a
£12m profit on the disposal of a portion of
our remaining shareholding in Air Astana.
This was partially offset by £22m of
integration-related costs, primarily in relation
to SMS, and £1m of costs related to historic
transactions. The prior year gain reflected a
net profit of £94m on a number of non-core
businesses disposals and a settlement gain of
£13m on a US pension buyout, offset by
£72m of acquisition and integration-related
costs and £12m of other costs related to
historic transactions.
As derived from IFRS
Revenue was £28.3bn (2024 £26.3bn), with
growth during the year of 8% (2024 14%) on
a reported currency basis, which reflected the
same drivers behind the increase in sales,
excluding the impact of MBDA and our other
equity accounted investments.
Operating profit increased 9% (2024 4%)
to £2,925m (2024 £2,685m) on a reported
currency basis. On an operating sector basis,
this reflected the same drivers as underlying
EBIT, however, operating profit was impacted
by additional costs from the amortisation of
acquired intangibles and impairment of equity
accounted investments and intangibles,
which increased by £70m to £414m in 2025
(2024 £344m), primarily due to the impact of
a full 12-months amortisation of intangibles
acquired with SMS.
- On a Group basis, £89m (2024 £85m) of profit for the year is attributable to non-controlling interests, with £2,253m (2024 £2,065m) attributable to equity shareholders.
On an IFRS basis, £89m (2024 £85m) of profit for the year is attributable to non-controlling interests, with £2,062m (2024 £1,956m) attributable to equity shareholders.
| Strategic report | Governance | Financial statements | Additional information | 33 | ||
| Orders | ||||||||||
| As defined by the Group | ||||||||||
| Order intake was £36.8bn, which has lifted order backlog to a record of £83.6bn. Our book to bill ratio was 1.2 and reflected the continued relevance of our diverse geographic footprint and multi-domain capabilities, with all operating sectors recording strong order intake for the year. Details of awards in the year are covered in the segmental reviews on pages 37 to 47 with significant orders in the year including: |
– In Electronic Systems, the £8.7bn of order intake featured c.£2bn from SMS, including orders for missile warning and tracking systems for the US Space Force. – In Platforms & Services, the £6.2bn of order intake featured strong contract awards for our US combat vehicle programmes of c.£2bn, as well as continued European orders in our Bofors and Hägglunds businesses. |
– The Air sector recorded orders totalling £14.6bn. The agreement with Türkiye, to acquire 20 Typhoon aircraft and weapons, amounted to £4.6bn alongside increased orders in US Programmes and Future Combat Air Systems. Our share of orders through MBDA was in excess of £4bn. – The Maritime sector recognised orders of £5.0bn predominantly for the Submarines business, as well as the next major phase of Canada’s River Class destroyer programme and Australia’s Hobart Class combat system upgrade. |
||||||||
| As defined by the Group | As derived from IFRS | |||||||||
| Order intake | Order backlog | Order book | ||||||||
| (2024 £33.7bn) | (2024 £77.8bn) | (2024 £60.4bn) | ||||||||
| 2025 £36.8bn |
2025 £83.6bn |
2025 £63.1bn |
||||||||
Earnings per share (EPS)
| As defined by the Group | 2025 | 2024 | |
| Underlying earnings for the year attributable to equity shareholders | £2,253m | £2,065m | |
| Underlying EPS | 75.2p | 68.5p | |
| As derived from IFRS | |||
| Profit for the year attributable to equity shareholders | £2,062m | £1,956m | |
| Basic EPS | 68.8p | 64.9p |
As defined by the Group
Underlying EPS increased to 75.2p (2024
68.5p), 12% on a constant currency basis,
largely driven by the improved underlying
profit for the year, with detailed movements
set out in the table below.
As derived from IFRS
Basic EPS increased 6% to 68.8p (2024
64.9p) with the gain in underlying EBIT being
offset by the amortisation of programme,
customer-related and other intangible assets,
and impairment of equity accounted
investments and intangible assets, as well as
an increase in the Group’s effective tax rate.
Movement in underlying EPS (pence)
| 34 | BAE Systems plc Annual Report 2025 |
| Our financial review continued |
| Net debt (excluding lease liabilities) | |||
| 2025 | 2024 | ||
| Components of net debt | £m | £m | |
| Cash and cash equivalents | 3,438 | 3,378 | |
| Debt-related derivative financial instruments (net) | 3 | 89 | |
| Loans – non-current | (7,190) | (7,713) | |
| Loans – current | (95) | (699) | |
| Net debt (excluding lease liabilities) | (3,844) | (4,945) |
Cash and cash equivalents of £3,438m
(2024 £3,378m) are held primarily for
management of working capital as well as
the repayment of debt securities, pension
funding when required and committed
shareholder returns.
The Group’s net debt (excluding lease
liabilities) at 31 December 2025 was
£3,844m (2024 £4,945m), a net decrease of
£1,101m (2024 increase of £3,923m) from
the position at the start of the year, with
detailed movements set out in the table
below.
For details of maturity of the Group
borrowings see note 21 on page 180.
Other movements comprised foreign
exchange on the Group’s US dollar-
denominated cash and borrowings, offset by
their associated derivatives, and dividends
paid to non-controlling interests.
Movement in net debt (excluding lease liabilities) (£m)
Free cash flow
2,158
Balance sheet
| 2025 | 2024 | ||
| £m | £m | ||
| Goodwill | 12,732 | 13,297 | |
| Other intangible assets | 2,513 | 2,965 | |
| Property, plant and equipment, right-of-use assets and investment property | 6,835 | 6,636 | |
| Equity accounted investments and other investments | 822 | 906 | |
| Working capital | (6,499) | (6,386) | |
| Lease liabilities net of finance lease receivables | (1,742) | (1,817) | |
| Group’s share of net IAS 19 post-employment benefits surplus | 844 | 768 | |
| Net tax assets | 285 | 422 | |
| Net other financial liabilities | (9) | (69) | |
| Net debt (excluding lease liabilities) | (3,844) | (4,945) | |
| Net assets | 11,937 | 11,777 |
Goodwill of £12.7bn (2024 £13.3bn) was a
decrease of £0.6bn on the prior year, driven
by foreign exchange translation of the
Group’s US dollar-denominated goodwill.
Other intangible assets of £2.5bn (2024
£3.0bn) was a decrease of £0.5bn on the
prior year, driven by amortisation of acquired
intangibles of £0.3bn, predominantly due to
the assets acquired from Ball Aerospace in
2024, combined with foreign exchange
movements.
Property, plant and equipment, right-
of‑use assets and investment property
was £6.8bn (2024 £6.6bn), an increase of
£0.2bn as significant investment in both
facilities and expansion of capacity across the
Group was offset by the impact of
depreciation and foreign exchange.
Equity accounted investments and other
investments was £822m (2024 £906m) as
the Group’s share of profit from its equity
accounted investments of £219m was more
than offset by dividends received in the year
of £304m.
The Group’s share of the net IAS 19 post-
employment benefits surplus was £0.8bn
(2024 £0.8bn), net of a 25% (2024 25%)
withholding tax of £0.4bn (2024 £0.4bn).
Details of the Group’s post-employment
benefit schemes are provided in note 23 to
the Consolidated financial statements on
page 182.
| Strategic report | Governance | Financial statements | Additional information | 35 | ||
Cash flow
| 2025 | 2024 | ||
| As defined by the Group | £m | £m | |
| Free cash flow | 2,158 | 2,505 | |
| Operating business cash flow | 2,787 | 3,093 | |
| As derived from IFRS | |||
| Net cash flow from operating activities | 3,432 | 3,925 | |
| Net cash flow from investing activities | (541) | (5,269) | |
| Net cash flow from financing activities | (2,774) | 695 | |
| Net increase/(decrease) in cash and cash equivalents | 117 | (649) | |
| Cash and cash equivalents at 1 January | 3,378 | 4,067 | |
| Effect of foreign exchange rate changes on cash and cash equivalents | (57) | (40) | |
| Cash and cash equivalents at 31 December | 3,438 | 3,378 |
As defined by the Group
Free cash flow of £2,158m (2024 £2,505m)
reflected higher than anticipated customer
advances towards the end of the year
together with good operational cash
conversion.
Operating business cash flow of £2,787m
(2024 £3,093m) was a decrease of £306m
(2024 £125m). Although the Group received
significant net customer advances, these
were lower than the prior year. The net
customer advances were offset by a high
level of capital expenditure of £957m
(2024 £987m) as we invested in our facilities
to increase capacity and efficiency across
the Group.
As derived from IFRS
Net cash flow from operating activities
was £3,432m (2024 £3,925m), a decrease
of £493m (2024 increase of £165m) primarily
resulting from lower net customer advances
received during the year.
Net cash flow from investing activities
was an outflow of £541m (2024 £5,269m).
Capital expenditure remained high in the
year at £957m (2024 £987m) as we
continued to invest in our facilities across the
Group. This was offset by dividends from our
equity accounted investments, interest and
cash proceeds on the partial disposal of our
shareholding in Air Astana. The prior year
reflected significant M&A investment across
a number of acquisitions, including Ball
Aerospace, which accounted for a net
cash outflow of £4.8bn, as well as capital
expenditure of £1.0bn. This was offset by
cash proceeds of £194m from non-core
business disposals.
Net cash flow from financing activities
was an outflow of £2,774m (2024 inflow
of £695m), a decrease of £3,469m (2024
increase of £2,883m). Cash returns to
shareholders, through dividend and share
repurchases amounted to £1,529m (2024
£1,492m). Although dividends increased to
£1,027m (2024 £937m), the value of share
repurchases was lower at £502m (2024
£555m). During 2025, we repurchased
30m shares under the 2023 share buyback
programme (2024 43m shares under the
2022 and 2023 share buyback programmes).
The Group repaid debt finance of £562m,
compared to a net cash inflow from debt
finance of £3,139m in the prior year.
Exchange rates
| Average | 2025 | 2024 |
| £/$ | 1.319 | 1.278 |
| £/€ | 1.167 | 1.181 |
| £/A$ | 2.045 | 1.938 |
| Year end | ||
| £/$ | 1.345 | 1.253 |
| £/€ | 1.145 | 1.210 |
| £/A$ | 2.017 | 2.023 |
| 36 | BAE Systems plc Annual Report 2025 |
| Guidance for 20261 |
After a strong financial year for 2025, 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 $1.32:£1, which is in line with the
actual 2025 exchange rate.
| Sales | ||
| Expected to increase in the range of |
||
| 7% to 9% | ||
| 2025 £30.7bn |
| Underlying net finance costs | Effective tax rate | Non-controlling interests | ||||||||
| c.£370m | c.22% | c.£80m | ||||||||
| Underlying EBIT | ||
| Expected to increase in the range of |
||
| 9% to 11% | ||
| 2025 £3,322m |
| Underlying EPS | ||
| Expected to increase in the range of |
||
| 9% to 11% | ||
| 2025 75.2p |
| Free cash flow for 2026 |
||
| >£1.3bn | ||
| 2025 £2.2bn |
Sensitivity to foreign exchange rates: the Group operates in a number of currencies, the most significant of which is the US dollar. As a guide,
a 5 cent movement in the £/$ exchange rate will impact sales by c.£500m, underlying EBIT by c.£70m and underlying EPS by c.1.4p.
Segmental guidance
The following table provides guidance by segment, aligned to the Group guidance.
| Year ended 31 December 2026 | Expected sales | Expected return on sales 2 | |||
| Electronic Systems | Up 6% to 8% | c.15% | |||
| Platforms & Services | Up 9% to 11% | 11% to 12% | |||
| Air | Up 9% to 11% | c.12% | |||
| Maritime | Up 5% to 7% | 7% to 8% | |||
| Cyber & Intelligence | Up 5% to 7% | 8% to 9% |
In 2026, the HQ reporting segment is expected to be an expense of c.£225m (2025 £204m).
Three-year cumulative free cash flow guidance
| Actual | Forecast | ||||
| 2024 | 2025 | 2026 | 2027 | 2028 | |
| 2024–2026 in excess of £6.0bn (previously in excess of £5.5bn) |
£2.5bn | £2.2bn | >£1.3bn | ||
| 2025–2027 in excess of £5.5bn |
£2.2bn | >£1.3bn | |||
| 2026–2028 in excess of £6.0bn |
>£1.3bn |
- While the Group is subject to geopolitical and other uncertainties, the following guidance is provided on current expected operational performance.
The guidance is based on the measures used to monitor the underlying financial performance of the Group. See the Alternative performance measures
section on page 216.
- Underlying EBIT as percentage of sales.
| Strategic report | Governance | Financial statements | Additional information | 37 | ||
| Segmental review |
| Financial performance measures as defined by the Group1 |
Financial performance measures as derived from IFRS |
||||||||||||||||
| Sales | Underlying EBIT |
Return on sales |
Operating business cash flow |
Order intake |
Order backlog |
Revenue | Operating profit |
Return on revenue |
Net cash flow from operating activities |
Order book | |||||||
| Year ended 31 December 2025 | £m | £m | % | £m | £bn | £bn | £m | £m | % | £m | £bn | ||||||
| Electronic Systems | 7,528 | 1,162 | 15.4 | 1,337 | 8.7 | 13.6 | 7,507 | 863 | 11.5 | 1,571 | 9.1 | ||||||
| Read more Page 38 | |||||||||||||||||
| Platforms & Services | 5,039 | 576 | 11.4 | 166 | 6.2 | 15.0 | 5,021 | 576 | 11.5 | 392 | 14.6 | ||||||
| Read more Page 40 | |||||||||||||||||
| Air | 9,299 | 1,108 | 11.9 | 904 | 14.6 | 32.6 | 7,372 | 1,078 | 14.6 | 873 | 18.5 | ||||||
| Read more Page 42 | |||||||||||||||||
| Maritime | 6,797 | 457 | 6.7 | 373 | 5.0 | 21.3 | 6,579 | 431 | 6.6 | 673 | 20.5 | ||||||
| Read more Page 44 | |||||||||||||||||
| Cyber & Intelligence | 2,397 | 223 | 9.3 | 59 | 2.7 | 2.1 | 2,397 | 182 | 7.6 | 115 | 1.4 | ||||||
| Read more Page 46 | |||||||||||||||||
| HQ2 | 232 | (204) | — | (52) | 0.2 | — | 52 | (205) | — | 4 | — | ||||||
| Deduct: Intra-group | (630) | — | — | — | (0.6) | (1.0) | (592) | — | — | — | (1.0) | ||||||
| Deduct: Tax3 | — | — | — | — | — | — | — | — | — | (196) | — | ||||||
| Total | 30,662 | 3,322 | 10.8 | 2,7874 | 36.8 | 83.6 | 28,336 | 2,925 | 10.3 | 3,432 | 63.1 | ||||||
We use financial performance measures as defined by the Group to monitor the underlying financial performance of the Group’s reporting
segments. The definitions and purposes of these alternative performance measures, and the reconciliations from these measures to the financial
performance measures derived from IFRS, are provided in our alternative performance measures section on page 216.
-
The definition and purpose of all performance measures defined by the Group are provided in the Alternative performance measures section on page 216.
-
HQ comprises the Group’s head office activities, together with a 17% interest in Air Astana up to the date of disposal of a portion of the shareholding. The
remaining 7% share is no longer equity accounted by the Group. See note 32 on page 203.
-
Tax is managed on a Group-wide basis.
-
At a Group level, the key cash flow metric is free cash flow (see Alternative performance measures on page 216). In 2025, free cash flow was £2,158m
(2024 £2,505m).
| 38 | BAE Systems plc Annual Report 2025 |
| Our business segments |
Electronic Systems
Electronic Systems, with 22,400 1 employees, comprises
our US- and UK-based Electronic Systems business
and our US-based Space & Mission Systems business.
Electronic Combat Solutions designs,
builds and supports integrated electronic
warfare systems for platform prime and
government customers and is a trusted
mission systems provider for all three
electronic warfare missions: electronic
attack; electronic protection; and
electronic support.
Space & Mission Systems (SMS) delivers a
range of products and differentiated
technologies for civil, commercial and
defence applications, including world-class
instruments, spacecraft, tactical hardware,
ground systems, data exploitation solutions
and mission-enabling technologies.
C4ISR Systems provides actionable
intelligence through innovative technical
solutions for airborne persistent
surveillance, secure communications,
identification systems, signals intelligence,
underwater and surface warfare solutions
and space resiliency.
Precision Strike & Sensing Solutions
designs and manufactures state-of-the-art
systems and technology that enable our
customers to execute their precision
strike missions.
Controls & Avionics Solutions develops
and produces electronics for military and
commercial aircraft, including fly-by-wire
flight controls, full authority digital engine
controls, power management solutions,
cabin management solutions and
mission systems.
Countermeasure & Electromagnetic
Attack Solutions provides next-generation
threat detection, countermeasure and
attack solutions that deliver full-spectrum
electronic warfare capabilities to enhance
mission survivability.
Power & Propulsion Solutions delivers
propulsion and power management
performance with innovative electrification
products and solutions that advance vehicle
mobility, efficiency and capability.
Financial performance
| As defined by the Group2 | ||||
| 2025 | 2024 | Variance3 | ||
| Sales | £7,528m | £7,189m | +8% | |
| Underlying EBIT | £1,162m | £1,071m | +12% | |
| Return on sales | 15.4% | 14.9% | +50bps | |
| Operating business cash flow | £1,337m | £801m | £536m | |
| Order intake | £8.7bn | £7.3bn | £1.4bn | |
| Order backlog | £13.6bn | £12.7bn | £0.9bn |
| As derived from IFRS | ||||
| 2025 | 2024 | Variance3 | ||
| Revenue | £7,507m | £7,186m | +4% | |
| Operating profit | £863m | £708m | +22% | |
| Return on revenue | 11.5% | 9.9% | +160bps | |
| Cash flow from operating activities | £1,571m | £1,044m | £527m | |
| Order book | £9.1bn | £8.6bn | £0.5bn |
| Sales by line of business |
| A | Electronic Combat Solutions | 24% |
| B | Space & Mission Systems | 22% |
| C | C4ISR Systems | 15% |
| D | Precision Strike & Sensing Solutions | 15% |
| E | Controls & Avionics Solutions | 12% |
| F | Countermeasure & Electromagnetic Attack |
11% |
| G | Power & Propulsion Solutions | 1% |
| Sales analysis: Defence and commercial |
| A | Defence | 89% |
| B | Commercial | 11% |
– The Electronic Systems sector booked
orders of £8.7bn, featuring c.£2bn from
our SMS business including missile warning
and tracking satellite systems for the US
Space Force.
– Sales increased by 8%, benefitting from a
full year of SMS sales, alongside increased
demand across the sector.
– Growth in underlying EBIT of 12% reflected
an increased return on sales of 15.4%,
including a strong contribution from SMS.
– Operating cash flow was £1,337m,
reflecting strong operational cash
conversion and cash advances from
customers.
| More information: Our financial review Page 30 |
- Including share of equity accounted
investments.
- The definition and purpose of all performance
measures defined by the Group are provided
in the Alternative performance measures
section on page 216.
- Growth rates for sales and underlying EBIT are
on a constant currency basis. All other growth
rates and year-on-year movements are on a
reported currency basis.
| Strategic report | Governance | Financial statements | Additional information | 39 | ||
Operational performance
Demand was strong across our Electronic
Systems customer base in 2025, as evidenced
by our order intake. We supported customers
on key electronic warfare and precision-
guided munition programmes, while
pursuing and maturing innovative
capabilities. In commercial avionics, airline
traffic continues to grow globally, resulting in
stronger demand for our OEM products and
aftermarket services.
Our SMS business is delivering strong
programme performance centred on
customer relationships and growth,
particularly in military space. Core defence
programmes remain aligned with US
Government priorities and we are leveraging
our proven capabilities in tactical space
systems in response to increasing demand.
Key operational points
for the year
– Our SMS team supported the launch of
NASA’s Carruthers Geocorona Observatory
and NOAA’s Space Weather Follow On L-1
spacecraft. We leveraged commercial best
practices to design and build both satellites
and are supporting mission operations to
study and monitor space weather.
– We celebrated the launch of NASA’s
SPHEREx Observatory, equipped with the
BAE Systems-built spacecraft bus, telescope
and RAD750® single-board computer,
subsequently seeing “first light” images
from the mission.
– We introduced our new ElevationTM
spacecraft product line, featuring common
system components and defined
configurations for enhanced affordability
and rapid deployment. The Trek bus variant
was selected to support our recent contract
to build the next-generation Resilient
Missile Warning & Tracking (RMWT)
satellite system.
– The US Space Force formally accepted the
Weather System Follow-on-Microwave
satellite into operations. As the mission
prime, we built the spacecraft bus and
microwave imager and are performing
mission operations supporting critical, time-
sensitive data to enhance weather
forecasting for military operations.
– The Air Force Research Laboratory awarded
our SMS team the FORGE-IT contract to
continue development and deployment of
the Battlefield Assisted Trauma Distributed
Operations Kit to enhance time-sensitive
medical care on the battlefield.
– Our EA-37B programme team is executing
contracts, including for international
support, valued at more than $1.45bn
(£1.1bn). Under Baseline 3, we are focused
on cross-decking the prime mission
equipment and have delivered five aircraft
for formal testing and training. Future
baselines are in development to evolve the
electro-magnetic attack capability.
– Our Eagle Passive Active Warning
Survivability System was successfully
fielded, with two F-15Es delivered to RAF
Lakenheath in the UK, and we are under
contract for full-rate production.
– The F-35 Lightning II programme delivered
approximately 180 electronic warfare suites
to Lockheed Martin, including 100 of the
Block 4 configuration.
– We delivered the 1,000th infrared seeker
to Lockheed Martin for integration on the
Terminal High Altitude Area Defense
(THAAD) interceptor missile. In response to
increased demand, the THAAD 2-Color
Infrared Seeker development programme is
underway to field next-generation
capabilities to defeat evolving threats.
– The AN/ARC-231A Multi-mode Aviation
Radio Set has completed initial installation
and is operationally ready for use on select
US Army rotary-wing aircraft. This milestone
marks a major step forward in equipping
warfighters with an advanced, secure and
fast-operating communications solution to
inform key decisions in the field.
Strategic and order highlights
– Our SMS team secured a $1.2bn (£0.9bn)
US Space Systems Command contract for
the RMWT – Medium Earth Orbit Epoch 2
programme to build the next-generation
RMWT satellite system. As the mission
prime, we will develop and integrate
multiple satellite buses and payloads and
provide ground command, control and
mission operation capabilities.
– We are building the spacecraft bus
for NOAA’s upcoming Space Weather
Next L1 Series mission under a $230m
(£174m) contract to continue providing
valuable data to NOAA’s Space Weather
Prediction Center.
– Under the FORGE C2 contract, worth
$151m (£114m), we are developing a next-
generation ground system for US Space
Force missile-warning satellites.
– We secured a $322m (£244m) order for
APKWS® laser-guidance kits under the
follow-on, five-year $1.7bn (£1.3bn)
Indefinite Delivery, Indefinite Quantity
contract awarded in August. We continue
to demonstrate APKWS counter-UAS
capability, recently in conjunction with the
Group’s Malloy platforms.
– We secured a low rate initial production
contract from the US Navy to produce three
units of the Advanced Survivability Pods for
P-8 Poseidon aircraft.
– The Common Missile Warning System
programme is executing on $250m
(£190m) of foreign military sales contracts,
with a further $138m (£105m) received in
December.
– The Long-Range Anti-Ship Missile
programme continues production
deliveries for Lots 7 and 8 and has been
awarded a $360m (£273m) contract for the
large lot procurement effort, which
includes the C1 baseline configuration.
– We secured a $129m (£98m) follow-on
production order from Data Link Solutions,
our joint venture with Collins Aerospace,
Inc., under its US Navy contract to deliver
the Multifunctional Information
Distribution System Joint Tactical Radio
System on production Lot 14.
Looking forward
– Our Electronic Systems sector remains
positioned for growth in the medium
term through its diverse portfolio of
defence and commercial products and
innovative capabilities for US and
international customers.
– Over the long term, we are poised to
benefit from our technology strengths
spanning precision weaponry, space
resilience, hyper-velocity projectiles,
autonomous platforms and the
development of multi-domain capabilities.
We are also expanding our engineering
and manufacturing capacity to grow our
position in the emerging market for energy
storage and power management solutions
to support aircraft electrification.
– In SMS, we continue to drive growth by
expanding product lines from spacecraft
and payloads to ground systems. We are
collaborating across segments to identify
and deliver combined capabilities to
address customers’ mission needs and
capture new and adjacent opportunities,
such as those of the US Golden Dome
missile defence initiative.
| 40 | BAE Systems plc Annual Report 2025 |
| Our business segments continued |
Platforms & Services
Platforms & Services, with 12,1001 employees and operations in the
US, Sweden and the UK, manufactures and upgrades combat vehicles,
weapons and munitions, and delivers services and sustainment activities,
including US naval ship repair and the management and operation of
two government-owned, contractor-operated ammunition plants.
Combat Mission Systems focuses on a
portfolio of combat vehicles, amphibious
vehicles, naval weapons, artillery systems,
advanced weapons, precision munitions and
submarine components for the US military
and international customers.
Maritime Solutions is a major provider
of non‑nuclear ship repair, modernisation,
overhaul and conversions to the US Navy and
other government and commercial maritime
customers, and a fabricator of submarine and
surface combatant components.
Ordnance Systems Inc. operates the US
Army’s Holston and Radford ammunition
plants under government-owned, contractor-
operated agreements and focuses on
explosives and propellants production and
facility modernisation.
BAE Systems Hägglunds, based in Sweden,
focuses on the tracked vehicle market for
Swedish and international customers.
BAE Systems Bofors, based in Sweden,
provides advanced land and maritime
weapons and precision‑guided munitions.
Weapon Systems UK is a provider of
land‑based artillery systems, sustainment
and services, primarily for the M777 towed
ultra-lightweight howitzer.
Financial performance
| As defined by the Group2 | ||||
| 2025 | 2024 | Variance3 | ||
| Sales | £5,039m | £4,390m | +17% | |
| Underlying EBIT | £576m | £448m | +30% | |
| Return on sales | 11.4% | 10.2% | +120bps | |
| Operating business cash flow | £166m | £732m | £(566)m | |
| Order intake | £6.2bn | £7.4bn | £(1.2)bn | |
| Order backlog | £15.0bn | £14.3bn | £0.7bn |
| As derived from IFRS | ||||
| 2025 | 2024 | Variance 3 | ||
| Revenue | £5,021m | £4,344m | +16% | |
| Operating profit | £576m | £456m | +26% | |
| Return on revenue | 11.5% | 10.5% | +100bps | |
| Cash flow from operating activities | £392m | £976m | £(584)m | |
| Order book | £14.6bn | £13.6bn | £1.0bn |
| Sales by line of business |
| A | Combat Mission Systems | 48% |
| B | BAE Systems Hägglunds | 17% |
| C | Maritime Solutions | 14% |
| D | Ordnance Systems | 11% |
| E | BAE Systems Bofors | 6% |
| F | Weapon Systems UK | 4% |
| More information: Our financial review Page 30 |
-
Including share of equity accounted investments.
-
The definition and purpose of all performance
measures defined by the Group are provided
in the Alternative performance measures
section on page 216.
- Growth rates for sales and underlying EBIT
are on a constant currency basis. All other
growth rates and year-on-year movements
are on a reported currency basis.
– Order intake of £6.2bn included significant
orders in Europe for our Hägglunds and
Bofors businesses and c.£2bn of US combat
vehicle orders. The segment closed the year
with order backlog of £15.0bn, which has
resulted from the significant demand in
Europe for both CV90 and BVS10 over the
last few years.
– Sales recorded the highest growth across
the Group in the year, at 17%, with
European growth from Hägglunds and
Bofors at 32%, while the US combat vehicle
business grew 15%.
– Underlying EBIT grew 30% which reflected
an increased return on sales of 11.4% as
production volumes increased.
– The reduction in operating business cash
flow reflected the timing of customer
advances, with those received in the prior
year unwinding into the supply chain.
| Strategic report | Governance | Financial statements | Additional information | 41 | ||
Operational performance
With a strong order backlog across our
diverse portfolio of innovative products and
services, we remain dedicated to delivering
on our customer commitments, driving
operational excellence and investing in
infrastructure to maintain a solid foundation
for sustained growth. We continue to scale
our Combat Mission Systems and Maritime
Solutions (formerly US Ship Repair) divisions
to support the US maritime industrial base,
enhancing our manufacturing capabilities by
upgrading welding, machining and heavy-lift
capacity to support submarine construction
and component fabrication.
We marked multiple milestones to expand
our production capacity, spanning facilities
in Sheffield, UK; Jacksonville, Florida;
Minneapolis, Minnesota; and across our
Swedish sites. Our Hägglunds business
continues to ramp up efforts to meet
customer expectations and transition
current programmes from development
to delivery in line with agreed schedules.
Key operational points
for the year
– Our AMPV programme celebrated its
500th delivery milestone during the year
and is executing under full-rate
production toward meeting the US
Army’s plan to field approximately 3,000
AMPVs in its Armored Brigade Combat
Team formations.
– We directed R&D efforts into developing
a series of AMPV capability kits to
advance future combat innovations,
including counter-UAS detection and
targeting, ground autonomy and
uncrewed turrets.
– We partnered with the US Army to
advance our capabilities through
successful tests of the Scorpio-XR
extended range projectile that more
than doubled the precision range of
existing cannon artillery munitions.
– Our Hägglunds team marked key
milestones with the first CV9030 MkIV
infantry fighting vehicle unveiled for the
Czech Republic and the first three BvS10
vehicles presented to Sweden, Germany
and the UK.
– We announced a license agreement with
Wojskowe Zakłady Motoryzacyjne SA
for in-country fleet support of Poland’s
M88A2s and signed a Memorandum of
Understanding with Champion Auto to
pursue sustainment opportunities in
Taiwan. We also continued to deliver
Bradleys to Croatia and M88A2s to Poland.
– We renamed our Maritime Solutions
business to reflect its broader mission to
serve a wide range of military and
commercial customers. Our Jacksonville,
Florida, shipyard continued fabrication
work for Virginia- and Columbia-class
submarines and Arleigh Burke-class
destroyers. Our Jacksonville team
commenced operations in June of its new
shiplift and land-level repair facility that
expanded capacity beyond its existing
operational drydock and increased support
of submarine construction.
– Our Ordnance Systems Inc. team continues
to progress the new Nitrocellulose Facility
at the Radford Army Ammunition Plant.
The endurance run was successfully
completed.
– In the UK, we opened our Sheffield facility
where we will initially deliver M777
howitzers, with plans to evolve to develop
and produce a range of combat systems to
support the UK Government’s ambitions to
revitalise and sustain UK artillery capacity.
Strategic and order highlights
– Our Bofors business signed a framework
agreement with Latvia to supply 18
ARCHER Mobile Howitzers and Sweden
procured another 18 ARCHERs as part of a
military support package.
– Our Bofors business secured its first order
from Sweden for TRIDON Mk2 systems, a
highly adaptable, cost-effective solution
designed to provide rapid counter-UAS
capabilities that are currently operational in
Europe.
– Our Hägglunds business won a $450m
(£341m) contract to deliver 44 additional
CV90MkIIIC vehicles to Denmark.
– Our Combat Mission Systems team secured
a number of orders across its vehicle
portfolio, including contracts for more than
$360m (£273m) from the US Marine Corps
for ACVs, two long-lead awards worth
approximately $550m (£417m) to produce
additional AMPVs, and a $396m (£300m)
contract from the US Army to produce
additional upgraded Bradley A4 vehicles.
– We also received two multi-year contracts
from the US Army totalling more than
$973m (£738m) for M109A7 Paladin Self-
Propelled Howitzer sets.
– Across our US shipyards, we won
approximately $1.0bn (£0.8bn) in US Navy
contracts featuring awards for the USS
Somerset, USS Oak Hill, USS Forrest
Sherman and USS The Sullivans.
Looking forward
– We continue to shape our business to
deliver on increased demand from US and
international customers for production and
sustainment of combat vehicles and artillery
systems. The AMPV, M109A7, M88, Bradley
and ACVs in our US vehicle portfolio are
gaining increased international interest due
to their proven capabilities.
– In our maritime businesses, we are focused
on sustaining our naval gun, missile launch
and submarine positions, as well as US Navy
ship repair, modernisation and growing
fabrication activities.
– Across our Swedish businesses, we
continue to build a growing pipeline of
opportunities for the CV90, BvS10 and
Beowulf from Hägglunds, as well as for
artillery, naval and air defence systems and
munitions from Bofors.
| 42 | BAE Systems plc Annual Report 2025 |
| Our business segments continued |
Air
Air, with 30,6001 employees, comprises our UK‑based aircraft build
and support activities for European and international markets,
US programmes, development of our Future Combat Air System and
FalconWorks®, alongside our business in the Kingdom of Saudi Arabia
and interests in our joint ventures: Edgewing, Eurofighter and MBDA.
Our Europe and International Markets
business includes the production of Typhoon
combat aircraft, support, training and
upgrades for Typhoon and Hawk, and
support and upgrades for Tornado.
Our US Programmes business is a key
partner to Lockheed Martin in the delivery of
the world’s largest defence programme and
is focused on UK-based F-35 Lightning II
manufacture, engineering development
and support activities.
Our Future Combat Air Systems team is
working in close partnership with the UK
Ministry of Defence to deliver commitments
across GCAP and UK Future Combat Air
System programme including a portfolio of
future combat air technologies and
demonstrators. During the year, we formed a
new joint venture, Edgewing, with Leonardo
and Japan Aircraft Industrial Enhancement
Co. Ltd. (JAIEC), to deliver next-generation
combat aircraft under GCAP.
FalconWorks® is our centre for advanced
research and technology development within
the Air sector.
In the Kingdom of Saudi Arabia, we
provide operational capability support to
the Kingdom’s air and naval forces through
UK-Saudi government-to-government
programmes. The Saudi British Defence
Co‑operation Programme and Salam
Typhoon project provide for multi-year
contracts between the governments.
MBDA is a leading global prime contractor
of missiles and missile systems across the air,
maritime and land domains.
Eurofighter Typhoon is Europe’s largest
collaborative defence capability programme.
Financial performance
| As defined by the Group2 | ||||
| 2025 | 2024 | Variance3 | ||
| Sales | £9,299m | £8,519m | +9% | |
| Underlying EBIT | £1,108m | £1,007m | +10% | |
| Return on sales | 11.9% | 11.8% | +10bps | |
| Operating business cash flow | £904m | £1,243m | £(339)m | |
| Order intake | £14.6bn | £8.3bn | £6.3bn | |
| Order backlog | £32.6bn | £26.8bn | £5.8bn |
| As derived from IFRS | ||||
| 2025 | 2024 | Variance3 | ||
| Revenue | £7,372m | £6,880m | +7% | |
| Operating profit | £1,078m | £1,009m | +7% | |
| Return on revenue | 14.6% | 14.7% | -10bps | |
| Cash flow from operating activities | £873m | £1,359m | £(486)m | |
| Order book | £18.5bn | £15.6bn | £2.9bn |
| Sales by line of business |
| A | Kingdom of Saudi Arabia | 30% |
| B | European and International Markets | 24% |
| C | MBDA | 20% |
| D | US Programmes | 12% |
| E | Future Combat Air System | 11% |
| F | FalconWorks® | 3% |
| More information: Our financial review Page 30 |
- Including share of equity accounted
investments.
- The definition and purpose of all performance
measures defined by the Group are provided
in the Alternative performance measures
section on page 216.
- Growth rates for sales and underlying EBIT are
on a constant currency basis. All other growth
rates and year-on-year movements are on a
reported currency basis.
– The Air sector had a strong year with good
growth in sales and underlying EBIT, high
order intake and a material step up in our
order backlog.
– Sales increased by 9%, mainly driven by our
Future Combat Air System programme,
MBDA and European & International
Markets, which flowed through to
underlying EBIT,generating a return on
sales of 11.9%.
– Operating cash flow was £904m. The lower
level compared to 2024 reflected advance
payments in the prior year, which were
flowed to our supply chain in 2025.
– Order intake was £14.6bn, a 76% increase,
which reflected high demand for our
capabilities and services. This increased our
order backlog by 22% to £32.6bn.
| Strategic report | Governance | Financial statements | Additional information | 43 | ||
–
Operational performance
We continue to work with our UK and
international customers to support their
existing platforms and provide new
enhanced capabilities. Deliveries of Typhoon
aircraft to Qatar were completed in the year,
alongside support to the in-service fleet.
Our US Programmes business remains
focused on delivery execution across all
production lines. Our Future Combat Air
Systems and FalconWorks® organisations
continue to invest in our people, facilities and
cutting-edge technologies to deliver
disruptive capabilities to our customers.
Key operational points
for the year
– We delivered the final two Typhoon aircraft
to Qatar during the year, bringing the
Qatari Emiri Air Force fleet total to 24. We
also continue to deliver Typhoon major
units in support of core European customer
orders, with 13 completed during the year.
– Our US Programmes business completed
153 AFTs in 2025. The current Production
Lots 18/19 support the continuation of
production deliveries at Samlesbury, UK,
through to 2027.
– The Royal Navy selected our all-electric
Malloy T-150 UAS to transport vital supplies
between UK Carrier Strike Group ships for
the first time during their deployment to
the Indo-Pacific.
– We continue to progress construction of
the UK’s Flying Combat Air Demonstrator,
which will test next-generation skills, tools,
processes and techniques needed to
underpin GCAP and the entry into service
of the core aircraft platform, which will be
called Tempest in the UK. In July, alongside
our industry partners and the Ministry
of Defence, we revealed the design as
the aircraft reached a major milestone,
with two-thirds of its structural weight in
manufacturing.
Strategic and order highlights
– In October, the Republic of Türkiye and
the UK Government signed a c.£5.4bn
agreement which included the purchase
of 20 Typhoon aircraft along with an
associated weapons package. We will be
the prime contractor and will manufacture
major airframe components, undertake
final assembly of the aircraft and lead the
weapons integration. We continue to work
with the two governments to secure a
contract for future support of the aircraft.
– We also secured further European Typhoon
major units orders for Germany (20) and
Italy (8), totalling c.£0.8bn.
– We were awarded a contract for the full
production of the new European Common
Radar System Mk2 advanced radar for the
Royal Air Force’s Typhoon aircraft from the
UK Ministry of Defence worth £454m.
– We launched Edgewing, a joint venture
with our international partners, Leonardo
(Italy) and JAIEC (Japan), on GCAP. The new
company, based in Reading, UK, will be
accountable for the design and
development of the next-generation
combat aircraft and will remain the design
authority for the life of the product, which
is expected to go out beyond 2070.
– Concept and assessment work on GCAP
continues with our international industry
partners in all three nations under their
respective national contracts. We received
a further £1.0bn of funding on the UK
assessment phase contract in the first half
of the year.
– We created BAE Systems Arabian Industries
Ltd by merging two of our existing portfolio
companies, enhancing our visibility and
participation within the military industry
sector, while creating further opportunity in
accordance with our long-term strategy to
support the Kingdom of Saudi Arabia.
– MBDA continued to secure significant
orders through 2025, including further
production orders with the French Air
Force, Italian Air Force and Army, German
Armed Forces and the UK Royal Navy for
ASTER 15 & 30 Block 1 missile; Indian Navy
Rafale weapon package order for the
METEOR Beyond Visual Range Air-to-Air
Missile (BVRAAM), MICA, SCALP and
EXOCET AM39; and a South Korean
production order for the METEOR
BVRAAM, which will enable the Air Force to
benefit from a common stockpile for both
KF-21 and F-35. The Lancaster House 2.0
Declaration at the 37th Franco-British
Summit in July 2025 saw both the UK and
French Armed Forces confirm their
continued support for Future Cruise/Anti-
Ship Weapon development, now re-named
as STRATUS Low Observable & Rapid Strike.
Looking forward
– GCAP is a strategically important
partnership that will not only drive
innovation and technological advancement
but also promote significant economic
activity in the UK, Japan and Italy, with the
aim of securing the future of their
respective combat air industries for
decades.
– We will continue to focus on ensuring that
Typhoon major units and support
deliverables are made in line with customer
expectations. Future Typhoon production
and support sales are underpinned by
existing contracts. We continue to pursue
future sales of Typhoon.
– We expect to sustain production of the rear
fuselage assemblies for the F-35 at current
levels of approximately 150 aft fuselages
per year. Negotiations continue with
Lockheed Martin to secure the full value of
Lots 20-22, which will continue production
to 2030.
– In the Kingdom of Saudi Arabia, the
In-Kingdom Industrial Participation
programme continues to make good
progress consistent with our long-term
strategy, while supporting the Kingdom’s
National Transformation Plan and Vision
2030. This includes a further package of
industrialisation agreed in 2025 on our
Saudi British Defence Co‑operation
Programme. We expect our Saudi in-
Kingdom support business to remain
stable, underpinned by long-standing
contracts, while we continue to address
the Kingdom’s current and future combat
air requirements.
– MBDA is well placed to benefit from
increased defence spending in Europe and
internationally and is investing in critical
resources accordingly. The business has a
strong order backlog, and development
programmes continue to enhance the long-
term capabilities of the business in air, land,
sea and space domains.
| 44 | BAE Systems plc Annual Report 2025 |
| Our business segments continued |
Maritime
Maritime, with 31,9001 employees, comprises our
UK‑based maritime and land activities, including ship
build and support activities, major submarine build
programmes, as well as our Australian business and
interest in our RBSL joint venture.
Our Submarines business is focused on
completing the seven boat Astute Class
programme and the design and production
of four Dreadnought Class submarines for
the Royal Navy, as well as the delivery of the
new generation of SSN-AUKUS submarines to
both the UK and Australia.
Naval Ships is delivering the design and
manufacture of eight Type 26 frigates for
the Royal Navy as well as the warship
design for Canada’s River Class destroyer
programme.
Maritime & Land Defence Solutions offers
in-service support, including the delivery of
training services and worldwide engineering
support to the Royal Navy’s Portsmouth-
based surface flotilla on behalf of the UK
Ministry of Defence, as well as the design and
manufacture of torpedoes and radars. The
portfolio also comprises the munitions
business, which designs, develops and
manufactures a comprehensive range
of munitions products. Within our Maritime &
Land Defence Solutions business, our French
Joint Venture, CTA International, has
developed and manufactures the 40mm
cased-telescoped weapon system.
In Australia, our business delivers platforms,
upgrade and support programmes for
customers in defence across the air, maritime
and land domains. This includes the Hunter
Class Frigate Programme and Jindalee
Operational Radar Network (JORN) upgrade.
Services contracts include the provision of
sustainment, training solutions and upgrades.
Rheinmetall BAE Systems Land (RBSL) –
our UK‑based joint venture with Rheinmetall
– specialises in the design, manufacture and
support of military vehicles used by the British
Army and international customers.
Financial performance
| As defined by the Group2 | ||||
| 2025 | 2024 | Variance3 | ||
| Sales | £6,797m | £6,187m | +11% | |
| Underlying EBIT | £457m | £474m | -3% | |
| Return on sales | 6.7% | 7.7% | -100bps | |
| Operating business cash flow | £373m | £436m | £(63)m | |
| Order intake | £5.0bn | £8.7bn | £(3.7)bn | |
| Order backlog | £21.3bn | £23.2bn | £(1.9)bn |
| As derived from IFRS | ||||
| 2025 | 2024 | Variance 3 | ||
| Revenue | £6,579m | £6,002m | +10% | |
| Operating profit | £431m | £465m | -7% | |
| Return on revenue | 6.6% | 7.7% | -110bps | |
| Cash flow from operating activities | £673m | £734m | £(61)m | |
| Order book | £20.5bn | £22.3bn | £(1.8)bn |
| Sales by line of business |
| A | Submarines | 44% |
| B | Australia | 19% |
| C | Defence Solutions | 18% |
| D | Naval Ships | 17% |
| E | RBSL | 2% |
| More information: Our financial review Page 30 |
- Including share of equity accounted
investments.
- The definition and purpose of all performance
measures defined by the Group are provided
in the Alternative performance measures
section on page 216.
- Growth rates for sales and underlying EBIT are
on a constant currency basis. All other growth
rates and year-on-year movements are on a
reported currency basis.
– Order intake of £5.0bn included increased
funding for our Submarines business as
well as the next major phase of Canada’s
River Class destroyer programme. The prior
year included £4.6bn for Batch 1 of the
Hunter Class frigates which are now under
construction.
– The Maritime segment recorded double-
digit sales growth of 11% as construction
continued across major programmes
including Dreadnought, Type 26 and
Hunter Class frigates, and design work for
SSN-AUKUS.
– The lower return on sales of 6.7% reflects
the early stage maturity of the Maritime
portfolio with several first-in-class
programmes trading at relatively low
margins as we invest in in additional
capacity and capability both within our
shipyards and the supply chain to support
programme delivery.
| Strategic report | Governance | Financial statements | Additional information | 45 | ||
Operational performance
Our major Maritime platforms continue to
progress through their long-term
programmes. With five of the seven
Astute Class submarines delivered to the
Royal Navy, work continues on the remaining
two boats and on the construction on the
four Dreadnought Class submarines. We also
continue to deliver in accordance with our
SSN-AUKUS contracts. Construction of the
initial five UK Type 26 frigates continues
and more than half of the units on the
first Australian Hunter Class frigate are in
production. We also continue to deliver on
customer requirements in both munitions
and services.
Key operational points
for the year
– In September, His Majesty King Charles III
commissioned the sixth Astute Class
submarine, Agamemnon, into service with
the Royal Navy. Agamemnon continues to
progress through its in-water phase, while
we also continue construction on the final
vessel in the class.
– We continue to make progress on the
four Dreadnought Class submarines, with
advancing levels of construction underway
on the first three boats. In September, we
cut steel on Boat 4 at our site in Barrow-in-
Furness, UK, and commenced early stage
construction activities.
– We are progressing the Type 26 frigate
programme of eight ships for the Royal
Navy. Investment in additional capacity and
capability continues both within our
shipyards and the supply chain to support
programme delivery. Focus remains on the
achievement of key milestones in advance
of sea trials for the first of class.
– During the year, Her Royal Highness The
Princess of Wales officially named HMS
Glasgow at a ceremony in the UK. HMS
Glasgow and HMS Cardiff, the first two
ships in class, are docked at our Scotstoun
shipyard and are progressing through final
outfit. HMS Belfast and HMS Birmingham
are both under construction in our new
Janet Harvey Hall. Units for the fifth ship are
also being constructed at our shipyard in
Govan.
– October 2025 marked the first full year
of RECODE, an eight-year availability
support programme signed in 2024.
RECODE continues to adapt to the
changing operational needs of the Royal
Navy, achieving 99% combat systems
equipment availability across the fleet
against a target of 95%. Modernisation of
our Combat Management System is using
new development principles to deliver
capability into operation quickly.
– In Australia, construction of the Hunter
Class frigate is progressing with 45 of the
78 units of the first ship in production.
– Significant upgrade work is underway at
our Osborne shipyard on the first Air
Warfare destroyer, HMAS Hobart. HMAS
Parramatta, the final Anzac Class frigate,
undergoing the Midlife Capability
Assurance Programme, is in the final stages
of production and commissioning, with full
handover to the Royal Australian Navy
scheduled in 2026.
– The upgrade programme for the Royal
Australian Air Force’s Hawk aircraft is
approaching conclusion with installation of
32 of the 33 engines completed.
– Over the past 12 months, our teams based
at Portsmouth Naval Base continued to
work side by side with the Royal Navy to
support the nation’s defence ambitions at
home and abroad. From the Carriers, the
Type 23 frigates and Type 45 destroyers, to
the batch 1 offshore patrol vessels and the
Hunt Class mine countermeasure ships – we
continue to service and maintain the critical
assets that keep the UK safe.
– Our teams ensured HMS Prince of Wales
and HMS Dauntless were prepared and
ready to deploy as part of the Royal Navy’s
UK Carrier Strike Group in April.
– In RBSL, vehicle deliveries continue under
the Boxer programme, with 15 UK-built
vehicles to date. On the Challenger 3
programme, focus remains on design
maturity to facilitate the transition to full
production. A total of six prototype tanks
have been delivered with another two in
build.
Strategic and order highlights
– The Canadian Government announced that
it will work with Australia to establish an
Arctic Over The Horizon Radar capability. As
the enterprise partner for Australia’s over
the horizon radar system, JORN, we will
support the Government in this important
agreement.
– The initial mobilisation phase of the SSN-
AUKUS programme in Australia has
commenced to support the future build of
the SSN-AUKUS fleet of conventionally
armed, nuclear-powered submarines for
the Royal Australian Navy.
– We signed a contract with Canada’s Irving
Shipbuilding Inc., marking the start of the
next major phase on the River Class
destroyer programme. The ship is based on
the Type 26 platform with specified design
changes to meet the Royal Canadian Navy’s
requirements. Under this new contract, we
will provide support and consultancy
services throughout the build phase.
– We signed a new strategic partnership
with PGZ to establish a new ammunitions
factory in Poland to produce 155mm
artillery ammunition. This is aimed at
increasing the nation’s production of
ammunition.
Looking forward
– Our Submarines business is executing
across three long-term programmes:
Astute; Dreadnought; and SSNA.
Our focus remains on strengthening our
workforce, supply chain and infrastructure
to provide the capability, capacity and
resilience required to deliver these long-
term programmes.
– Preparations to start construction of the
sixth Type 26 frigate, HMS Newcastle, are
well underway with long-lead equipment
items already in progress.
– In Australia, we are a key partner to the
Commonwealth in the delivery of its
National Defence Strategy, which seeks
a strategy of denial and an integrated,
focused force. AUKUS nuclear-powered
submarines, an enhanced lethality surface
fleet, strategic surveillance and long-range
strike are prioritised in the Integrated
Investment Plan which supports this.
– We will continue to work alongside
ASC Pty Ltd to deliver initial mobilisation
activities to support Australia’s SSN-AUKUS
submarines programme.
| 46 | BAE Systems plc Annual Report 2025 |
| Our business segments continued |
Cyber & Intelligence
Cyber & Intelligence, with 10,5001 employees, comprises
our US‑based Intelligence & Security business and
UK‑headquartered Digital Intelligence business and
covers the Group’s cyber security activities for national
security, central government and government enterprises.
Intelligence & Security is made up of three
US-based business units:
– Our Air & Space Force Solutions business
provides the US Air Force, US Space Force
and combatant commands with innovative
systems engineering and integration
solutions to modernise, maintain, test and
cyber-harden aircraft, radars, strategic
missile systems, mission applications and
information systems that detect, deter and
dissuade national security threats.
– Our Integrated Defense Solutions
business provides the US Army and Navy
with systems engineering, integration and
sustainment services for critical weapon
systems, C5ISR (Command, Control,
Computers, Communications, Cyber,
Intelligence, Surveillance and
Reconnaissance) and cyber security that
enhance mission effectiveness. Our
solutions are deployed across platforms
and networks in the air, maritime, land and
cyber domains.
– Our Intelligence Solutions business
provides innovative mission-enabling
solutions and services to intelligence and
federal/civilian agencies, as well as the
provision of cost-effective synthetic training
and simulation software products and
components for global defence
applications.
Digital Intelligence, headquartered in the
UK, provides products and expertise in cyber,
intelligence and security to help protect
nations, businesses and citizens. Our solutions
span customers in law enforcement, national
security, central government and
government enterprises, critical national
infrastructure, telecommunications, military
and space.
Financial performance
| As defined by the Group2 | ||||
| 2025 | 2024 | Variance3 | ||
| Sales | £2,397m | £2,411m | +2% | |
| Underlying EBIT | £223m | £199m | +15% | |
| Return on sales | 9.3% | 8.3% | +100bps | |
| Operating business cash flow | £59m | £139m | £(80)m | |
| Order intake1 | £2.7bn | £2.4bn | £0.3bn | |
| Order backlog1 | £2.1bn | £1.8bn | £0.3bn |
| As derived from IFRS | ||||
| 2025 | 2024 | Variance3 | ||
| Revenue | £2,397m | £2,411m | -1% | |
| Operating profit | £182m | £182m | —% | |
| Return on revenue | 7.6% | 7.5% | +10bps | |
| Cash flow from operating activities | £115m | £194m | £(79)m | |
| Order book | £1.4bn | £1.3bn | £0.1bn |
| Sales by business |
| A | Digital Intelligence | 33% |
| Intelligence & Security: | ||
| B | Intelligence Solutions | 26% |
| C | Air & Space Force Solutions | 21% |
| D | Integrated Defence Solutions | 20% |
| Sales by customer |
| A | US Government | 65% |
| B | UK and other governments | 33% |
| C | Other | 2% |
– The Cyber & Intelligence segment recorded
£2.7bn of new orders.
– Sales grew by 2%3, predominantly related
to counter-UAS sales in our Digital
Intelligence business following the
acquisition of Kirintec in the prior year.
– Underlying EBIT of £223m reflected an
increased return on sales of 9.3%.
| More information: Our financial review Page 30 |
- Including share of equity accounted
investments.
- The definition and purpose of all performance
measures defined by the Group are provided in
the Alternative performance measures section
on page 216.
- Growth rates for sales and underlying EBIT are
on a constant currency basis. All other growth
rates and year-on-year movements are on a
reported currency basis.
| Strategic report | Governance | Financial statements | Additional information | 47 | ||
4.
Operational performance
Our US-based Intelligence & Security business
delivered solid performance amid shifting
US Government priorities, an increasingly
competitive defence technology landscape,
as well as furloughs on some programmes
due to the US Government shutdown.
Despite these headwinds, we continued to
align closely with evolving customer
requirements and national security priorities
to drive faster, more cost-effective and
resilient outcomes for our customers.
In our UK-based Digital Intelligence business,
we continue to work collaboratively to
collect, connect and understand complex
data for governments, nation states, armed
forces and commercial businesses in both the
UK and international markets.
Key operational points
for the year
– Our Intelligence & Security business
brought together Bohemia Interactive
Simulations, TerraSim and Pitch
Technologies to launch BAE Systems
OneArc, a commercial defence technology
business focused on delivering synthetic
environments to transform modern
battlespace simulation.
– We are using OneArc’s VBS4 platform to
develop an AI-enabled embedded training
capability for the Bradley Fighting Vehicle
that integrates virtual and real-world
systems to improve readiness, reduce costs
and advance the US armed forces’ digital
modernisation goals.
– Our Intelligence & Security business
also launched its Velhawk zero-trust cyber
security solution to provide customers cyber
resilience, accelerated cyber response and
optimised working efficiency.
– We continue to expand our presence
on the Instrumentation Range Support
Program, providing support to dozens of
ranges for the US Army, Navy, Air Force,
Space Force, Department of Energy, NASA
and various international ranges.
–
– In our Digital Intelligence business, we
achieved the successful launch of our
first low earth orbit satellite cluster, Azalea,
at the end of November. This capability will
provide defence, national security and civil
sectors with sovereign space-based
intelligence, surveillance and
reconnaissance to enhance decision-
making around today’s threats.
– In our National Security & Government
division, we focused on mobilising new
frameworks secured in 2024. Our Defence
division continues to progress campaigns
for key programmes and secured an
important international order for
assessment of core C4 capability for a
sovereign client.
– Following the acquisition of Kirintec in
2024, we continued to identify
opportunities to exploit our electronic
warfare and counter-UAS products
alongside other complementary capabilities
within our Digital Intelligence business and
the wider Group. Kirintec specialises in
cyber and electromagnetic activities,
counter-improvised explosive devices and
counter-UAS products for military
customers.
Strategic and order highlights
– Our Air and Space Force Solutions
business was awarded a $238m
(£180m) Systems Engineering and
Evaluation, Systems Analysis Worldwide
VIII contract, continuing our 28-year
legacy on the programme.
– Our Integrated Defense Solutions team
grew the Strategic Systems Program by
more than 20% year-on-year in support
of the submarine nuclear deterrence
mission. The team was selected to provide
weapon systems engineering and
integration services for the nuclear armed
Sea-Launched Cruise Missile programme
and completed weapon system
integration activities on the Columbia and
Dreadnought submarine construction
programmes.
–
Looking forward
– Our Intelligence & Security business
maintains a pipeline of qualified business
opportunities aligned to current US
Government priorities.
– We seek to accelerate growth by using AI,
automation and autonomy to modernise
offerings in digital labour, counter-UAS and
UAS, decision advantage and platform
digitisation.
– In our UK Digital Intelligence business, we
continue to progress our transformation
roadmap to ensure we are well placed to
take advantage of more favourable
conditions in the medium to long term
resulting from anticipated increases in
defence spending across our existing and
target markets. We are continuing to drive
operational efficiencies through system
integration and the simplified
organisational structure embedded at the
beginning of the year.
– In our UK Digital Intelligence business,
investment in our product portfolio
continues with good progress made on
developing cross-domain products for the
US and other international markets, low
earth orbit satellites and multi-domain
network solutions for the defence market.
– Through Kirintec, we will continue to
identify opportunities for our counter-UAS
products and complimentary capabilities
for military customers.
| 48 | BAE Systems plc Annual Report 2025 |
| Our skills and training academies |
We have invested in a number of academies across the UK
which provide education and training opportunities for our employees.
Our investments have enabled the creation
of multi-million-pound skills academies to
upskill thousands of employees each year
to maintain the advanced science,
technology, engineering and mathematics
(STEM) capabilities critical to the UK’s
sovereign defence.
Applied Shipbuilding
Academy, Scotstoun
The academy is a key training facility
for apprentices and graduates in
our Naval Ships business and provides
life-long learning and skills development
activities for around 4,500 employees
across the workforce, from new starters
to senior leaders.
It measures over 5,500 square metres
and comprises a modern trade hall and
a flexible learning hub. The hall offers
a high-quality, hands-on training
environment where learners are fully
immersed in realistic ship mock-ups.
The adjacent hub houses over
30 teaching spaces, a cutting-edge
STEM innovation lab, an exhibition
area and conference space.
Submarine Academy
for Skills & Knowledge,
Barrow-in-Furness
The state-of-the-art training academy
was built to develop the world-class
engineering skills required to design,
build and deliver complex submarine
programmes for the Royal Navy.
The academy covers 8,300 square
metres and features 20 classrooms,
10 workshops, a virtual reality suite
and scale-model-sized submarine units
to support the provision of bespoke
training to around 12,300 employees
including nearly 800 apprentices,
undergraduates and graduates.
| Strategic report | Governance | Financial statements | Additional information | 49 | ||
Academy for Skills and
Knowledge, Samlesbury
The academy is the learning hub for
continuing development of all
employees in our Air sector. We have
invested more than £20m in the
academy to ensure our people have the
skills ready to continue engineering and
manufacturing military aircraft of the
future, and more than 300,000 people
have walked through its doors since
opening in 2016.
The academy covers 7,400 square
metres and includes 43 learning
spaces across laboratories, training
rooms, practical workshops and a virtual
reality cave. The academy’s education
station offers an exciting learning area
to inspire visiting school children to
consider STEM careers.
Aircraft Maintenance
Academy, North Lincolnshire
The training academy is where we
develop the next generation of aircraft
maintenance technicians in our Air sector
to ensure our customers have the right
people for the job of keeping aircraft
ready to deliver air power.
In 2025, the academy celebrated a
decade of providing training at the
facility, which covers 5,500 square
metres including five workshops,
11 classrooms and an aircraft hangar.
| 50 | BAE Systems plc Annual Report 2025 |
| Our investment in our people and communities |
We are committed to investing in our people and having
a positive impact on the communities where we operate.
Total employees1
111,400
In 2025, we increased our
workforce by 4%.
Employees1 by location
| A | US | 35,900 | 32% |
| B | UK | 52,900 | 48% |
| C | Europe | 8,200 | 7% |
| D | Kingdom of Saudi Arabia | 7,000 | 6% |
| E | Australia | 6,700 | 6% |
| F | Other | 700 | 1% |
Employees1 by sector
| A | Electronic System | 22,400 | 20% |
| B | Platforms & Services | 12,100 | 11% |
| C | Air | 30,600 | 27% |
| D | Maritime | 31,900 | 29% |
| E | Cyber & Intelligence | 10,500 | 9% |
| F | HQ/Other | 3,900 | 4% |
- As at 31 December 2025 and including share
of equity accounted investments.
Investing in our people
Our people are at the heart of everything we
do, from advancing the next generation of
defence and security solutions to making a
difference in the communities where we
operate. That is why we are committed to
investing in the skills of both our current and
future workforce and to creating inclusive
workplaces that attract, develop and retain
the very best talent.
We aim to deliver this through:
– a competitive employee value proposition
that rewards merit;
– strategic recruitment initiatives;
– targeted talent development;
– a positive, learning-focused workplace;
– strong succession planning; and
– creating an inclusive and respectful culture
where everyone can belong and thrive.
| Record number of young people in training | ||||
| In 2025, we had more than 6,800 young people in training across our UK operations. This includes around 5,100 apprentices and 1,700 graduates and undergraduates in training and marks a significant milestone in our commitment to developing the next generation of British talent. In 2026, we are planning to recruit more than 1,100 apprentices and around 1,200 graduates and undergraduates in the UK, offering opportunities to work on some of the world’s most advanced defence and security programmes. These early careers employees will contribute to projects of significant international importance, including the Global Combat Air Programme, the UK’s next-generation SSN-AUKUS submarines and Type 26 frigates, alongside emerging technologies such as cyber, space and drone capabilities. |
||||
| >£1bn |
| Spent on education and skills in the UK since 2020 |
Strategic workforce planning
In 2025, we invested in education, training
and skills to strengthen the ability of our
workforce to drive innovation, business
performance and growth. We recruited
across all career stages, with a commitment
to attracting and retaining talent from a
range of backgrounds, to ensure that we
have the right skills in the right places at
the right time.
We worked to recruit people with skills
essential to delivering complex national
security and defence programmes and
prioritised building digital capabilities across
our workforce, recognising their growing
importance.
| Strategic report | Governance | Financial statements | Additional information | 51 | ||
In the US, as part of our efforts to identify,
acquire, measure and develop the skills
needed to execute our business plan, we
rolled out “My Career Profile”. This gathers
employees’ work experience, skills and
education and maps them on to an
enterprise skills database, providing insight as
to where their next role within BAE Systems
may lie. This is an integral part of our new
“Career Connect” virtual career centre, which
is designed to support internal mobility
through coaching, networking and other
resources.
Further key initiatives included:
– the launch of a new employer brand
campaign, “Pioneer + Protect” in the UK
and international markets, to complement
the “Where Purpose Connects” campaign
launched in the US in 2024;
– the development of a new learning and
development strategy to ensure the
delivery of high-quality training and
development pathways for employees
at every career stage; and
– strengthened development programmes
aiming to build leadership capability and
ensure long-term workforce resilience.
Looking ahead to 2026, our priorities
include enabling greater opportunities for
development and long-term career paths
for our people, while continuing to build
the critical capabilities needed to support
defence and security programmes.
Learning and development
We invested in education and skills, creating
opportunities for our people to keep learning
and developing throughout their careers and
enabling us to meet customers’ needs, today
and into the future. Our Global Digital
Academy continued to evolve and scale its
digital skills provision, engaging over 8,000
employees. We prioritised the introduction of
learning packages focused on cyber
awareness, AI and digital effectiveness, as
well as a variety of digital specialist technical
training.
Since 2020 in the UK, we have spent over
£1bn on education and skills. This includes
training delivered at our dedicated academies
at Samlesbury, North Lincolnshire, Barrow-in-
Furness and Scotstoun, which officially
opened this year.
Our comprehensive leadership development
portfolio has equipped over 10,000 leaders
and managers across the UK, Australia,
Kingdom of Saudi Arabia and Qatar with the
skills needed to meet both current and future
leadership challenges. In the UK, this included
opening our Submarines Leadership
Academy in Barrow-in-Furness. The new
academy will deliver over 4,000 learning
places per year and is designed to equip
delegates with a comprehensive range of
skills to improve their leadership abilities
to support the design and build of Royal
Navy submarines.
In the Kingdom of Saudi Arabia, our
AGDR strategic leadership programme
saw the graduation of its second cohort and
the commencement of its third cohort. The
programme focuses on empowering women,
growing their capabilities and supporting
their progression to leadership roles within
the Group. We also delivered 20 Leadership
Development centres for around 140
managers in the Kingdom.
In the US, the number of executive and
leadership coaching engagements with
external resources more than doubled. These
investments in leadership capability are highly
customised and designed to accelerate the
development of new skills and behaviours
necessary for leading the workforce of today
and the future.
In addition, we developed a new long-term
learning and development strategy that
we will start to implement in 2026, with a
focus on promoting a culture of learning
and growth, building an efficient global
skills ecosystem and further enabling the
transfer of expertise and experience
between markets.
Early careers
We continued to invest in our award-winning
early careers programmes, designed to
attract, recruit and develop future talent for
our business.
In the UK, 2,274 people joined our early
careers programmes, including 1,162
apprentices and 1,112 graduates and
undergraduates. In 2025, we had a total of
5,146 apprentices in training across the UK
(4,653 in 2024). We were proud to be ranked
second in the Department for Education’s
2025 Top 100 Apprentice Employers (up from
sixth in 2024).
We continue to grow our Australian
apprenticeship programme and welcomed
our largest ever cohort of apprentices into
our South Australian Operations.
In the US, we continued our Learn, Engage,
Apply and Progress (LEAP) intern programme
with nearly 470 participants in 2025. Many
students who take part in LEAP choose to
join BAE Systems on graduation. LEAP
also garnered national attention with our
ranking as a “top internship program” for
Engineering, Data Analytics, Information
Technology and Finance on the 2025 Vault
Internship Survey.
Pathways into STEM careers
In partnership with government, educational
institutions and other stakeholders, we
are working to broaden and strengthen
pathways into STEM careers, both within BAE
Systems and the wider defence industry. In
the UK this includes work with UCAS, Skills
England, the Department for Work and
Pensions and Movement to Work (see page
54) to improve access and opportunity to join
the defence industry.
We delivered 918 in-person UK work
experience placements and 228 virtual work
experience placements. We are proud to
have entered into a strategic partnership with
the University of Cumbria to support the
establishment of its new campus in Barrow-
in-Furness. The campus was completed in
2025 and aims to be a catalyst for growing
higher education participation in the local
area. In Australia, we partnered with the
South Australian Government to become an
employment partner for the Heights
Technical College. Through this partnership,
we are working collaboratively with the
government to create new pathways into
the defence industry.
Details of our education roadshow and STEM
outreach are below on page 54 . Our
partnership with FIRST® (For Inspiration and
Recognition of Science and Technology) in
the US is also featured on page 54.
| 52 | BAE Systems plc Annual Report 2025 |
| Our investment in our people and communities continued |
Safety, health and wellbeing
Our people’s safety, health and wellbeing
are an enduring priority. Throughout 2025,
keeping our people safe at work and
supporting them to manage their health and
wellbeing remained our priority. This
included ongoing mandatory safety training
and embedding our BAE Systems Life Saving
Rules (or US equivalent Life Saving
Commitments) across the business. Our
senior leaders continue to provide visible
leadership on health, safety and wellbeing,
led by our Executive Committee.
| Safety data | ||||
| In 2025, the recordable injury rate decreased by 6% from 2024. The primary root causes for recordable injuries sustained during 2025 were related to slips, trips and falls (24%), and handling, lifting and carrying (23%). Major injuries decreased by 9%. The occurrence of serious injury and fatality non-fatal actual events continues to decrease from the data baseline set in 2021. |
||||
Safety
We have multiple programmes in place
to support the safety of our people and
reinforce a strong safety culture. Our focus is
on preventative safety management, aiming
to identify, remove and mitigate the most
significant health and safety hazards that
could potentially lead to a Significant Injury
or Fatality (SIF). Among several tools across
our UK and international sites, we use our
safety data platform, Shield, to access data
to advance our efforts on SIF prevention.
We will deploy an equivalent platform
in the US in 2026.
Looking ahead, we will continue to focus on
the capacity and capability of our leaders to
manage high-hazard exposure work areas,
learning from wider industry best practices to
keep driving the evolution of our safety,
health and environment programmes and
emphasis on SIF prevention.
Health and wellbeing
We offer a wide range of resources and
programmes to support the health and
wellbeing of our people. In 2025, we created
a new digital hub called ‘My Wellbeing’ for
our UK employees, making it easy to find
resources. ‘My Wellbeing’ is aligned to life
moments, from starting a family, to retiring,
to dealing with a health or financial issue.
In the UK, our employee assistance
programme is available 24/7, offering health
support and confidential counselling, as well
as legal and financial information.
In the UK, we have trained more than 400
mental health first aiders, who provide a
confidential point of contact for any
employee experiencing a mental health issue.
Our UK employees and their families also
have access to Unmind, a mental health app
which provides a range of tools.
In 2025, we launched an additional pilot
programme with Unmind, allowing
employees to access virtual counselling via
a network of qualified counsellors.
In the US, we launched a new,
comprehensive portal to provide ease of
access to the full range of health, finance and
wellbeing benefits we offer to help
employees thrive and care for themselves and
their families. Key wellbeing resources include
free support through our Confide/Employee
Assistance Programme to help our employees
be their best, at work and at home.
| Recordable injury rate (per 100,000 employees)1 |
||
| 2025 | 432 | |
| 2024 | 459 | |
| Major injury rate (per 100,000 employees) 1 |
||
| 2025 | 43 | |
| 2024 | 47 | |
The award of the executive directors’ bonuses
is dependent upon achievement of
improvements in both safety and workforce
culture (see page 115).
- BAE Systems Internal Audit has reviewed the
systems, processes and controls in place to collate,
validate and report this data. Based on the
procedures and the evidence obtained, nothing has
come to its attention that indicates the disclosures
have not been properly prepared in accordance
with such systems, processes and controls.
| Strategic report | Governance | Financial statements | Additional information | 53 | ||
People and culture
Our ambition is to have a high-performing
workforce that enables business performance
and growth through a culture of operational
excellence where all our employees feel
respected and valued and that they can
contribute fully to our mission. We do this
working in collaboration with employees
and external partners, to create a supportive
working environment, with access to
opportunity for all.
For our Employment of Disabled Persons
statement please see page 128.
Engaging our employees
We work with our leadership and employees
on a range of initiatives to create an
environment where everyone feels
empowered to contribute and perform
at their best.
We recognise that we have a multi-
generational workforce and are working to
understand specific needs to be able to work
effectively at BAE Systems.
We conduct regular surveys on employee
experiences and culture and learn from
their findings.
| Recognising and celebrating our people | ||
| Our global recognition programme, Stars, is our opportunity to recognise and reward colleagues for their achievements and contribution. Stars awards align to our strategic priorities to give everyone a chance to be recognised for delivering exceptional work in support of our mission. |
||
We expect all employees to treat each
other with dignity and respect, and we
do not tolerate discrimination or harassment
in any form. In 2025, in the UK, we delivered
focused employee communications
campaigns and training around the themes
of ‘do the right thing’ and ‘speak up’ to
help build and maintain a positive culture
of respect.
We have been re-accredited as a menopause-
friendly workplace by Henpicked in the UK
and Menopause Friendly in Australia.
Support for veterans
We are proud to have been awarded joint
first place for Top 50 Employers of Veterans at
the British Ex-Forces Awards and the Silver
Award at the English Veterans Awards,
Employer of the Year.
In the US, highlights included a Gold Award
as a Military-Friendly Employer, coupled with
recognition as a Best for Vets Employer by
Military Times Magazine and a Top Veteran-
Friendly Employer by US Veterans Magazine.
| Gender balance1 | |||||
| All employees2 | |||||
| A | Men | 79,000 | 76% | ||
| B | Women | 25,000 | 24% |
| Senior managers3 | |||||
| A | Men | 257 | 70% | ||
| B | Women | 109 | 30% |
| Executive Committee | |||||
| A | Men | 8 | 62% | ||
| B | Women | 5 | 38% |
| Board | |||||
| A | Men | 7 | 64% | ||
| B | Women | 4 | 36% |
- As at 31 December 2025 and excluding share
of equity accounted investments.
- Rounded to the nearest thousand employees.
BAE Systems Internal Audit has reviewed the
systems, processes and controls in place to
collate, validate and report this data. Based on
the procedures and the evidence obtained,
nothing has come to its attention that
indicates the disclosures have not been
properly prepared in accordance with systems,
processes and controls.
- Senior managers has the meaning given
to that term by section 414C(9) of the
Companies Act 2006. Senior managers are
defined as employees (excluding executive
directors) who have responsibility for
planning, directing or controlling the activities
of the Group or a strategically significant part
of the Group and/or who are directors of
subsidiary companies. This includes the
Executive Committee (excluding executive
directors) and their direct reports.
| 54 | BAE Systems plc Annual Report 2025 |
| Our investment in our people and communities continued |
Supporting our communities
We are dedicated to making a meaningful
difference in the communities where we
live and work, focusing on areas that align
with our values and business priorities. This
includes supporting the armed forces and
inspiring the next generation through our
STEM education outreach programmes.
Community investment
Through donations, fundraising, volunteering
and working closely with our charitable
partners, our community investment
initiatives aim to create lasting impact.
In 2025, we donated £12.2m to community
and charitable projects and 36,182 hours of
employee volunteering time.
UK highlights included partnering with the
Royal British Veterans Enterprise on its Great
Tommy Sleep Out campaign, which raised
more than £2m to help veterans who are
experiencing homelessness. We also
supported the Royal British Legion’s
annual Poppy Appeal.
In the Kingdom of Saudi Arabia, among a
range of community investment and
educational initiatives across the Kingdom,
we donated clothes and books to 20,000
disadvantaged people and provided 1,000
school bags to underprivileged students. In
Australia, we launched our inaugural
community investment grant programme
and our Legacy Week fundraiser raised over
AUS$10,000 in employee giving.
| Sparking innovation and inspiring tomorrow’s thinkers at the FIRST® Championship | ||
Inspiring young people
Alongside our skills development initiatives,
we continued to expand our global STEM
education outreach programmes. These
efforts are designed to inspire the next
generation to pursue careers in science,
technology, engineering and mathematics.
Our UK education roadshow, delivered in
partnership with the Royal Air Force and the
Royal Navy, reached 535 schools and more
than 136,500 young people. This programme
is in its 20th year and has reached over 1.4m
young people in this time. In 2026, the
roadshow will be delivered in schools and via
live stream, aiming to reach even more young
people.
We continued to deliver Coding Success in
partnership with the Royal Air Force, which
has so far reached 1,000 schools. We provide
schools with a full kit including Lego robots
and coding training for teachers. STEM
Roving Robots, a programme we deliver in
the UK and Australia, with roll-out also
planned for the Kingdom of Saudi Arabia, has
reached over 3,000 young people to date.
In the UK, our education outreach conducted
by our STEM ambassadors in local schools
reached around 215,000 young people in
2025. We have more than 2,400 registered
STEM ambassadors.
| 36,182 hours |
| (2024 40,959 hours) |
| Volunteered by our highly skilled and passionate employees working with charities and not-for-profit organisations |
In the US, we continued our decades of
support for FIRST®, both locally and nationally
as the presenting sponsor of the 2025 FIRST
Robotics National Championship, which had
more than 50,000 attendees from 66
countries. More than 280 FIRST teams
received support from BAE Systems during
the season and 59 of them advanced to the
championship.
In addition, we are partnering with Girls
Who Code in the US to support its Pathways
Program, which is designed for high school
students to explore web development, cyber
security, data science and an artificial
intelligence curriculum.
Creating opportunity
To help more young people into work in the
UK, we helped found Movement to Work in
2014. Working in partnership with The King’s
Trust and The Launch Group we deliver a
three-week programme to support young
people in developing their employability,
vocational skills, knowledge of the workplace
and confidence. This includes work
experience at BAE Systems. The programme
has proven highly successful, with over 60%
of participants advancing to full-time roles,
further education or training. A significant
number have secured permanent positions
at BAE Systems, primarily through
apprenticeships.
Working with Movement to Work from 2014
to 2025:
– we welcomed 80 cohorts of young people
across six business units;
– 1,028 young people completed placements
at BAE Systems;
– more than 640 young people who
completed the programme went on to
either take up a role with us or another
employer or return to education or training;
– 343 young people secured roles in our
company, including 246 who joined an
apprenticeship programme; and
– our Movement to Work cohorts have a
92% programme retention rate (exceeding
our target of 90%).
In 2026, we will increase the number of
placements we can offer in our UK business
from 100 to 135.
| Strategic report | Governance | Financial statements | Additional information | 55 | ||
| Supporting First Nations communities | ||
| In Australia, our commitment to support First Nations communities through long-term practical outcomes across community engagement, employment and supply chain was formalised through our fourth Reconciliation Action Plan. At the Osborne Naval Shipyard, we undertook initiatives to work alongside local First Nations leaders on two main pillars of Building Local First Nation’s Workforce Capability and Connecting Osborne Naval Shipyard to Culture. Our initiatives to support these pillars have included leadership training, targeted employment campaigns and cultural education and understanding workshops. |
||
| £12.2m1 |
| (2024 £12.7m) |
| Contributed to local, national and international organisations throughout the year |
Support for veterans and
the armed forces
Our support for the armed forces community
includes partnering with charitable
organisations to support veterans, serving
personnel, their families and heritage
institutions through community investment.
We are also committed to being a preferred
employer for service leavers and reservists.
We recognise the exceptional talent within
the armed forces and aim to be a top choice
for those transitioning to civilian careers.
In the UK, we work closely with the Careers
Transition Partnership sponsored by the
Ministry of Defence, and we were jointly
named ‘Employer of the Year’ at the British
Ex-Forces Awards.
Launched in 2020, ForcesNet is our UK
employee-led group that brings together
and supports colleagues who are veterans,
reservists and cadet force adult volunteers.
It now has more than 1,200 members and
offers camaraderie and coaching for armed
forces leavers as they transition into new
careers at BAE Systems.
In the US, our teams participated in more
than 50 military and veteran hiring events
and expanded our engagement with the
SkillBridge Program. We are also a corporate
partner in support of the US Chamber of
Commerce “Hiring Our Heroes” programme
and a presenting sponsor of the “Hire Vets
Now” statewide initiative in Virginia.
We proudly work with military charities to
make a positive impact and preserve national
military heritage. Over the past five years, we
have committed more than £18m globally to
the armed forces community, directly via
donations and sponsorships and through
employee volunteering and fundraising.
In the UK, we supported many military
charities and their work, including making a
commitment of £400,000 to the Royal British
Legion’s BattleBack Centre and Admiral
Nurse Service – a specialist service helping the
armed forces community and their families
living with dementia.
| The Armed Forces Covenant The UK’s Armed Forces Covenant is a promise by the nation to ensure that those who serve in the armed forces are treated fairly. We were one of the first signatories in 2013, and we hold a Gold Award in the Ministry of Defence’s Employer Recognition Scheme. We revalidated our commitments in 2022 and refreshed them in 2025 to align with key objectives in the UK Government’s Strategic Defence Review. |
||
- Deloitte has provided independent limited
assurance in accordance with the International
Standard for Assurance Engagements 3000 (ISAE
3000) issued by the International Auditing and
Assurance Standards Board (IAASB). Deloitte’s full
unqualified assurance opinion, which includes
details of the selected metrics assured, can be
found at baesystems.com/annual-report.
| 56 | BAE Systems plc Annual Report 2025 |
| Climate and the environment |
We have made progress in managing our climate-related risks
and advancing and integrating our decarbonisation strategy.
Our decarbonisation strategy aims to
mitigate the potential impacts of the material
transition risks we have identified by
underpinning business operations, growth
and resilience and delivery of capability to our
customers. Our business continuity
mitigations respond to climate-related
physical risks.
The long-term nature of our projects and
order backlog, stretching out to 2040 and
beyond, means we consider climate-related
risks across longer time horizons. We have
embedded mitigation plans in our sectors’
five-year business plans and our ongoing
Business Continuity Management systems.
We continue to assess the impact of our
predicted business growth to ensure our
energy and infrastructure strategies are
aligned to our decarbonisation strategy.
Our decarbonisation strategy includes:
– taking action to reduce our operational
GHG emissions in support of our Scope 1
and 2 GHG emissions reduction targets;
– supporting our customers on their climate
plans by developing energy efficient
products and services while maintaining
military operational advantage;
– engaging suppliers across markets on
their decarbonisation programmes;
– engaging and developing the skills and
capabilities of our employees to drive
innovative solutions for energy
management and resource efficiency across
our operations and the product lifecycle;
– seeking to mitigate adverse environmental
impacts and being good stewards of the
environment in the locations where we
operate; and
– partnering and collaborating with defence
peers, through industry associations, and
with academia and government to address
climate and environment matters.
How we manage
climate-related risk
We have assessed our material sustainability
impacts, risk and opportunities (see our
Double Materiality Assessment on page 221)
which identified climate adaptation and
climate mitigation as being a material
sustainability issue and have conducted
dedicated climate risk assessments.
Climate and environmental risks are
embedded in our approach to risk
management (see page 62).
Climate and environmental risk is addressed
within the Group’s principal risks: climate
transition and environmental factors;
business interruption; and legal risk (see
Climate scenario planning
We use climate scenarios to assess the
resilience of our business, decarbonisation
strategy and our approach to managing
potential future climate-related risk, including
the impact on our financial results.
| Climate Scenario Planning Page 226 |
Climate-related transition risk
Our decarbonisation strategy addresses our
climate-related transition risks. An overview
of activities we have undertaken in 2025 to
implement our strategy are explained in this
section and on page 226.
Climate-related physical risk
We continue to mature our assessment and
management of the climate-related physical
risks and impacts across our global facilities,
assessing potential future disruption and
implementing improvement
recommendations, including investment to
improve and develop our facilities.
The higher-impact risks of flood and wind-
related storms are our key focus due to the
potential interruption to the business these
events could cause. We also review data on
heat waves, drought, heat and cold stress
and seek to understand where these may
potentially impact operations. We plan to
conduct reviews approximately every three
years, but we may conduct them sooner if
there is a material change in external climate
scenarios or in the quality or availability of
climate data.
Of our 510 sites globally, 701 have been
identified as potentially having high exposure
to physical climate-related risks. We have
undertaken detailed reviews across prioritised
high-risk sites to assess potential impacts and
identify mitigations.
Examples include raising floor elevations as
required to mitigate impacts of flooding,
moving operations to other areas of a site as
necessary, increasing ship lift height to
mitigate rising sea levels, increasing roof
structure tolerances to support additional
snow loads and power outage response
assessments.
| Further information on physical risk can be found on Page 229. |
Decarbonising our operations
The decarbonisation of our operations
underpins business resilience over the long
term.
Our near-term absolute target and KPI,
embedded in long-term incentives (see page
106) is to reduce GHG emissions across our
operations (Scopes 1 and 2) by 44% by 2030,
reducing operational emissions by 4.2% year-
on-year.
Following the integration of SMS into our
environmental data systems in 2024, we
recalculated our 2020 GHG emissions
baseline in 2025 to include the emissions
from this business, in line with our GHG
reporting methodology. Our updated 2020
baseline for scope 1 and 2 GHG emissions is
526,434 tonnes CO2e. The integration of SMS
has added 39,037 tonnes CO2e and the
impact of these emissions is not deemed
significant to our targets.
Against our near-term absolute target, based
on our recalculated 2020 GHG emissions
baseline (explained above), we have reduced
our absolute GHG emissions by 35% since
2020.
Our progress towards and ability to meet
these targets will be affected by the
significant uncertainties around the transition
to a low-carbon economy and is likely to be
non-linear.
- Increased from 66 to 70 sites due to the integration of SMS acquisition during 2024
| Compliance with Task Force on Climate-related Financial Disclosures (TCFD) | ||||||
| In line with our obligation under UK Listing Rule 6.6.6R(8), we can confirm that we have made disclosures consistent with the TCFD Recommendations and |
Recommended Disclosures (including the implementing guidance set out in the 2021 TCFD Annex). Please go to page 222 to view a table that summarises our disclosures |
relating to the four TCFD Recommendations and 11 Recommended Disclosures as required by UK Listing Rule 6.6.6R(8). |
||||
| Strategic report | Governance | Financial statements | Additional information | 57 | ||
Our progress will also be dependent on a
wide range of factors, some of which will be
beyond our control including market and
policy developments, material scarcity,
technological developments and the progress
of our customers and suppliers as they seek to
decarbonise their own operations, products
and services. We will keep our performance
and approach under review, taking into
account all relevant business considerations.
During 2025, our overall GHG emissions have
decreased by 8.9%.
We continued to progress activities to meet
our near-term target. We have a strategic
energy management programme in place
which focuses on resource efficiency and
resilience improvements and planning to
drive carbon reduction, while factoring in
business growth.
As part of our continued our efforts to
transition to renewable energy, we have a
number of power purchase agreements
(PPAs) in place covering wind and solar
projects. During 2025, in the UK and
Australia, we commenced local to private
wire and self-generation renewable supplies
at key industrial sites and, in the UK, we also
signed a solar corporate PPA.
Our long-term energy strategy includes
investment in long-term renewable
generation and supply, which supports price
certainty and energy security.
In the UK, at the end of 2025, we had
renewable energy source contracts in place to
meet 60% of our future energy requirements.
To support our near-term absolute GHG
reduction target, we aim to have 90% of our
UK electricity requirement met from
renewable sources by 2030, subject to
commercially reasonable availability and our
business outlook.
In the UK, we successfully trialled the use of
alternative fuels (HVO) for our fleet vehicles
and plant operations and sustainable aviation
fuel in our flight operations. Following the
success of trials we commenced
a small-scale transition of fleet vehicles
and plant operations to HVO. Our UK sites
will continue to assess the most efficient
transition plans to support our
decarbonisation strategy.
We developed and rolled out a global energy
efficient building standard, incorporating
energy efficiency and modern building
standards into both refurbishments and new
building investments, to help us optimise our
energy resilience and reduce our energy
consumption. We also proactively manage
our real estate and have undertaken site
consolidation across our markets.
Across all major sites we have implemented
energy efficiency measures, reducing like
for like consumption. Examples include
replacement of lighting to energy efficient
LED lights, upgraded heating and cooling
systems and continual improvement of real
| GHG emissions data 1,2 | |||
| 1. | Emissions from activities which BAE Systems owns or controls (Scope 1) | ||
| 2. | Emissions from the electricity, natural gas and steam purchased for BAE Systems’ use (Scope 2 – location-based) |
||
| Total gross Scope 1 and 2 emissions | |||
| 3. | Emissions from employee business travel included in Scope 3 | ||
| For our GHG emissions and Streamlined Energy and Carbon Reporting (SECR) data - Page 230 | |||
| 1. Relevant reporting period 1 January to 31 December . 2. Deloitte has provided independent limited assurance in accordance with the International Standard for Assurance Engagements 3000 (ISAE 3000) and Assurance Engagements on Greenhouse Gas Statements (ISAE 3410) issued by the International Auditing and Assurance Standards Board (IAASB) for the year ended 31 December 2025 only. Deloitte’s full unqualified assurance opinion, which includes details of the selected metrics assured, can be found at baesystems.com/annual-report. |
| 2025 Global tonnes CO2e | 2025 UK tonnes CO2e | ||
| 2024 figures | 2024 figures |
estate to higher energy efficient standards
through refurbishment, retrofit, site
rationalisation and transition to electrified
heating systems.
| 58 | BAE Systems plc Annual Report 2025 |
| Climate and the environment continued |
Value chain
We continue to work towards our long-term
absolute target of achieving a net zero value
chain by 2050.
The products and services we make now and
in the future need to operate under different
climate temperature scenarios over the long-
term. Our customers already operate today
in diverse temperature and bio-diverse
environments, supporting interoperability
role requirements from NATO, and address
logistical challenges globally – these
environments are only expected to become
more volatile as a consequence.
During 2025, we continued to work with our
customers to develop and deliver products
and services that support their operational
efficiency and capability.
We are innovating to drive decarbonisation
of products and services for customers
to deliver energy security, resilience and
adaptation. We intend to achieve this
through:
– energy efficiency;
– alternate fuels and in situ energy
production;
– electrification programmes;
– new technology opportunities; and
– identifying opportunities to enhance
longer-term capability.
20–30%1 of defence industry emissions come
from upstream activities, so it is key that we
collaborate and partner with our suppliers.
We estimate, using recognised spend
methodology, that 80% of our scope 3
category 1 emissions2 come from less than
4% of suppliers. We are prioritising engaging
with these suppliers, many of whom already
have active decarbonisation programmes in
place.
We are expanding our understanding of
climate-related impacts on material scarcity
and supplier resilience.
We conducted initial analysis of critical raw
materials that are essential for the production
of advanced military technology (see page
227 for scenario planning), which includes
potential climate and environmental impacts.
We are researching how we can replace
critical minerals with alternative materials and
identifying opportunities to recover and
recycle materials.
Environmental stewardship
We are committed to high levels of
environmental stewardship and aim to
consume resources responsibly by:
– using energy efficiently; and
– improving efficiency of operations to
reduce and optimise all types of waste
(eg hazardous, non-hazardous, radioactive)
where we can.
We also seek to prevent adverse
environmental impacts by preventing sources
of contamination and to protect the natural
environment from harm and degradation in
the geographies where we operate.
Consumption of resources and materials
can be different year-on-year, due to
differences in geography across our
operations and the stage of manufacture
of our platforms and programmes.
We are taking a business-led approach to
waste and driving improvement programmes
and activities related to reducing
consumption of materials used. In the UK, we
reviewed waste data to understand business
variability to provide process improvement
diagnostics. For example, analysing waste
aligned to production stages to reduce waste
and repurpose materials. Whilst there have
been improvements in some areas with
specific waste reduction initiatives, overall
increases are driven largely by activity levels
in the Platforms & Services sector.
In the UK, we have a number of
collaborations underway, with academic
institutions, focused on energy transition
and materials resilience.
We collaborate with customers, trade groups
and suppliers on potential business impacts
and regulatory changes, for example, relating
to perfluoroalkyl and polyfluoroalkyl
substances.
Biodiversity and natural capital
We undertake surveys and assessments to
better evaluate and understand how our
facilities and operations can impact the
surrounding natural habitat to enable us to
address impacts where appropriate.
In the UK, we are factoring the Biodiversity
Net Gain legislation into the significant level
of new infrastructure and development
across our sites.
Employee engagement
We recognise that mitigating climate change
and protecting the environment are
important to many of our employees.
We engage our employees through special
interest groups, seminars and awareness
sessions. Our Early Careers Sustainability
group in the UK organised a series of ‘lunch
‘n learn’ sessions to coincide with COP 30.
Key environmental data
Waste production (tonnes)3
36%
recycled
(2024 48%)
| 2025 | 2024 | ||
| A | Non-hazardous | 68,576 | 55,305 |
| B | Hazardous | 7,408 | 4,952 |
| Total | 75,984 | 60,257 | |
| C | Recycled | 27,417 | 29,200 |
Electricity consumption (kWh)4
1.2%
renewable
(2024 0.3%)
| 2025 | 2024 | ||
| A | Grid | 762,699,555 | 803,847,418 |
| B | Renewable | 9,437,194 | 2,505,945 |
| Total | 772,136,749 | 806,353,363 |
| Other sustainability information/ GHG methodology statement page 231 |
- BAE Systems Internal Audit has reviewed
the systems, processes and controls in
place to collate, validate and report this
data. Based on the procedures and the
evidence obtained, nothing has come to its
attention that indicates the disclosures
have not been properly prepared in
accordance with such systems, processes
and controls.
- Deloitte has provided independent limited
assurance in accordance with
the International Standard for Assurance
Engagements 3000 (ISAE 3000) and
Assurance Engagements on Greenhouse
Gas Statements (ISAE 3410) issued by
the IAASB. Deloitte’s full unqualified
assurance opinion, which includes details
of the selected metrics assured, can be
found at baesystems.com/annual-report.
- Roland Berger – Defence Zero Volume 1: Military emissions and potential solutions
- Category 1 - Purchased goods and services.
| Strategic report | Governance | Financial statements | Additional information | 59 | ||
| Ethics and compliance |
Our approach to business includes a robust ethics and compliance programme.
Ethics and compliance
Our industry is among the most highly
regulated of any sector. Our global
Operational Framework sets out our
approach and the mandated policies and
processes which apply across all wholly-
owned entities.
Anti-corruption programme
Our customers, shareholders, partners and
employees expect the highest standards
when it comes to anti-corruption. We support
our employees in understanding the vital role
they have in helping the business to meet
those standards and in respect of business
conduct compliance more generally. We do
not tolerate corruption in any of its forms.
Our anti-corruption programme is designed
to identify, manage and mitigate corruption
risks and enable the company to adhere to
all relevant legal and regulatory requirements
recognising the bribery and corruption risks
the Group faces (see legal risk on page 71).
The programme provides our employees with
practical guidance, helps them to understand
what is expected of them and creates an
environment where they feel they can
confidently and, anonymously if needed,
ask questions and raise concerns.
Our ethics programme
Our global Code of Conduct lays out
the standards and behaviours that we
expect of all employees and outlines the
ways in which anyone can seek help and
guidance. Our Code is supported by a
training and engagement programme.
All of our employees are required to
complete live, manager-led ethics training
annually alongside e-learning programmes
of role-specific training, for example on
trade controls.
We value openness and strive to create a
culture where people feel they can speak
up freely and report issues and concerns
without fear of retaliation.
Employees can raise a concern through four
primary channels: via our Ethics Officers; by
email; on the telephone; and online reporting
to our externally run Ethics Helpline service.
Our Ethics Helpline permits anonymous
reporting and is also open to third parties.
Our Ethics Officers receive training to equip
them with the skills to provide guidance to
employees raising a concern.
During 2025, we received 2,099 reports,
reflecting a 22% increase globally from 2024;
an increase driven across all businesses. The
growth reflects our expanding operations
and continued efforts to promote a speak
up culture.
During 2025, 56% of reports were resolved
and closed through guidance, compared to
49% in 2024. Reporters seeking guidance has
increased, with the substantiation rate of
allegations at 31%.
Our anonymity rate remained at 27%
for the second consecutive year, remaining
below the global benchmark rate of 54%3.
35% of reports were made directly to Ethics
Officers in 2025 – we encourage this route
for raising reports, as it allows for an
immediate response by someone familiar
with the local situation.
We interpret these metrics as positive
indicators of reporters, including our
employees, showing trust in the business
and in speaking up.
| Total ethics enquiries1 |
Number of ethics officers |
Dismissals for reasons relating to unethical behaviour1, 2 |
||||
| 2025 | 2025 | 2025 | ||||
| 2024 | 2024 | 2024 | ||||
| Anonymity rate | Code of Conduct training | |||||
| 27% | 99.5% | |||||
| (2024 27%) | (2024 99%) | |||||
| 2025 ethics enquiries by region | How our Ethics Helpline has been used |
| A | US | 1,166 |
| B | UK | 836 |
| C | Kingdom of Saudi Arabia | 61 |
| D | Australia | 36 |
| How were concerns raised? | What happened? | ||||||||||
| Helpline 768 |
Concerns raised 2,099 |
Guidance 1,172 |
|||||||||
| Ethics Officer 729 |
Still under investigation 179 |
||||||||||
| Email 578 |
Investigations 927 |
Case to answer4 288 |
|||||||||
| Other 24 |
No case to answer5 460 |
||||||||||
- BAE Systems Internal Audit has reviewed the systems, processes and controls in place to collate, validate and report this data. Based on the procedures
and the evidence obtained, nothing has come to its attention that indicates the disclosures have not been properly prepared in accordance with such
systems, processes and controls.
-
Represents a dismissal rate of 0.36% based on 2025 headcount (compared to 0.33% in 2024).
-
Navex 2025 anonymity benchmark.
-
Case to answer is defined as the investigation has concluded that, based on the information reviewed, the alleged breach of policy or misconduct is
credible and supported by evidence.
- No case to answer is defined as the investigation found insufficient evidence, or the information does not support that a breach of policy or misconduct occurred.
| 60 | BAE Systems plc Annual Report 2025 |
| Ethics and compliance continued |
Working with our supply chain
It is important that we collaborate and
partner with our suppliers and the steps we
are taking are detailed below.
In 2025, we spent £16bn with more than
22,000 directly contracted suppliers
worldwide. These relationships are often
long-lasting due to the complexity of our
products and their long lifecycles, so it is
critical that our suppliers adhere to our
Supplier Code of Conduct.
We communicate our expectations of our
supply chain through our Supplier Code of
Conduct, which we share with all our directly
contracted suppliers.
Our Supplier Code of Conduct covers supplier
workplace, labour standards, employee
business practices and wider topics of focus.
We are keen to continue to build our
networks with companies, particularly small
businesses, both within and external to our
current supply chain, seeking to strengthen
existing relationships, build new and novel
ones, where appropriate, and continue to
take actions that support businesses
both within local communities and the
broader defence sector.
During 2025, we undertook an annual
risk-based assurance activity to assess our
suppliers’ adoption of our Supplier Code
of Conduct and to identify any areas that
required investigation and/or mitigation.
We completed this assurance activity with
directly contracted suppliers representing
more than 31% of our global spend.
Additionally, our standard terms and
conditions require suppliers to comply with
all applicable laws and regulations, including
those related to human rights, anti-slavery,
anti-corruption and the environment.
Conflict minerals
We expect our suppliers to provide products
made from materials, including constituent
minerals, that are sourced responsibly. We
also expect our suppliers to support efforts
to eradicate the use of any minerals which
directly or indirectly finance or benefit armed
groups that are perpetrators of serious
human rights abuses.
UK Fair Payment Code
BAE Systems plc and a number of its UK
subsidiaries are awardees of the UK Fair
Payment Code and we are committed to
paying our suppliers promptly and in
accordance with agreed terms. The Fair
Payment Code requires a commitment to the
principles of being clear, fair and collaborative
with suppliers. Adoption of appropriate
payment practices is of significant importance
to us, and ensuring that we pay invoices on
time is a key focus for our UK businesses.
Human rights
We are committed to respecting human
rights wherever we operate, in the activities
that fall under the full, direct control of the
Group. Our employees, suppliers and
business partners are all expected to adopt
high standards. We are committed to
conducting business responsibly and
maintaining and improving systems and
processes to mitigate the risk of slavery and
human trafficking in our business and supply
chain.
Our Human Rights Statement outlines our
approach to activities that fall under the full,
direct control of the Group, including in
relation to anti-corruption and the
environment, as well as our workplace, supply
chain, local communities and products. Our
Supplier Code of Conduct sets out the human
rights principles we expect of our suppliers.
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 on our
website. We also provide a statement in
response to the California Transparency in
Supply Chains Act.
Reporting, disclosure and
assurance
We report on progress of our sustainability
agenda within our Annual Report and online:
baesystems.com/sustainability.
Double materiality assessment
Sustainability is integrated into our Group
strategic framework (see page 16).
To understand the sustainability impacts, risks
and opportunities that are relevant for our
business we engage internal and external
stakeholders, via a materiality assessment (see
page 221).
Our sustainability agenda addresses material
risks and opportunities identified from this
assessment.
For an update on activities that support our
sustainability agenda please review the
following sections of this report - Our
investment in people and communities,
Climate and the environment, Ethics and
compliance, TCFD statement and Climate
Scenario planning.
We plan to run our materiality assessment
every three years or sooner in the event of
material changes to the business.
In 2024, we conducted our first double
materiality assessment to support future
compliance with any reporting under the EU
Corporate Sustainability Reporting Directive.
| Additional information Page 221 |
Sustainability reporting boundary
The reporting boundary for sustainability
information and data, including our
investment in people and communities,
climate and environment and the responsible
business section, covers wholly- and not
wholly-owned subsidiaries, but excludes
equity accounted investments. Data includes
organisational changes made in 2025.
Our approach to UN Sustainable
Development Goals
We continue to support the UN Sustainable
Development Goals (SDGs) and remain
committed to making progress on specific
goals that are aligned to our sustainability
agenda. The SDGs provide a framework for
developing and addressing the challenges
that global populations face from climate
change and environmental risks through
to managing societal needs and building
economic growth.
| For more information please visit our website www.baesystems.com/en/sustainability |
Assurance of data
External assurance of GHG emissions
(page 57), energy (page 230) and community
investment (page 54) data is provided by
Deloitte LLP.
| Deloitte’s full unqualified assurance opinion, including details of the selected metrics assured www.baesystems.com/annual report |
| Strategic report | Governance | Financial statements | Additional information | 61 | ||
| Non-financial and sustainability information statement |
The ‘Our investment in our people and communities’, ‘Climate and the environment’ and ‘Ethics and compliance’ sections constitute the non-
financial and sustainability information statement as required by the Companies Act 2006 as amended, together with the ‘Our stakeholders and
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 | |
| Climate and the environment Page 56 Addressing climate risks (TCFD) Page 222 Climate Scenario Planning Page 226 |
|||
| Environmental matters and climate-related disclosures |
– Climate Response and Environmental policy – Decarbonisation strategy – Supplier Code of Conduct |
||
| Employees | – People policy – Health and Safety policy – Communications policy – Code of Conduct – Personal Data Protection policy |
Our stakeholders and work of the board Page 85 Our investment in our people and communities Page 50 |
|
| Respect for human rights | – Code of Conduct – Human Rights Statement – People policy – Product Trading policy – Modern Slavery Statement – Supplier Code of Conduct |
Ethics and compliance Page 59 | |
| Social matters | – Community Investment policy – Commercial policy – Lobbying, Political Donations and Other Political Activity policy – Dignity and Respect Standards, in support of our global workplace culture vision – Supplier Code of Conduct |
Our stakeholders and work of the board Page 85 Ethics and compliance Page 59 Environmental, social and Governance Committee report Page 101 Our investment in our people and communities Page 50 |
|
| Anti-bribery and corruption | – Gift and Hospitality policy – Finance policy – Conflicts of Interest policy – Facilitation Payments policy – Advisers policy – Fraud Prevention policy – Lobbying, Political Donations and Other Political Activity policy – Procurement policy – Supplier Code of Conduct |
Ethics and compliance Page 59 Governance framework Page 82 |
|
| Description of principal risks relating to topics mentioned above |
– Risk Management policy | How we manage risk Page 62 | |
| Description of business model |
Our business model Page 14 | ||
| Non-financial key performance indicators |
Key performance indicators Page 18 |
All our policy summaries can be found on our website: https://www.baesystems.com/en/sustainability/sustainability-reporting/operational-
framework-and-policy-summaries
| Section 172 statement For the year ended 31 December 2025 , in accordance with the requirements of Section 172(1) of the Companies Act 2006, the directors consider that they have acted in good faith and in a manner most likely to promote the success of the Company for the benefit of its members as a whole, having regard to stakeholders and other certain factors, including standards of business conduct and the impact of its operations on the environment and local communities. |
|||
| More information in support of this statement, including key matters considered and decisions made by the Board during 2025 Page 85 | |||
| 62 | BAE Systems plc Annual Report 2025 |
| 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.
Roles & Responsibilities
Board
The Board has overall responsibility for
determining the nature and extent of the
risks the Group is willing to take to achieve
its long-term strategic and financial
objectives, and ensuring that risks are
managed effectively across the Group.
Risk is considered on a regular basis at Board
and Board committee meetings and the
Board reviews risk (including emerging risk)
as part of its business planning and annual
strategy review process. This provides the
Board with an appreciation of the key risks
within the business and oversight of how
they are being managed.
The Board delegates oversight of certain risk
management activities to the Audit and Risk
Committee.
Audit and Risk Committee
The Audit and Risk Committee monitors
the Group’s key risks identified by the risk
management processes and reports its
findings to the Board twice a year.
To support this activity, it receives insight
on particular risk-related matters from the
other Board sub-committees, including the
Environmental, Social and Governance and
Remuneration Committees.
The Audit and Risk Committee is also
responsible for reviewing the effectiveness
of the Group’s risk management and internal
control framework and presenting its
assessment to the Board.
Environmental, Social and Governance
Committee
The Environmental, Social and Governance
Committee monitors the Group’s approach
to, and relevant policies on, climate resilience
and transition plans and the Group’s
approach to, and relevant policies on,
workplace environment, including health
and safety.
Remuneration Committee
The Remuneration Committee aims to
achieve a balance between the reputational
and other risks from excessive reward
and the retention risk from below-market
remuneration and ensures that behavioural
risks that can arise from target-based
incentive plans are identified and mitigated.
Approach
The Group’s approach to risk management
is set out in the Risk Management policy,
a mandated policy under the Operational
Framework, and is aimed at the early
identification of material risks, mitigating
the effect of those risks before they occur
and dealing with them effectively if they
crystallise.
The Group is committed to the protection
of its assets, which include its people,
intellectual and physical property, and
financial resources, through an effective risk
management process, underpinned where
appropriate by insurance.
Reporting within the Group is structured
so that key issues are escalated through
the management team and ultimately
to the Board where appropriate. The
underlying principles of the Group’s risk
management processes are that risks are
monitored continuously and associated
action plans reviewed, with this information
reported through established management
review processes.
The Audit and Risk Committee of the Board
has conducted a review of the effectiveness
of the Group’s risk management and internal
control framework, including material
financial, operational and compliance
controls, in accordance with the 2018 UK
Corporate Governance Code. This framework
was in place throughout 2025 and to the
date of this report.
As with any system of internal control, the
policies and processes that are mandated
in the Operational Framework are designed
to manage rather than eliminate the risk of
failure to achieve business objectives and can
only provide reasonable, and not absolute,
assurance against material misstatement
or loss.
Process
The responsibility for risk identification,
analysis, evaluation and mitigation rests
with the line management of the sectors
and Group functions. They are also
responsible for reporting and monitoring
key risks in accordance with established
policies and processes under the Group’s
Operational Framework.
The businesses and Group functions maintain
detailed risk registers containing the risks to
the Group’s strategic and financial objectives
that have been identified, characteristics
of the risk and the mitigation strategy for
the risk, including the internal controls in
operation. Each risk is allocated an owner
who has authority and responsibility for its
management. The more significant risks
identified by the businesses and Group
functions are reported and reviewed at the
Quarterly Business Review and the Chief
Executive’s Business Review, which are both
core business processes mandated by the
Operational Framework.
The businesses and Group functions
undertake a formal refresh of their Business
Risks annually. This provides a topical set of
risks which, together with insight from senior
management, are collated to report the
Group’s most significant risks to the Executive
Committee. The Executive Committee then
determines management responsibility
for these risks.
| Strategic report | Governance | Financial statements | Additional information | 63 | ||
The Executive Committee keeps these
significant risks, and their corresponding
controls and mitigation actions, under review.
They are reported to the Board and form the
basis of the Board’s assessment of the
Group’s Principal Risks.
Assurance over the effectiveness of controls
and mitigation actions is tailored,
commensurate to the corresponding risk.
Primary assurance is provided by the Group’s
Operational Assurance Statement process
which is mandated under the Operational
Framework and whereby each business and
Group function leader undertakes a self-
assessment of compliance with Operational
Framework policies and processes every
six months. Where appropriate, this is
supplemented by functional oversight.
Finally, Internal Audit or, when appropriate,
other independent third parties, provide
independent assurance.
Principal and emerging risks
The Board has carried out a robust
assessment of the principal and emerging
risks facing 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. A description of the
principal risks and their potential impact,
together with details of how they are being
controlled and mitigated, can be found on
Risks can develop and evolve over time,
and their potential likelihood and impact
may vary over time in response to events.
These may include emerging risks, which
are considered through the above-
mentioned existing processes, and through
the Group’s business planning and annual
strategy review process.
There have been no substantial changes to
the Group’s principal risks compared to the
2024 Annual Report.
2024 UK Corporate Governance
Code Provision 29
The Financial Reporting Council updated the
UK Corporate Governance Code in January
2024 with the changes to Provision 29 of
the Code becoming effective for accounting
periods beginning on or after 1 January 2026.
The amended Provision 29 covers the Board’s
monitoring and review of the effectiveness
of the risk management and internal control
framework and introduces a requirement for
the Board to make a declaration of the
effectiveness of material controls.
In preparation for the implementation of
these changes to the Code, the Audit and
Risk Committee has formally codified the
Group’s material controls and the assurance
the Board will likely require to support its
declaration of material control effectiveness.
Assurance activities over the Group’s material
controls will take place throughout 2026
ahead of the Board’s first declaration of
material control effectiveness in the 2026
Annual Report.
For further details on the work of the Audit
and Risk Committee on this topic, see the
Audit and Risk Committee report on page 96.
| Our principal risks Page 65 |
| 64 | BAE Systems plc Annual Report 2025 |
| Our risk management framework |
| Board Overall responsibility for risk management |
| Risk challenge, monitoring and reporting |
||||
| Audit and Risk Committee Monitors key risks and reviews effectiveness of the risk management and internal control framework |
||||
| Executive Committee Review and challenge of business risks |
||||
| Risk challenge, monitoring and reporting |
||||
| Chief Executive’s Business Review Quarterly top-level review of key operational and financial performance issues, business risks and significant forthcoming bids |
||||
| Quarterly Business Review Quarterly management review of the performance of each of the Group’s businesses against their objectives, measures and milestones, including business risks |
||||
| Integrated Business Plan Annual long-term strategy review, five-year plan for each business and emerging risks |
||||
| Strategic objectives and shareholder value | Project objectives and financial return | |||
| Business Risk Risk Management policy (mandated policy) |
Project Risk Lifecycle Management Framework (Core Business Process) |
|||
| Risks recorded in risk registers | ||||||
| Risk owners identified and action plans implemented Robust mitigation strategy subject to regular and rigorous review |
Risks analysed for impact and probability to determine exposure |
|||||
| Risk exposure reviewed and risks prioritised | ||||||
| Operational Assurance Statement Six-monthly management self-assessment of compliance with the Operational Framework (Mandated Policy) |
||
| Assurance Review Board Assurance of the Business Risk management processes as mandated in the Operational Framework |
| See the group’s Operational Framework for definitions of policies, processes and reviews Page 84 |
| Strategic report | Governance | Financial statements | Additional information | 65 | ||
| Our principal risks |
Risks are identified based on the likelihood of occurrence, the potential impact on the Group
and the timescale over which they might occur. The Group’s principal risks are identified below
together with a description of how each risk is mitigated. The risks estimated as more significant
to the Group (as at the date of this Strategic Report) are placed at the top end of the list.
| Our Strategic Framework Page 16 |
| Government customers, defence spending and terms of trade | Links to strategy | ||||
| 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 2025, 96% of the Group’s sales were defence related. The political landscape in certain of the Group’s principal markets and the current heightened volatility in geo-politics give rise to increased uncertainty over governments’ defence spending priorities and budgets. Defence budget levels are difficult to predict and can fluctuate depending on change of government policy, other political considerations, budgetary constraints, specific threats to national security and macroeconomic conditions. From time to time, there have been constraints on government expenditure in certain of the Group’s principal markets. |
Lower defence spending by the Group’s major customers could have a material adverse effect on the Group’s business, results of operations, financial condition and prospects. |
The Group actively manages its strategic market and product positioning through its established Integrated Business Planning process. The business is geographically spread across the US, UK and international defence markets and the Group’s diverse product and services portfolio is marketed across a range of defence markets. Many of the countries in which the Group operates have announced increases in defence spending to address the elevated threat environment. while governments face global economic and fiscal pressures, the commitment to defence in the Group’s major markets remains robust. In particular, the Group’s principal markets – the UK, US, the Kingdom of Saudi Arabia and Australia – have a significant and sustained commitment to defence and security notwithstanding the volatile political landscape. See ‘Our markets’ on page 22 of this Annual Report. The Group benefits from a large order backlog, with established positions on long-term programmes in its principal markets. |
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| The Group has long-standing relationships and security arrangements with a number of its government customers, including its four largest customers, the governments of the US, UK, Kingdom of Saudi Arabia and Australia, and their agencies (who represented, as at 31 December 2025, 73% of the Group’s revenue). It is important that these relationships and arrangements are maintained. In the defence and security industries, governments can typically modify contracts for their convenience or terminate them at short notice. Furthermore, governments from time to time review their terms of trade and underlying policies and seek to impose such new terms and policies when entering into new or amending existing contracts. Most long-term US Government contracts, for example, are funded annually or incrementally and are subject to cancellation if funding appropriations for subsequent periods are not made. Further, certain of the Group’s contracts with government customers are subject to financial audits and other reviews, which can result in adjustments to prices and costs. |
Deterioration in the Group’s principal government relationships resulting in the failure to obtain planned contracts or expected funding appropriations, adverse changes in the terms of its arrangements with those customers or their agencies, or the termination of contracts could have a material adverse effect on the Group’s business, results of operations, financial condition and prospects. |
The Group has established strong and enduring relationships in its principal markets and is recognised as playing a key role in the industrial capability of each of the countries in which it operates. Government customers have sophisticated procurement and security organisations with which the Group has long-standing relationships with well- established and understood terms of business. In the event of a customer terminating a contract for convenience, the Group would typically be paid for work done and commitments made at the time of termination. Where contracts are subject to financial audits, which may lead to price or cost adjustments, the Group has established processes to ensure costs estimated and/or incurred on contracts are considered allowable under the applicable law and regulation. This approach aims to minimise the risk of detrimental price or cost adjustments. |
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| The Group’s profits and cash flows are dependent, to a significant extent, on the receipt and timing of the award of defence contracts and the profile of cash receipts thereunder. |
Amounts receivable under the Group’s defence contracts can be substantial and, therefore, the timing of, or failure to receive, awards and associated cash advances and milestone payments could materially impact the Group’s profits and cash flows for the periods affected, thereby reducing cash available to meet the Group’s capital allocation priorities, potentially resulting in the need to draw on external funding and impacting its investment- grade credit rating. This in turn could have a material adverse effect on the Group’s business, results of operations, financial condition and prospects. |
The Group’s balance sheet continues to be managed in line with its policy to retain an investment-grade credit rating and to ensure operational flexibility. The Group monitors a rolling forecast of its liquidity requirements to ensure that there is sufficient access to cash to meet its operational needs and maintain adequate headroom. |
| 66 | BAE Systems plc Annual Report 2025 |
| Our principal risks continued |
| Contract risk, execution and supply chain | Links to strategy | ||||
| The Group has many contracts, including a number of large contracts and fixed-price contracts, and is dependent on the delivery of services, component availability, subcontractor performance and key suppliers. |
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| Description | Impact | Mitigation | |||
| As a major defence, aerospace and security company, the Group executes long-term high-value contracts for the provision of complex, strategically important products and services for its customers. For example, in 2025, 51% of the Group’s sales were generated by its 17 largest programmes and, as at 31 December 2025, the Group had 13 programmes with an order backlog in excess of £1bn. It is important that the Group delivers on its projects within tight tolerances of quality, time and cost performance in a reliable, predictable and repeatable manner. A significant portion of the Group’s revenue is derived from fixed-price contracts. Assumptions used to estimate projected costs, including those on future rates of inflation, on which fixed prices are agreed may prove to be inaccurate and, since these contracts can extend over many years, there is a risk that actual costs may significantly exceed projected costs. |
A failure by the Group to anticipate technical problems or deliver on its contractual commitments could result in (among other things) the loss, expiration, suspension, cancellation or termination of one or more of its large contracts, which could have a material adverse effect on the Group’s business, results of operations, financial condition, prospects or reputation. A failure to estimate accurately and control costs on fixed-price contracts could have a material adverse effect on the Group’s business, results of operations, financial condition and prospects. |
All of the Group’s major programmes are managed under the Group’s mandated Lifecycle Management process, the objective of which is to manage contract performance, including contract- related risks, and deliver acceptable contract outcomes. Further, the Group has a well-balanced spread of programmes and a significant defence order backlog, which provides portfolio resiliency and forward visibility. Estimating, 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. Risks inherent in prospective contracts are considered carefully as part of these processes to ensure that proposed contract terms are commensurate with such risks. In particular, the Group recognises that fixed price design and development contracts are generally more risk intensive than other contract types and, as a result, the Group has limited exposure to such contracts. A significant proportion of the Group’s largest and most complex contracts are with the UK Ministry of Defence. In the UK, development programmes are normally contracted with the customer holding appropriate levels of risk initially. It is important that suitably skilled and experienced personnel are appointed to lead complex projects containing significant levels of risk and uncertainty. To support this the Group has an array of learning and development programmes to maintain a pool of competent project leaders and other key project delivery roles. |
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| The Group is dependent on the delivery of services and materials by suppliers and the assembly of components and subsystems by subcontractors used in its products in a timely and satisfactory manner, on appropriate commercial terms and in full compliance with applicable terms and conditions. This can be exacerbated where the Group is dependent on either one or a limited number of suppliers. Some of the Group’s suppliers or subcontractors may be impacted by economic factors (such as inflationary pressures, trade restrictions and material shortages (including critical minerals)), bankruptcy or financial difficulties and other business continuity events, which could impair their ability to meet their obligations to the Group and to supply on appropriate commercial terms. |
A failure by one or more of the Group’s suppliers to provide the agreed-upon materials, components or products or perform the agreed-upon services, on a timely basis, at the agreed price, according to specifications (including compliance with regulatory requirements) or at all may adversely affect the Group’s ability to perform its obligations, result in additional costs or delays, require the Group to transition work to other companies (resulting in further additional costs and delay) and/or result in penalties under, or the termination of, customer contracts. This impact is heightened where a supplier is a sole supplier or one of a small number of qualified suppliers. Additionally, the Group could be adversely affected by actions, or issues experienced by, the Group’s suppliers which are outside its control (such as misconduct and reputational issues), which could subject the Group to liability or adversely affect its ability to compete for contracts. Any of the foregoing could have a material adverse effect on the Group’s business, results of operations, financial condition, prospects and reputation. |
The Group’s supply chain function establishes and manages supplier relationships and agreements, in partnership with the programmes it supports. Supply chain management starts with the Group’s Global Procurement policy, which defines the requirements to be implemented by each of the Group’s sectors for the establishment of procurement controls and the management of supplier-related risk to a minimum set of standards. Where the Group has long-term programmes in place, it seeks to leverage the benefit of forward visibility of long-lead requirements to allow the Group to better manage supplier deliverables against programme requirements. Risk-based due diligence, for both new and existing suppliers, is carried out with reference to a range of financial and non-financial factors. Third-party toolsets are used to support compliance and risk assessments as part of these due diligence checks. The Group’s supply chain function holds regular regional and global supply chain risk and disruption reviews to ensure that the latest risk data is appropriately shared and to identify emerging risks through horizon scanning. The Group seeks to manage its supplier capacity, and cost inflation risks through contracting arrangements, supplier cost management activity, long-term supplier agreements and leverage of category volumes. |
| Strategic report | Governance | Financial statements | Additional information | 67 | ||
| Cyber security and other security risks | Links to strategy | ||||
| The Group could be negatively impacted by cyber security threats or personnel, physical or technical security-related disruptions. | |||||
| Description | Impact | Mitigation | |||
| As a major defence, aerospace and security company, the Group faces significant risks in respect of its information security, continuity of operations, integrity of its products and physical security. These threats are continuous and evolving, and are posed by organisations with a broad range of capability, from criminals to nation states, acting independently or with the assistance of an “insider”. Threats include attempts to gain unauthorised access to the Group’s and customers’ sensitive data in order to compromise the integrity, confidentiality and/or availability of that data (in some cases potentially compromising the products to which it relates); attempts to disrupt business operations through the sabotage of the Group facilities, networks and other assets; threats to the safety of employees; theft of assets including potentially hazardous material; and threats to the Group’s supply chain and partners (including joint ventures and joint venture partners). These threats can manifest through cyber, human and/or physical means and directly or indirectly via the supply chain. The continuing war in Ukraine has increased a number of risks to Ukraine’s allies and their defence industries. Further, geo-political instability could give rise to similar threats. |
While the impact of any such threats and/or disruption is difficult to predict, it could lead to (among other things): (a) production downtimes; (b) operational delays; (c) reduction in the effectiveness of, and/or introduction of vulnerabilities into, products sold to customers; (d) the compromise, misappropriation, destruction or corruption of the Group’s data or intellectual property and that held or generated by the Group on behalf of its customers, suppliers and partners; (e) other manipulation or improper use of the Group’s or third-party systems, networks or products (eg disabling or denying their use and/or altering their performance characteristics); (f) diversion of management’s attention and resources; (g) harm to staff; and/or (h) financial losses from remedial actions, potential exclusion from key markets, or potential liability, penalties, fines and/or damages. Furthermore, as part of its Cyber & Intelligence sector, the Group provides systems, products and services to various customers who also face cyber threats. These systems, products and services could themselves be compromised, may not be able to detect or deter threats, or effectively mitigate resulting losses, which could adversely affect the Group’s customers and therefore result in financial losses from remedial actions, loss of business, or potential liability and/or damages. In addition, a failure by the Group to prevent or mitigate cyber- attacks that impact the Group could have a detrimental impact on the reputation and/or performance of the Cyber & Intelligence sector. Any of these impacts could have a material adverse effect on the Group’s business, results of operations, financial condition, prospects and reputation. |
The Board and senior management regularly consider security risk. These senior level reviews cover evolving threats, the Group’s planned responses and the effectiveness of security controls and security investments in meeting intended objectives. Security risk is also reviewed at a functional and operating business level. A robust security risk management framework identifies risks to the Group’s critical assets and personnel, be they based on digital infrastructure, company sites, attending events or on overseas travel. The Group’s internal Cyber Security Standards are aligned to the National Institute of Standards and Technology framework. A formal, three layers of defence assurance programme, which is reviewed both internally and externally, is operated to check adherence to these standards and to customer requirements. Additionally, resulting from the need to comply with government customer requirements, certain of the Group’s IT networks are formally accredited by those customers. Education and awareness to embed a strong security culture across the Group is a vital part of its preventative activities. Employees are required to complete mandatory training which (depending on role) covers cyber security, physical and personal security, document marking, security of export- controlled information and personal data protection. As many cyber-attacks involve email, the Group runs a programme of phishing exercises for all email users across the enterprise. To increase the Group’s resilience against security threats, including insider risk, the Group performs protective monitoring of activity on the Group’s core networks via the Group’s Security Operations Centres, maintains incident response and crisis management plans with updates following regular test exercises and obtains threat intelligence to the Group, utilising its internal security capabilities and from external partners including governments. To address the risk to the security of the Group’s personnel, communications and advice are provided to all employees on personal safety precautions, with additional tailored communications provided in high-threat cases. To mitigate the cyber security risk posed by working with suppliers, the Group performs risk-based due diligence and assurance and (where relevant) seeks to require suppliers to comply with cyber security- related contractual provisions. In addition to the above, the Group purchases cyber and property insurance; however, as with all insurance, it does not provide full cover against all potential loss scenarios. |
| 68 | BAE Systems plc Annual Report 2025 |
| Our principal risks continued |
| International markets | Links to strategy | ||||
| The Group operates in international markets. | |||||
| Description | Impact | Mitigation | |||
| The Group is an international company conducting business in several regions, including the US, Australia and the Middle East, as well as in the UK. International sales and operations are sensitive to (among other things): social and political changes impacting the business environment; economic downturns and inflation; political instability, armed conflict and civil disturbances; the imposition of capital controls; the introduction of burdensome taxes or tariffs; changes to export control, tax and other government policy and regulations in the UK, US and all other relevant jurisdictions; and the inability to obtain or maintain the necessary export licences and other trade restrictions. |
Any of these factors could have a material adverse effect on the Group’s business, results of operations, financial condition and prospects. |
The Group has a balanced portfolio of businesses across a number of markets internationally and benefits from a large order backlog, with established positions on long-term programmes in the US, UK, the Kingdom of Saudi Arabia and Australia. The Group’s contracts are often long-term in nature and, consequently, it may be able to mitigate these risks over the term of those contracts. While some of the Group’s contracts are on a government-to- government basis, for contracts which are not government- to-government, political risk insurance is held where considered appropriate with regard to the level of risk involved. However, as with all insurance, it does not provide full cover against all potential loss scenarios. The Group has a well-established legal and regulatory compliance structure aimed at ensuring adherence to legal and regulatory requirements and identifying matters that could adversely impact the Group’s activities, including export control requirements. |
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| Given the international nature of its business, the Group is exposed to volatility arising from movements in currency exchange rates, particularly in respect of the US dollar, euro, Saudi riyal and Australian dollar. |
Significant fluctuations in exchange rates to which the Group is exposed could cause volatility in its financial results reported in pounds sterling and could have a material adverse effect on the Group’s business, results of operations, financial condition and prospects. |
The Group’s policy is to hedge all material firm transactional currency exchange rate exposures. Control processes are in place to ensure adherence to this policy. |
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| The international markets in which the Group operates are highly competitive and the Group’s business depends on its ability to win and contract for high-quality new programmes in these markets. The Group’s competitors may also develop new technologies or offerings, novel support models or more efficient ways to produce existing products that could cause the Group’s existing products or services to become obsolete or that could gain market acceptance before the Group’s own products or services. |
If the Group is unable to compete adequately and/or obtain new business in the international markets in which it operates, there may be a material adverse effect on its business, results of operations, financial condition and prospects. |
The Group has an international, multi-market presence, a broad portfolio of products and services, leading capabilities and a track record of delivery on its commitments to its customers. To remain competitive, the Group continues to invest in both research and development and its systems and processes; seek cost base reductions; and improve efficiency. UK and US Government support is often provided to the Group in relation to its business opportunities in export markets. In the UK, export contracts can be structured on a government-to-government basis and government support can also involve military training, ministerial support for promotional activities and financial support through UK Export Finance. In the US, most of the Group’s defence export sales are delivered through the Foreign Military Sales process, under which the importing government contracts with the US Government. |
| People | Links to strategy | ||||
| The Group needs to attract and retain suitably qualified people across all of its operations. | |||||
| Description | Impact | Mitigation | |||
| Delivery of the Group’s strategy is dependent on its ability to recruit and retain people with appropriate talent and skills, including those with innovative technological capabilities. The Group may be unable to attract and retain suitably experienced senior executives to provide the necessary leadership and direction in a complex and dynamic environment. Competition for suitably qualified and experienced people is high both in the defence sector and in other technology-centred businesses. Further, competition is intensified by nationality and regulatory restrictions (including the requirement for security clearances for certain roles) and can be exacerbated by macroeconomic, industry and labour market conditions more generally. |
The Group’s long-term defence programmes benefit from continuity of leadership and the loss of key employees, or inability to attract the appropriate people on a timely basis, could adversely impact the Group’s ability to deliver its strategy, meet its business plan and deliver on its contractual commitments, which accordingly could have a material adverse effect on the Group’s business, results of operations, financial condition and prospects. |
The Group recognises that its employees are key to delivering its strategy, business plan and contractual commitments. Accordingly, senior management proactively considers the Group’s current and future workforce requirements in terms of both capabilities and staffing volumes and seeks to develop the existing workforce and hire talented people to meet those requirements. In particular, the Group has well-established graduate and apprenticeship programmes, structured attraction, recruitment and retention processes and an effective through-career capability development programme. The Group’s remuneration policies and levels, including those for its senior executives, are regularly reviewed to ensure they remain fit for purpose. In order to seek to maximise its talent pool, the Group is committed to creating an inclusive environment for its employees. |
| Strategic report | Governance | Financial statements | Additional information | 69 | ||
| Safety | Links to strategy | ||||
| Employees work with hazardous materials and in challenging locations and the Group’s products and services, and those of its customers or suppliers, inherently pose a safety risk. |
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| Description | Impact | Mitigation | |||
| The nature of the Group’s business means that a number of employees work in challenging locations, perform high-risk activities and handle hazardous materials. Furthermore, many of the activities that the Group undertakes are in high-hazard industries with inherent risk of harm, such as heavy industrial production, including shipbuilding. The risks associated with the Group’s activities and working environments can cause harm to its people and those affected by its operations. |
There could be significant impacts if the Group fails to meet the necessary standards to adequately mitigate against health and safety risks, which could potentially lead to injury or death. The Group may face criminal and civil prosecution in connection with health and safety incidents, which could result in substantial penalties and fines. Furthermore, the Group could be prevented from operating, due to employees being unavailable for work, investigations being conducted or a regulatory approval or certification being withdrawn, potentially leading to contractual penalties due to loss of productivity or inability to deliver on contractual commitments. Moreover, a failure to maintain a safe working environment could have a detrimental impact on the Group’s reputation, leading customers, suppliers and employees (both current and potential) to be disinclined to work with/for the Group. Any of these factors could have a material adverse effect on the Group’s business, results of operations, financial condition, prospects and reputation. |
Safety of the Group’s personnel, contractor personnel and the wider communities in which the Group operates is a primary concern. The Group proactively monitors its safety performance through leading and lagging indicators and regular operating business reviews. Safety performance is led at an Executive Committee level by the ESG, Culture and Business Transformation Director and is regularly reported to both the Environmental, Social and Governance Committee and the Board. Accountability for safety performance at a business level rests with the relevant Managing Director, who is responsible for ensuring compliance with the Group’s Safety, Health and Environmental management systems and the Operational Framework. At a user level, every employee is required to complete preventative safety training that is both Company-wide and job role-specific, and is supported by dedicated health and safety professionals. The Group has implemented recognised safety risk assessment processes that are task specific and seek to ensure hazards are identified, classified and mitigated against prior to activities taking place. Where appropriate, safety management systems are externally accredited to internationally recognised standards (eg ISO 45001). In addition to the above, the Group continues to evolve and improve its health and safety practices, liaise across industry and learn from safety-related failures in adjacent industries. |
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| The Group designs, develops, manufactures and maintains highly complex and specialised products and services. By their very nature, many of the Group’s products and services are potentially hazardous, where technical, mechanical or other failures may occur from time to time as a result of a manufacturing or design defect, ineffective maintenance, incorrect usage, poorly executed integration with a third party’s products or services or through some other cause. In addition, the safety of the Group’s products could be compromised as a result of cyber-attacks, such as those that seize control and result in misuse or unintended use of the Group’s products, or other intentional acts. |
The impact of a catastrophic product, service or system failure or similar safety incident affecting the Group’s, its customers’ or its suppliers’ products or services could be significant and could result in injuries or death, property damage, loss of strategic capabilities, loss of intellectual property, environmental harm, reputational damage or other significant effects. It could also lead to a loss of equipment, product recalls and product liability and warranty claims, other service, repair and maintenance costs, significant damages and other costs (including fines and other remedies), regulatory and environmental liabilities and a reduction in demand for the Group’s products and services. Any of the foregoing could have a material adverse effect on the Group’s business, results of operations, financial condition, prospects and reputation. |
The Group recognises it is vitally important to work with its customers, suppliers and partners to ensure its products continue to work safely, securely and with integrity, within their intended operational environments. Each of the Group’s businesses is required to identify suitably qualified and experienced individuals with clear accountabilities for ongoing review of the application and effectiveness of the business’ Product Safety Management System and certification of the products developed or traded by the business. Businesses work with customers to agree the level of safety that is required for each product, seeking the highest reasonably practicable level of safety. The Group assures the development and production of safe products through reviews by in-house subject matter experts and external regulatory agencies. Given the potential impact of sub-standard product security on product safety performance, the Group applies product cyber security standards that meet or exceed contracted customer requirements. In addition to the above, the Group continues to communicate product safety-related information across the Group via regular bulletins, evolving and improving product safety practices, liaising across industry and its government customers to develop new product safety-related standards, and learning from safety-related failures in adjacent industries. |
| 70 | BAE Systems plc Annual Report 2025 |
| Our principal risks continued |
| Acquisitions (including joint ventures) | Links to strategy | ||||
| The anticipated benefits from acquisitions (including joint ventures) may not be achieved. | |||||
| Description | Impact | Mitigation | |||
| The Group considers investment in value-enhancing acquisitions and/or forming joint ventures where market conditions are right and where they progress its strategy. There are a number of risks and uncertainties which may arise in these transactions, including (but not limited to): the risks involved in entering new markets; the difficulty in integrating newly acquired businesses into the Group and/or the establishment, governance and oversight of joint ventures; the potential for governments or regulatory authorities to deny the proposed transactions, or to impose on those transactions conditions that undermine the business case for those transactions; diversion of management’s attention and resources; unidentified issues not discovered in due diligence; the performance of underlying products, capabilities or technologies; and failure of the acquired businesses and/or joint ventures to perform in line with expectations. |
Any of these factors could have a material adverse effect on the Group’s business, results of operations, financial condition and prospects. In particular, the potential for an impairment of goodwill and other assets could arise. |
The Group has established policies and procedures to conduct due diligence, manage the acquisition and joint venture process, monitor the integration and performance of acquired businesses and joint ventures, and identify potential impairments. Approval of acquisition transactions including the formation of joint ventures is made at the appropriate level in the Group in accordance with well-defined delegations of authority. |
| Business interruption | Links to strategy | ||||
| The Group could be negatively impacted by a range of events outside its control, including physical risks arising from natural disasters. | |||||
| Description | Impact | Mitigation | |||
| The Group’s operations (as well as those of its suppliers, subcontractors and customers) could be disrupted by a range of events, including (among other things): extreme weather, flooding and other natural disasters (which could increase in severity or frequency given the impact of climate change); public health crises (such as pandemics and epidemics); civil unrest, terrorism and other similar events; industrial action; and a fire incident or other incidents giving rise to damage to facilities. |
While the impact of any disruption caused by these events is difficult to predict, it could lead to (among other things): (a) production downtimes; (b) operational delays; (c) other detrimental impacts to the Group’s operations or ability to provide products and services to customers; (d) diversion of management’s attention and resources; and/or (e) financial losses from remedial actions, loss of business, or potential liability, penalties, fines and/or damages. Any of the foregoing could have a material adverse effect on the Group’s business, results of operations, financial condition, prospects and reputation. |
The Group uses analytical tools to apply natural catastrophe classifications to its sites worldwide. This has informed its strategy as to where to target a programme of specific flood, windstorm and earthquake assessments of the Group’s sites and implement the subsequent risk reduction recommendations. This analysis takes into account the predicted impact of climate change on the frequency and severity of natural catastrophe events. The Group maintains incident response and crisis management plans covering a wide range of incident types with updates following regular test exercises. The Group seeks to maintain constructive relations with its various trade unions, which represent employees within the Group. The Group’s experience in dealing with the COVID-19 pandemic between 2020 and 2022 will assist it in dealing with any further outbreaks of contagious diseases. This includes the establishment of safe working practices, the effective use of home working and working collaboratively with government customers to maintain critical defence and security programmes. In addition to the above, the Group maintains property insurance cover which includes property damage and business interruption; however, as with all insurance, it does not provide full cover against all potential loss scenarios. |
| Strategic report | Governance | Financial statements | Additional information | 71 | ||
| Legal risk | Links to strategy | ||||
| The Group is subject to risk from a failure to comply with applicable laws and regulations or contractual requirements. | |||||
| Description | Impact | Mitigation | |||
| The Group operates in a complex and highly regulated environment, across many jurisdictions and is therefore subject to a variety of legal, regulatory and litigation risks. These risks relate to (among other things) trade controls and sanctions, failure to protect and manage intellectual property and/or assert and defend intellectual property rights, data protection and security, contract-related claims, climate-related and environmental matters, product safety and reliability, health and safety, employment matters, competition laws and laws governing improper business practices (such as anti-money laundering, false accounting, anti-bribery and corruption, and anti-boycott laws). Furthermore, laws, regulations and contractual requirements may be interpreted in different ways, conflict and/or change from time to time (as may any related interpretations and guidance). For example, export restrictions could become more stringent and political factors or changing international circumstances could result in the Group being unable to obtain or maintain necessary export licences. |
Changes in laws and regulations (or the interpretation thereof) could result in higher compliance costs and impact customer or supplier contracts. Uncertainty relating to laws and regulations may also affect how the Group conducts its business and could limit its ability to enforce its rights. A breach of applicable legislation and/or regulations by the Group, its employees, sales representatives, marketing advisers or others working on its behalf could result in significant fines, penalties or other damages and/or the suspension or debarment of the Group from government contracts or the suspension of the Group’s export privileges. If customers or other third parties were harmed by the conduct of members of the Group, this may also give rise to legal proceedings, including class actions. Other legal disputes may also arise between members of the Group and third parties relating to matters such as breaches or enforcement of legal rights or interpretation or fulfilment of obligations arising under contracts, statutes or common law. Adverse findings in any such matters may result in remedial actions, loss of business, penalties and/or damages or may result in rights not being enforced or not being enforced in the manner intended or desired. Any of the foregoing could have a material adverse effect on the Group’s business, results of operations, financial condition, prospects and reputation. |
The Group has a well-established legal and regulatory compliance structure aimed at ensuring adherence to regulatory requirements and identifying restrictions that could adversely impact the Group’s activities. The Group General Counsel and (in relation to those parts of the business managed by BAE Systems, Inc.) the Senior Vice President and General Counsel for BAE Systems, Inc. have responsibility for developing and maintaining a legal risk management framework across the Group. This includes defining the relevant legal risk policies and oversight of the implementation of controls to manage legal risk including, among other things, policies in relation to appointment of advisers, trade controls and sanctions, and prevention of improper business practices. Where the Group participates in joint ventures, it exerts its influence to encourage the adoption of substantially equivalent policies governing legal and regulatory compliance by the joint venture, or otherwise through appropriate contractual provisions and/or senior director representation on the joint venture boards. The legal function’s operating model aligns legal expertise to businesses, functions, products, activities and geographic locations so that the Group’s businesses have access to legal expertise and support as required. Legally qualified and trained staff work in partnership with the businesses and functions to identify, manage and escalate legal risks as necessary. As part of this operating model, the legal function supports the businesses and functions in reviewing proposed contracts to ensure terms are appropriate and not unduly onerous. Businesses and functions are responsible for identifying and escalating to the legal function legal and regulatory risk in their areas, as well as adherence to policy and control requirements. To enable this, the legal function provides targeted training to businesses and functions where appropriate. The Group’s legal function also reinforces the Group’s ethics programme globally through training and other means. The Group’s legal function manages litigation and advises on the management of associated impacts. Where appropriate, the legal function will engage external counsel on litigation matters or other contractual or regulatory matters. |
| 72 | BAE Systems plc Annual Report 2025 |
| Our principal risks continued |
| Climate transition and environmental factors | Links to strategy | ||||
| The Group may be impacted by environmental factors, including those relating to climate change. | |||||
| Description | Impact | Mitigation | |||
| The Group is subject to comprehensive environmental laws, regulations and permitting requirements in each of the countries in which it operates, including those relating to the impacts of climate change. Such laws and regulations impose standards with respect to air emissions, wastewater discharges, the use, handling and storage of hazardous materials and waste, remediation of soil and groundwater contamination and the prevention of pollution. Furthermore, in certain jurisdictions, environmental legislation seeks to encourage a reduction in GHG emissions. These laws, regulations and/or permitting requirements may be interpreted in different ways, conflict and/or change from time to time (as may any related interpretations and guidance). In addition, the Group may be impacted by climate change transition risks resulting from the process of adjusting to a low-carbon economy. Associated with this are potential risks around: (a) the Group’s ability to attract and retain future talent; (b) the technology evolution and innovation required to respond to future customer lower-emissions requirements; (c) energy-related taxes; and (d) the increased costs of compliance with energy-related schemes. The physical risks associated with or arising from climate change are covered in ‘Business interruption’ above. |
Environmental factors, including those relating to climate change, have the potential to materially impact the Group’s business and operations. Increasing changes in environmental laws and regulations can expose the Group to increasing unplanned capital and operating costs associated with compliance, remediation and protection of the environment. Breaches of these laws and regulations can result in substantial costs, including fines, penalties or other sanctions, investigations and clean-up costs, and third-party claims for property damage or personal injury as well as the termination of permits. The shift to a low-carbon economy has the potential to increase the cost of business if the Group cannot secure renewable energy contracts or switch to low- carbon alternatives for heating at a reasonable cost. Failure to decarbonise products and services and develop products to operate in increasingly diverse environmental conditions could have a material adverse effect on the Group’s business, results of operations, prospects and reputation. |
The Group has set itself the target of achieving near-term GHG emissions reductions across its operations (Scopes 1 and 2) by 2030 and working towards reducing the GHG emissions of its value chain by 2050. The primary planned activities to meet the 2030 target include: the establishment of a renewable energy strategy; and optimising and reducing energy consumption via site consolidation, development of an energy efficient standard for both new builds and refurbishments, energy efficiency projects and low-carbon alternatives to heating buildings. The Group also seeks to monitor and manage wider environment impacts through environmental stewardship and managing consumption of resources. As part of this work, the Group undertakes surveys and assessments to better evaluate how its facilities and operations impact the surrounding natural habitat. With respect to reducing the GHG emissions of its value chain by 2050, the Group continues to progress programmes of work to understand the GHG emissions profile of its material products, further progress the energy efficiency of the Group’s products, research and develop alternative solutions, and identify how the Group can support customer capability requirements, while having due regard for environmental considerations. |
| The ranking and evaluation of risks as at the date of this Strategic Report should not be relied on as a guide to their future ranking and evaluation. Additional risks and uncertainties currently unknown to the Group, or which the Group currently deems immaterial, may also have an adverse effect on the business or financial condition of the Group. |
||
| Strategic report | Governance | Financial statements | Additional information | 73 | ||
| Viability statement |
As required by the provisions of the UK Corporate Governance Code 2024,
the Board has undertaken an assessment of the future prospects of the Group,
taking into account the Group’s current position and principal risks.
This assessment considered both the
Group’s long-term prospects and also its
ability to continue in operation and meet
its liabilities as they fall due over its five-
year business planning period.
The viability assessment period
The directors have assessed the viability of
the Group over a five-year period. This is
considered the most appropriate period for
the assessment as it is consistent with the
Group’s five-year business planning cycle
which provides a robust planning tool against
which long-term decisions can be made.
Analysis of business prospects
The Board has considered the long-term
prospects of the Group based on its strategy,
markets and business plan as outlined in this
report. In its strategic review of the Group,
the Board recognised the importance of
certain factors that underpin its long-term
prospects and viability. In summary, these are:
– a diverse portfolio of businesses based
on well-established market positions,
providing both complex, high-technology
products and programmes, and
differentiated technical services and
support;
– a geographically diverse business with a
high proportion of sales to governments
and other major prime defence contractors.
The Group’s robust order backlog
continues to provide a strong foundation
for further market diversity and growth;
– long-term visibility of sales and future sales
prospects through a substantial order
backlog and incumbent positions on major
defence programmes; and
– market positions underpinned by a highly-
skilled workforce, intellectual property
assets and proprietary know-how, which
are safeguarded and developed for the
future by customer- and Group-funded
investment.
Assessment
The following business processes informed
the Board’s assessment of the Group’s
prospects:
Risk management process
The Group has developed a structured
approach to the management of risk (as
detailed on pages 62 and 63). The Board
notes that the principal risks identified on
pages 65 to 72 could impact the future
viability of the Group and has undertaken a
more detailed scenario analysis in relation to
specific risks that are considered most likely to
have a more immediate and severe financial
impact on the Group as part of the IBP
process.
The viability assessment has taken into
account reasonably plausible, but severe,
downside scenarios related to these risks and
assessed the impact on the future cash flows,
profitability, financial covenants, solvency and
liquidity of the Group. The scenarios tested
included the impact of multiple adverse
factors and any mitigating factors.
Integrated Business Plan
The IBP represents a common process with
standard outputs and requirements that
produces an integrated strategic and
business plan for the Group and also for each
of its businesses over the following five years.
The Board reviews the detailed plan each year
as part of its strategy review process. Once
approved by the Board, the IBP provides the
basis for setting all detailed financial budgets
and strategic actions across the businesses
and the Board subsequently uses it to
monitor performance.
Liquidity and solvency analysis
The Group’s liquidity is underpinned by an
undrawn committed Revolving Credit Facility
(RCF) of £2bn. This facility is available to meet
general corporate funding requirements.
The Board regularly reviews an analysis
looking at the forecast working capital
requirements, cash flow and committed
borrowing (see note 21 on page 180) and
other funding facilities available to the Group
over the five-year IBP period.
This analysis includes ‘stress testing’ of the
Group’s liquidity and solvency under severe,
but plausible, scenarios including:
– the Group being unable to access debt
markets to renew term debt facilities;
– the inability of the Group to estimate
accurately and control costs on significant
fixed price contracts; and
– the loss of significant export awards
assumed in the IBP.
Conclusion
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.
Going concern statement
Accounting standards require that directors
satisfy themselves that it is reasonable for
them to conclude whether it is appropriate
to prepare financial statements on a going
concern basis, and the Code requires that, if
appropriate, this report includes a statement
to that effect. Following review, the directors
have concluded that it is appropriate to adopt
the going concern basis for these financial
statements and have not identified any
material uncertainties concerning the
Group’s ability to do so in the 12-month
period from the date of approving them.
For this reason, they continue to adopt
the going concern basis in preparing
the accounts.
| Strategic report This Strategic report was approved by the Board of directors of BAE Systems plc on 17 February 2026 and signed on its behalf by: Anthony Clarke Company Secretary |
||
| 74 | BAE Systems plc Annual Report 2025 |
| Strategic report | Governance | Financial statements | Additional information | 75 | ||
This section focuses on the Company’s
governance structures, the work of the Board
and its committees and how we comply
with the UK Corporate Governance Code 2024
(the Code) and other regulatory requirements.
Governance
| 76 | BAE Systems plc Annual Report 2025 |
| Chair’s governance letter |
Dear Shareholders
As you would expect from a company that
plays such an important role in the UK’s
national security, and supplies goods and
services that support the national security of
other nations, high standards of governance
and robust governance processes are well
embedded across the Group. Clear
frameworks and structures are in place to
provide the Board with the appropriate level
of oversight and assurance to assess the
effectiveness of governance controls.
The Company’s central role in the national
security of the UK, and its important
contribution to the national security of other
nations, makes good governance a
fundamental part of the Board’s work. The
Board reviews the Company’s robust
governance standards and processes each
year and has regular discussions on certain
aspects. Clear standards of behaviour are
outlined in our Code of Conduct, which
dovetails with our Operational Framework,
described elsewhere within this report. Both
of these underpin the Company’s strong
governance and culture.
Our governance structures also respect and
uphold the special arrangements that are in
place to protect the national security interests
of our government customers. These
arrangements are core to our success as an
international company and our role as a
valued and trusted partner working in the
security interests of our customers. We have a
significant presence in the US, serving our key
government customers. There is more detail
on the arrangements for managing our US
business on page 84.
This year, the Board, as usual, reviewed the
frameworks and structures that underpin our
processes and the oversight and assurance
used to provide the Board with confidence
that the governance systems and controls are
effective. As part of this work, we have taken
time at both the Board and Audit and Risk
Committee to review our preparations for the
new disclosures that will be required under
Provision 29 of the Code. This will apply to
reporting on the 2026 financial year. The
Board is satisfied that the Company is well
prepared for these reporting changes, with
some refinements made to our existing
processes to help alignment with the new
reporting requirements.
The Board considers an important part of its
role is its programme of visits to our
operations. This builds connections with local
leadership and employees and allows for
better understanding of product and
technology challenges. During these visits,
the Board also gains useful insights into our
culture through informal discussion sessions
with employees. In 2025, both the full Board
and smaller groups of directors made a
number of site visits. Further information on
these and pictures of the visits are included
throughout this report.
This report contains further information on
the work of the Board’s committees, which
begins on page 93. The responsibilities of
each committee are clear in its terms of
reference which are reviewed each year. The
Nominations Committee continues to ensure
plans are in place for orderly Board and senior
management succession and it leads the
process for making Board appointments. At
the end of 2025, Dame Elizabeth Corley
stood down from the Board, having joined
the Board in 2016. In September, we
announced that John Pettigrew would be
joining the Board as a non-executive director
from 23 February 2026. More detail on these
changes and on the Board’s approach to
succession planning can be found on pages
The Audit and Risk Committee report begins
on page 96. In addition to its usual activities
this year, I am grateful for the support that
this Committee has given to the Board in
reviewing and updating our governance
processes, in line with the revisions to the
Code, and also in the evolution of the
Company’s risk management processes.
More detail can be found in the Audit and
Risk Committee report starting on page 96.
This year, the Board has been discussing the
role of the Innovation and Technology
Committee (ITC) within the Board’s wider
responsibilities. The pace of change of
defence technology, and the criticality of
research and product development to our
business, means that many technology items
are discussed with the full Board during the
course of the year. As part of the Board
performance review process, the Board
decided that many of the responsibilities of
the ITC should be covered by the full Board.
Going forward, technology “deep dives” and
teach-in sessions will be arranged for the
Board during the year, co-ordinated and
chaired by the current ITC Chair, Dr Ewan Kirk.
The Board anticipates that these changes will
stimulate wider technology discussions and a
greater focus on defence technology and
strategy. I would like to thank Ewan for his
leadership in this area and his constructive
approach in helping to evolve the role of the
Board. You can read more about the work of
the ITC this year on page 103.
In addition to its wider responsibilities, the
Environmental, Social and Governance
Committee continues to focus on employee
matters. I am grateful to our committee Chair,
Dr Jane Griffiths, for the visits she has
undertaken to focus on employee matters in
our international markets. You can read more
about its activities on page 101.
Effective board performance is, of course, a
key part of governance. This year, the review
of the Board and its Committees was an
internally facilitated assessment, led by myself
with the assistance of the Company Secretary.
Further details on the performance review
process, its outcomes and the actions we will
be taking as a result are outlined in more
detail on page 95. In 2026, we are planning
to undertake an in-depth externally
facilitated review.
Finally, I would like to thank my colleagues on
the Board for their diligence, counsel and
support over the last year. I know that they
share my pride in work that BAE Systems does
protecting those in defence and national
security across the world.
Cressida Hogg CBE
Chair
| Strategic report | Governance | Financial statements | Additional information | 77 | ||
| Board of directors |
Cressida Hogg CBE
Chair
Tenure: 3 years and 3 months
(appointed to the Board in November
2022, appointed Chair in May 2023)
Nationality: UK
Skills, competence and experience
Cressida was appointed Chair of BAE
Systems plc in May 2023, having
joined the Board as a non-executive
director and Chair designate in
November 2022. In January 2026,
Cressida became Chair and President
of the Confederation of British
Industry. She previously had a
successful executive career, spent
largely with 3i Group, where she
gained a deep understanding of large
long-term infrastructure projects and
businesses, gaining international
experience while working in various
countries including the US, Canada,
India, Australia and the Middle East.
Cressida was awarded a CBE in 2014
for services to infrastructure
investment and policy.
Outside commitments on listed
companies
Senior Independent Director of
London Stock Exchange Group plc.
Dr Charles Woodburn CBE
Chief Executive
Tenure: 9 years and 9 months
Nationality: UK
Skills, competence and experience
Charles joined BAE Systems in May
2016 as Chief Operating Officer and
became Chief Executive on 1 July
2017. He is an experienced business
leader with over 29 years’ experience
in the aerospace and defence and oil
and gas industries. Prior to joining the
Company in 2016, he was Chief
Executive Officer of Expro Group and,
before that, he spent 15 years with
Schlumberger holding a number of
senior management positions in Asia,
Australia, Europe and the US.
Charles is a Fellow of the Royal
Academy of Engineering and was
awarded a CBE in 2023 for services
to international trade and skills.
Outside commitments on listed
companies
None
Brad Greve
Chief Financial Officer
Tenure: 5 years and 10 months
Nationality: UK/US
Skills, competence and experience
Brad joined BAE Systems in 2019 as
Group Finance Director designate
and became a Board member
on 1 April 2020. He is a highly
experienced executive with
deep financial and operational
management experience, gained
during a career in excess of 30 years
in international engineering and
technology businesses. Prior to
joining the Company, he held a
number of senior executive roles in
Schlumberger, undertaking roles in
Europe, Africa, South America and
the US.
Outside commitments on listed
companies
None
Tom Arseneault
President and Chief Executive Officer
of BAE Systems, Inc.
Tenure: 5 years and 10 months
Nationality: US
Skills, competence and experience
Tom was appointed to the Board on
1 April 2020 and serves as President
and Chief Executive Officer of BAE
Systems, Inc. Throughout his career,
Tom has led complex organisations
responsible for fulfilling critical and
technologically challenging missions.
Before becoming President and Chief
Executive Officer of BAE Systems, Inc.,
he held various senior roles within
BAE Systems, Inc.
Prior to his senior leadership
appointments, Tom managed various
organisations and programmes for
Sanders, a Lockheed Martin company,
until it was acquired by BAE Systems
in 2000. Earlier in his career, he
held a variety of engineering and
programme management positions
with General Electric and TASC.
Tom is a member of the Executive
committee of the Aerospace
Industries Association.
Outside commitments on listed
companies
None
| Committee Chair | ||
| A | Audit and Risk Committee | |
| E | Environmental, Social and Governance Committee | |
| I | Innovation and Technology Committee5 | |
| N | Nominations Committee | |
| R | Remuneration Committee |
| 78 | BAE Systems plc Annual Report 2025 |
| Board of directors continued |
| E I N |
Nick Anderson1
Non-executive director
Tenure: 5 years and 3 months
Nationality: UK/US
Skills, competence and experience
As the former Group Chief Executive
of a FTSE 100 industrial engineering
company, Nick has a proven track
record of leading and growing global
businesses. His knowledge and
experience, particularly in leading
international engineering and
manufacturing operations, are a
particular asset to the Board.
During his 10-year tenure as Group
Chief Executive of Spirax Group plc,
Nick oversaw the company’s
successful global expansion. Prior to
joining Spirax Group plc, he was Vice-
President of John Crane Asia Pacific
and President of John Crane Latin
America, part of Smiths Group plc.
Other commitments on listed
companies
Non-executive director of The Weir
Group plc.
Nick will join the Board of Hill and
Smith plc from March 2026 as non-
executive director and will assume
the role of Chair of the company with
effect from its AGM in May 2026.
| E N |
Crystal E Ashby
Non-executive director
Tenure: 4 years and 5 months
Nationality: US
Skills, competence and experience
Crystal has held several senior
leadership roles in the energy and
healthcare sectors, as well as
considerable experience in
government affairs, communications
and legal and regulatory matters.
Throughout her executive career,
Crystal held various senior leadership
roles at BP America Inc., culminating
with her appointment as Executive
Vice President of Government and
Public Affairs and Strategic University
Partnerships, and membership on its
Americas Leadership Team. She was
previously Executive Vice President,
Chief People Officer, DEI and
Communications Officer of the US
health insurance company,
Independence Blue Cross.
Crystal is a Fellow of the National
Association of Corporate Directors, as
well as a member of the International
Women’s Forum and the American
Bar Association.
Other commitments on listed
companies
None
| A E N R |
Angus Cockburn2
Non-executive director
Tenure: 2 years and 3 months
Nationality: UK
Skills, competence and experience
Angus was previously the Group
Chief Financial Officer of Serco Group
plc and, before that, the Chief
Financial Officer of Aggreko plc. He is
also a former non-executive director
of GKN plc, Howdens Joinery Group
Plc and STS Global Income & Growth
Trust.
Angus holds an MBA from
Switzerland’s IMD Business School.
He is also an Honorary Professor at
the University of Edinburgh and a
member of the Institute of Chartered
Accountants of Scotland.
Other commitments on listed
companies
Chair of James Fisher & Sons plc.
Senior Independent Director and
Chair of the Audit Committee of
Ashtead Group plc.
| A | N |
Dr Jane Griffiths
Non-executive director
Tenure: 5 years and 10 months
Nationality: UK
Skills, competence and experience
Jane has experience in leading high
technology businesses and
international corporate leadership .
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 is a former non-executive
director of Johnson Matthey plc.
She has also previously served as
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.
Other commitments on listed
companies
Non-executive director of Galapagos
NV.
| Committee Chair | ||
| A | Audit and Risk Committee | |
| E | Environmental, Social and Governance Committee | |
| I | Innovation and Technology Committee5 | |
| N | Nominations Committee | |
| R | Remuneration Committee |
| Strategic report | Governance | Financial statements | Additional information | 79 | ||
| A | N | R |
Dr Ewan Kirk3
Non-executive director
Tenure: 4 years and 8 months
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,
Ewan 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.
In 2023, Ewan became the first Royal
Society Entrepreneur in Residence at
Cambridge University at the Centre
for Mathematical Sciences. He holds
a PhD in General Relativity from the
University of Southampton, a MASt
in Mathematics from Queen’s
College, Cambridge, and a BSc in
Natural Philosophy and Astronomy
from the University of Glasgow.
Other commitments on listed
companies
None
| E | N |
Stephen Pearce4
Non-executive director
Tenure: 6 years and 8 months
Nationality: Australia
Skills, competence and experience
Stephen has over 20 years’
experience as a director of public
companies, as well as over 30 years of
financial and commercial experience
in the mining, oil and gas, and utilities
industries. He has held a range of
leadership roles, most notably serving
as Finance Director of Anglo
American plc for over six years. He
previously served as Chief Financial
Officer and as an executive director of
Fortescue Metals Group Limited from
2010 to 2016.
Stephen is a Fellow of the Institute of
Chartered Accountants, a Fellow of
the Governance Institute of Australia
and a member of the Australian
Institute of Company Directors.
Other commitments on listed
companies
Non-executive director of South32
Limited and will assume the role of
Chair of the company with effect
from 1 March 2026.
Non-executive director of Ampol
Limited.
| I | N |
Nicole Piasecki
Non-executive director and Senior
Independent Director
Tenure: 6 years and 8 months
Nationality: US
Skills, competence and experience
Nicole was appointed Senior
Independent Director on 1 January
2024. She has extensive experience
gained from executive positions
within the aerospace industry and
leadership of multi-functional teams.
She previously held a number of
engineering, sales, marketing and
business strategy roles during her
25-year career with the Boeing
Company, including Vice President
and General Manager of the
Propulsion Systems Division and Vice
President of Business Development &
Strategic Integration for Boeing’s
commercial aircraft business and
President of Boeing Japan.
Nicole formerly served on the Federal
Aviation Authority’s Management
Advisory Board, the American
Chamber of Commerce in Japan, the
US Department of Transportation’s
Future of Aviation Advisory
Committee and the Federal Reserve
Bank of San Francisco’s Seattle
branch. She is a former director of
Howmet Aerospace Inc.
Other commitments on listed
companies
Non-executive director of BWX
Technologies, Inc. and Weyerhaeuser
Company.
John Pettigrew CBE
Incoming non-executive director
Tenure: Joins the Board on 23
February 2026. John becomes a
member of the Audit and Risk
Committee from the same date.
Nationality: UK
Skills, competence and experience
John joins the Board as a non-
executive director in February 2026.
He brings over 35 years of complex
project management and
engineering experience in the energy
and gas industry and is a highly
accomplished FTSE 30 business
leader. Previously, John served as
Chief Executive Officer of National
Grid plc from 2016. During his tenure,
he held several senior leadership
roles, including UK Director of
Engineering, Chief Operating Officer
and Executive Vice President for the
US Electricity Distribution &
Generation business, Chief Operating
Officer for UK Gas Distribution, and
UK Chief Operating Officer, before
joining its board as Executive Director,
UK, in 2014.
John holds a BSc in Economics, an
MSc in International Economics
and Banking and completed the
Advanced Management Programme
at Harvard Business School.
He is a Fellow of the Energy Institute
and of the Institution of Energy and
Technology, and a member of the
Edison Electric Institute Executive
Committee. John was awarded a
CBE in 2026 for services to energy.
Other commitments on listed
companies
Senior Independent Director
of Rentokil Initial plc.
.
-
Nick Anderson will become a member of the Remuneration Committee with effect from 23 February 2026.
-
Angus Cockburn became a member of the Environmental, Social and Governance Committee from 24 February 2025. Subject to his re-election at the
Company’s 2026 AGM in May 2026, Angus Cockburn will succeed Stephen Pearce as Chair of the Audit and Risk Committee, with the appointment taking
effect from the conclusion of the 2026 AGM.
-
Ewan Kirk became a member of the Audit and Risk Committee from 24 February 2025.
-
Stephen Pearce has informed the Board of his intention to retire from his role as a non-executive director at the end of November 2026 and will step down
as Chair of the Audit and Risk Committee at the conclusion of the Company's AGM in May 2026.
- On 17 February 2026 the Board disbanded the Innovation and Technology Committee. Please see pages 76 and 103 for more information.
| 80 | BAE Systems plc Annual Report 2025 |
| Board and executive management diversity information |
The Board has adopted a Diversity and Inclusion policy 1 and recognises the
importance of the Board’s membership representing diversity in its broadest sense.
Board Diversity
and Inclusion policy
In accordance with the Code and UK Listing
Rules, the Board has adopted a Board
Diversity and Inclusion policy with the aim
of maintaining a diverse Board, including an
appropriate balance of nationalities, gender,
ethnicity, skills, knowledge, experience and
personal strengths. The Board Diversity and
Inclusion policy is monitored and reviewed by
the Nominations Committee and aligns with
the targets set by the UK Financial Conduct
Authority (FCA).
In accordance with the policy, appointments
and succession plans are based on merit and
objective criteria, reflecting the skills,
knowledge and experience needed to ensure
we have a well-rounded and effective Board.
In the case of non-executive directors, other
relevant matters are also taken into account,
such as independence and the ability to fulfil
time commitments.
Due to the nature of the Group’s activities,
the UK Government holds a Special Share in
the Company, ensuring that the Company
remains British controlled. The Special Share
also includes provisions requiring that a
majority of the directors on the Board and on
any Board Committee are British nationals
and the roles of Chair and Chief Executive are
also subject to UK nationality restrictions.
Furthermore, as different diversity and
inclusion requirements apply in the
jurisdictions in which the Group operates, the
Company accordingly adjusts the application
of its policies.
As at 31 December 2025 (the reference date
adopted by the Company pursuant to the UK
Listing Rules), the Company’s position against
the targets set by the FCA for UK listed
companies is as follows:
– at least one senior Board position is held by
a woman;
– at least one Board member is from a
minority ethnic background; and
– following the retirement of Dame Elizabeth
Corley at the end of November 2025, the
Company now has less than 40% female
representation on the Board.
There have been no changes to the Board
between the reference date and the date on
which this Annual Report was approved.
Board and executive diversity data as at
31 December 2025 can be found in the table
on the right, and on the following page.
Board and executive
management diversity
as at 31 December 2025
In compliance with UK Listing Rule 6.6.6R(9),
the tables below detail the diversity of the
individuals on the Board and executive
management as at 31 December 2025.
As at 31 December 2025, there were 13
Executive Committee members (including the
Chief Executive, President and Chief Executive
Officer of BAE Systems, Inc. and the Chief
Financial Officer, who are also executive
directors) and 11 Board directors. The
Company Secretary is included in the
calculation of executive management. There
were no changes made to the executive
management during the year.
For 11 months of the year, more than 40% of
the Board were women, in line with the
target set by the UK FCA. From 30 November
2025, following the retirement of Dame
Elizabeth Corley, the percentage of women
on the Board reduced to 36.4%.
Sex and gender identity2
| Number of Board members |
Percentage of the Board |
Number of senior positions on the Board (CEO, CFO, SID and Chair) |
Number in executive management3 |
Percentage of executive management |
|
| Men | 7 | 63.64% | 2 | 8 | 61.54% |
| Women | 4 | 36.36% | 2 | 5 | 38.46% |
| Other categories | – | – | – | – | – |
| Not specified/prefer not to say |
– | – | – | – | – |
Ethnic background
| Number of Board members |
Percentage of the Board |
Number of senior positions on the Board (CEO, CFO, SID and Chair) |
Number in executive management |
Percentage of executive management |
|
| White British or other White (including minority- white groups) |
10 | 90.91% | 4 | 12 | 92.31% |
| Asian/Asian British | – | – | – | – | – |
| Black/African/ Caribbean/Black British |
1 | 9.09% | – | – | – |
| Other ethnic group | – | – | – | 1 | 7.69% |
| Not specified/ prefer not to say |
– | – | – | – | – |
As announced in September 2025, John
Pettigrew will join the Board on 23 February
2026. Following his appointment, the Board’s
male/female balance will change further to
33.3% women, 66.7% men.
The Company has made progress in
improving gender diversity across many
management levels but recognises that more
is now needed to re-align with the “women
on the Board” target set by the UK FCA.
Although the Nominations Committee
remains committed to succession planning
and a recruitment process that embeds an
appropriate gender balance, along with
particular attributes, skills and experience
throughout Board appointments, the Board
must also adhere to the director nationality
obligations embedded within the Company’s
Articles of Association. These obligations will
continue to limit the pool of suitable
candidates that the Board is able to consider.
See the Nominations Committee report on
page 93 for further information and
disclosure on diversity.
-
A copy of the Board Diversity and Inclusion policy can be found at www.baesystems.com.
-
Other than the retirement of Dame Elizabeth Corley as a non-executive director on 30 November 2025, there have been no changes to the Board or
executive management of the Company during 2025. Accordingly there was no need to update the sex and gender identity data collected in 2024.
Please see Page 73 of the Company's 2024 Annual Report for an explanation of how this data was collected.
- Members of the Executive Committee and the Company Secretary.
| Strategic report | Governance | Financial statements | Additional information | 81 | ||
Board information
Gender
| A | Male | 7 | |
| B | Female | 4 |
Nationality
| A | UK | 6 | |
| B | US | 4 | |
| C | Australia | 1 |
Ethnicity
| A | White British or other white |
10 | |
| B | Black/African/Caribbean | 1 | |
Tenure1
| A | Up to three years | 1 | |
| B | Over three and up to six years |
5 | |
| C | Over six years | 2 |
Skills and experience
| Executive | ||||
| Non-executive | ||||
Membership and attendance for the year ended 31 December 2025
| Board meetings |
Committee membership |
Audit and Risk Committee |
Environmental, Social and Governance Committee |
Innovation and Technology Committee |
Nominations Committee |
Remuneration Committee |
|||
| Cressida Hogg | 7/7 | – | – | – | 3/3 | – | |||
| Nick Anderson | 7/7 | – | 3/3 | 2/2 | 3/3 | – | |||
| Crystal E Ashby | 7/7 | – | 3/3 | – | 3/3 | – | |||
| Angus Cockburn2 | 7/7 | 5/5 | 2/2 | – | 3/3 | 4/4 | |||
| Dame Elizabeth Corley3 | 5/6 | 1/1 | 1/1 | 2/2 | 2/3 | 3/3 | |||
| Jane Griffiths | 7/7 | 5/5 | 3/3 | – | 3/3 | – | |||
| Ewan Kirk4 | 7/7 | 4/4 | – | 2/2 | 3/3 | 4/4 | |||
| Stephen Pearce | 7/7 | 5/5 | 3/3 | – | 3/3 | – | |||
| Nicole Piasecki | 7/7 | – | – | 2/2 | 3/3 | 4/4 | |||
| Charles Woodburn (Chief Executive) | 7/7 | – | – | – | – | – | |||
| Brad Greve (Chief Financial Officer) | 7/7 | – | – | – | – | – | |||
| Tom Arseneault (President and Chief Executive Officer of BAE Systems, Inc.) |
7/7 | – | – | – | – | – |
-
Independent non-executive directors.
-
Angus Cockburn became a member of the Environmental, Social and Governance Committee from 24 February 2025.
-
Dame Elizabeth Corley stepped down as a member of the Audit and Risk Committee and the Environmental, Social and Governance Committee on
24 February 2025. Dame Elizabeth was unable to attend the meetings in July 2025 due to conflicting commitments. She retired as a non-executive
director on 30 November 2025.
- Ewan Kirk became a member of the Audit and Risk Committee from 24 February 2025.
| 82 | BAE Systems plc Annual Report 2025 |
| 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 of the Company, generating value for shareholders, while having regard to our stakeholders and the impact of our operations on the environment and the communities in which we operate. See page 85 for more information on the work of the Board. The Board agrees the Group’s purpose, values and standards of behaviour expected of all employees, satisfying itself that these and the culture of the business are aligned, and that action is taken to reinforce and embed culture. The Board also sets the Group’s strategy and oversees and monitors risk management and the internal controls framework, and the Group’s governance. A major element of the system of governance is the Operational Framework, which is agreed by the Board and sets out how we do business. |
|||||
| Purpose The Company’s purpose (see page 3) recognises that we serve, supply and protect those who serve and protect us, and that we have important wider stakeholder responsibilities that the Board has regard to in its decision- making. The Board monitors our strategy, behaviours and culture and their alignment with our purpose. |
|||||
| Culture Our culture is to be performance driven and values led. The Board is responsible for ensuring that culture is aligned with our purpose, values and strategy. |
|||||
| Strategy Our strategy (see page 16) is comprised of six 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 Group. |
|||||
| Board engagement with stakeholders In considering and engaging with stakeholders, the directors act in accordance with Section 172 of the Companies Act. The work of the Board during the year is detailed on pages 85 to 89. |
| Board composition The Board consists of executive and independent non-executive directors, plus a non-executive Chair who was independent in accordance with the Code on her appointment. There is a clear division in the roles and responsibilities of the executive and non-executive directors and between the Chair and Chief Executive, which are detailed below. |
||
| Chair The Chair leads the Board and is responsible for its overall effectiveness in directing the Company. The Chair is specifically responsible for the following: – Promoting the highest standards of corporate governance, including the requirement that all directors act with integrity, lead by example and promote the desired culture. – Leading the Board by exercising objective judgement, promoting a culture of openness and debate, facilitating constructive Board relations and maximising the effective contribution of all non-executive and executive directors. – Working with the Chief Executive to ensure that directors receive accurate, timely and clear information on the Group. – Through the Nominations Committee, leading the process for appointments to the Board, ensuring that plans are in place for orderly succession to both the Board and senior management positions. – Engaging regularly with shareholders to understand their views on governance and performance against the strategy, ensuring that the Board as a whole has a clear understanding of their views. – Leading the review of the performance of the Board, its committees and individual directors, and acting on the results. – Establishing an effective working relationship with the Chief Executive, providing support and advice, while respecting executive responsibility. – Representing the Group at the highest level and, in conjunction with the Chief Executive, developing strategic relationships with major customers worldwide. |
Chief Executive The Chief Executive is responsible for the leadership and operational management of the Group within the strategy and business plan agreed by the Board. The Chief Executive is specifically responsible for the following in respect of their relationship with the Board: – Developing and proposing Group strategy and delivering the strategy as agreed by the Board. – Producing business plans for the Group to be approved by the Board on an annual basis and delivering such plans. – Keeping the Board informed regularly as to the performance of the Group and promptly bringing to the Board’s attention all matters that materially affect, or are capable of materially affecting, the performance of the Group and the achievement of its strategy. – Overseeing the management of the executive resource and succession planning processes and presenting the output from these as they relate to executive directors and senior management to the Nominations Committee. – Ensuring a risk management and internal control framework is in place across the Group. – Developing for the Board’s approval, appropriate values and standards to drive the required behaviours and guide all activities the Group undertakes. Leading by personal example in communicating these to all employees and communicating expectations with regard to company culture. – Owning the Group’s commitment to sustainability including the Group’s ambition to reduce GHG emissions across its operations (Scopes 1 and 2) by 2030 and to work towards a net zero value chain by 2050. – On an annual basis, leading the review of the Operational Framework and recommending any proposed changes to the Board for its approval. |
||||||
| Strategic report | Governance | Financial statements | Additional information | 83 | ||
| Senior Independent Director The Senior Independent Director provides a sounding board for the Chair and serves as an intermediary for the other directors and shareholders. The Senior Independent Director is responsible for the following: – Annually, or on other occasions as necessary, leading the non-executive directors in appraising the Chair’s performance and providing feedback to them. – Chairing the Nominations Committee when it is considering the Chair’s succession. – Should the Board or Company be undergoing a period of stress, working with the Chair and other directors, and/or shareholders, to resolve significant issues with a view to maintaining Board and Company stability. Such intervention may be required, for example, if there is a dispute between the Chair and Chief Executive; shareholders or non- executive directors have expressed concerns that are not being addressed by the Chair or Chief Executive; the strategy is not supported by the entire Board; decisions are being made without the approval of the full Board; and Board succession planning is being ignored. |
Company Secretary The Company Secretary is specifically responsible for the following in respect of their relationship with the Board: – Ensuring that Board procedures are complied with, advising the Board on all governance matters, supporting the Chair and helping the Board and its committees to function effectively. – Assisting the Chair in establishing the policies and processes the Board needs to function properly. – Working with the Chair, ensuring good information flows within the Board and its committees and between senior management and non-executive directors, as well as facilitating induction, arranging Board training and assisting with professional development as required. – Ensuring that directors, especially non- executives, have access to independent professional advice at the Company’s expense where they judge it necessary to discharge their responsibilities as directors of the Company. |
||||||
| Principal committees The Board has established principal committees which focus on particular areas, as set out below. The chair of each committee reports to the Board on the committee’s activities after each meeting. |
||||||
| Nominations Committee | ||||||
| Page 93 | ||||||
| Audit and Risk Committee | ||||||
| Page 96 | ||||||
| Environmental, Social and Governance Committee |
||||||
| Page 101 | ||||||
| Innovation and Technology Committee |
||||||
| Page 103 | ||||||
| Remuneration Committee | ||||||
| Page 104 | ||||||
| Executive and other committees |
||||||
| 84 | BAE Systems plc Annual Report 2025 |
| Governance framework continued |
| Operational Framework Agreed annually by the Board, the Operational Framework is a comprehensive statement of mandated governance requirements and delegated responsibilities. The Code’s principles are embedded within the Operational Framework and its policies and processes underpin all the disclosures the Board makes 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 applies across all wholly-owned entities and details our organisation, governance framework, core business practices and delegated authorities. |
Internal controls Core Business Processes This describes the reporting and reviews mandated by the Operational Framework, which provide upwards visibility of project and business performance. Operational Assurance A process through which line and functional leaders respectively confirm twice yearly that their businesses and functions are compliant with the Operational Framework. Internal Audit Assesses the effectiveness of internal controls through a programme of reviews based on a continuous assessment of business risk across the Group. |
|||||
| We take pride in managing our operations effectively and responsibly |
||||||
Business conduct
How we conduct our business is fundamental to
the success of the Group. Our Operational
Framework sets out our approach to this and the
standards we adhere to.
Product Safety policy
We set out principles which describe our approach
to product safety to reduce the risk of unintentional
harm to people, property and the environment.
They apply throughout the life of the product and
throughout the supply chain.
Workplace and operational environment
Our people management expectations are
communicated to all employees and set out within
our People policy. We do not tolerate corruption in
any of its forms and our employees are made aware
of their role in ensuring we maintain high standards
of business conduct. Page 59 provides further detail
about our anti-corruption programme.
The safety and wellbeing of our employees is
paramount and our high standards for health and
safety management provide a common framework
to guide our workforce. Further information can be
found on page 52.
We are committed to ensuring that IT systems and
services are used in a manner which promotes
effective communication and working practices
within the organisation and to preventing damage
to our business or reputation through misuse of
those systems.
With the support of our Internal Audit team, our IT
assurance and governance programme has been
developed to support the effective management
of cyber risks.
Decarbonisation
We use our expertise to reduce our global
environmental impacts and to develop products
and services for our customers which reduce, where
possible, the impacts on the environment. Our
Environmental, Social and Governance Committee
monitors the Group's approach to, and relevant
policies on, climate resilience and transition plans
and the Group's approach to, and relevant policies
on, workplace environment, including health and
safety.
Suppliers
We depend on our suppliers to provide
fully compliant, cost-effective equipment, goods,
services and solutions, which are an integral part
of the world-class products our customers require,
and also support the effective operations of our
businesses and the Group’s standards of business
conduct.
Our supply chain management and Supplier Code
of Conduct are focused on high achievement of our
standards. Our standard form supplier contracts
contain anti-corruption and anti-bribery provisions
which stipulate the expectation that suppliers
comply with applicable safety, environment and
human rights legislation and also meet our
standards on business conduct and Supplier Code
of Conduct.
Risk Management policy
We understand that effective management of risks
is essential to the delivery of a business’s strategic
objectives and its financial targets. Our Risk
Management policy provides direction to
employees and line and functional leaders on how
to carry out project and business risk management.
We set clear requirements for the management
and reporting of risks in support of the delivery of
our strategy. See pages 62 to 63 for further details.
Core business processes
Our IBP represents a common process with
standard outputs and requirements that produces
an integrated strategic business plan for the Group
and also for each of our businesses over the
following five years. The Board reviews our IBP each
year as part of its strategy review process. Once
approved, the IBP provides the basis for setting all
detailed financial budgets and strategic actions
across the businesses and is subsequently used
by the Board to monitor performance.
As the Operational Framework mandates,
businesses and Group functions complete a bi-
annual Operational Assurance Statement (OAS).
The OAS is one of the Group’s review processes,
which provides assurance that mandated policies
and processes are being complied with. Together
with reviews our Internal Audit team undertakes
and the work of the external auditors, the OAS
forms the Group’s primary process for reviewing
the effectiveness of our system of internal controls.
Our Life Cycle Management (LCM) framework
describes our approach to the assurance of project
risk management. LCM is integral to the successful
execution of the Group’s projects and programmes.
Its application provides progressive risk-based
assurance throughout the lifecycle to aid decisions,
supporting delivery of projects to achieve customer
satisfaction, schedule and financial requirements.
The purpose of the mergers, acquisitions and
disposals process is to provide a structured
approach to managing the acquisitions, strategic
joint ventures and disposals. It forms a part of our
strategy and planning framework in order to
support the delivery of the IBP.
National security arrangements
The Group is subject to various national security
requirements, which are an important part of our
governance arrangements and how we operate as
a defence company, as well as how we meet the
needs of our customers. Due to the nature of our
activities, the UK Government holds a Special Share
in the Company, ensuring that the Company
remains British controlled.
We operate our US businesses through BAE
Systems, Inc. and its subsidiaries. Due to the nature
of their activities, the Company, BAE Systems, Inc.
and the US Government have entered into a Special
Security Agreement (SSA) to address national
security matters relating to the ownership and
control of our US defence businesses.
Consequently, as a member of the Group, BAE
Systems, Inc. is subject to the Operational
Framework and its policies except where they
conflict with the SSA or the US national security
interest.
The SSA augments the Group’s governance
structure by requiring (among other things) that
BAE Systems, Inc. appoints independent non-
executive directors (known as ‘outside directors’)
to its board. These outside directors are currently
retired or former members of the US armed forces
and intelligence community and are required by
the SSA to perform their duties (including their
fiduciary duties) in good faith and in a manner
believed to be, first, in the US national security
interest and, second, where not inconsistent with
the US national security interest, in the best
interests of BAE Systems, Inc. and its shareholders.
Compliance with the SSA and US Government
security and export regulations is overseen by a
Government Security Committee, comprising the
outside directors and BAE Systems, Inc. executives,
and meetings are held regularly with US
Government oversight agencies to provide
feedback on that compliance.
Similarly, our Australian operations are subject to
an Overarching Deed with the Commonwealth
of Australia, which protects national security and
other interests and allows the Group to own and
manage certain Australian defence-related
industrial assets.
| Strategic report | Governance | Financial statements | Additional information | 85 | ||
| Our stakeholders and work of the Board |
Understanding our stakeholders, and their expectations, is critical to our long-term
success and to fulfilling the vital role we play in helping our customers to protect
people, information and nations.
This section provides details of how the
directors of BAE Systems plc have acted in
accordance with their duty under Section 172
of the Companies Act (s.172)* to promote
the success of the Company, having regard
(among other things) to certain stakeholders
and other factors during the year.
The principles of s.172 are embedded not
only at Board level, but throughout our
policies and procedures across the Group.
Engagement with our stakeholders goes
beyond the Board and is a critical activity in
supporting our operations. Our broader
business engages with our stakeholders
throughout the year, from covering the build-
up to a new project, during a project and/or
during the ongoing support and
maintenance that the business provides. This
engagement is often governed by
formulated policies, control frameworks,
regulation and legislation, and may also differ
by region.
We receive feedback at multiple levels of the
organisation, which helps inform decisions
made on a delegated basis across the Group
within the well-developed governance
structure approved by the Board. The
directors also benefit from stakeholder
feedback, received either directly via
executive management or through formal
reporting processes.
During 2025, matters the Board considered
and approved included:
– A proposal for the manufacture of Type 26
ships for Norway. The UK Government
announced a government-to-government
agreement at the end of August 2025,
noting that the deal would support 4,000
UK jobs, including more than 2,000 at BAE
Systems Glasgow shipyards, where the
frigates will be built.
– A proposal for the purchase of Eurofighter
Typhoon aircraft for Türkiye. In October
2025, the UK Government announced a
c.£5.4bn agreement with the Republic of
Türkiye for the purchase of 20 Typhoon
aircraft and an associated weapons and
integration package. The UK Government
reported that this agreement would help
sustain more than 20,000 highly-skilled jobs
involved in the Typhoon programme.
Other bids and proposals were considered by
the Board, or overseen by other members of
senior management, as their scale did not
warrant escalation to the Board. Collectively,
these activities reflect the continued global
demand for our leading defence capabilities
and the strategic alignment of our offerings
with customer defence strategies. As part of
our strategy sessions, the Board reviewed
global market and geopolitical trends and
approved the 2026 IBP, ensuring alignment
with long-term strategy, investment priorities
and the interests of our stakeholders.
The Board also received regular updates on
the delivery of key programmes worldwide,
including progress on the AUKUS partnership,
the Edgewing joint venture and programmes
delivered through MBDA. These programmes
play an important role in strengthening
national security for our partners, supporting
thousands of skilled jobs across the supply
chain and contributing significant export
value to the UK economy.
| *Companies Act 2006, s.172(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to: (a) the likely consequences of any decision in the long term; (b) the interests of the company’s employees; (c) the need to foster the company’s business relationships with suppliers, customers and others; (d) the impact of the company’s operations on the community and the environment; (e) the desirability of the company maintaining a reputation for high standards of business conduct; and (f) the need to act fairly as between members of the company. |
| Employee voice In accordance with Provision 5 of the Code, the Board has established workforce‑engagement arrangements, which it considers effective. The Board reviews the effectiveness of this framework regularly, drawing on insights gathered through site visits, meetings and direct interactions with employees. Alongside data on employee sentiment and management reports on the application and impact of workforce policies, these engagement activities give the Board a well-rounded understanding of the matters important to our workforce and how strategic decisions may affect them. The Board keeps its approach to workforce engagement under regular review, to ensure it remains aligned with contemporary workforce‑engagement practices and continues to provide an effective overview of the perspectives of our global workforce. |
||
| 86 | BAE Systems plc Annual Report 2025 |
| Our stakeholders and work of the Board continued |
Site visits
The Board, alongside senior management, is
committed to a site-led approach to its
oversight of the business. Understanding the
operations and engaging with employees
plays an important part in enabling the Board
and its Committees to fulfil their obligations.
The Board adopts an informal approach to
site visits and the agile nature of these
meetings allows for members of the Board to
get a better feel for key technology, culture
and alignment with the Group’s strategic
priorities. The visits provide important
opportunities to engage with the workforce
and see the development of our operations
from the ground.
Top right: Our Innovation and Technology
Committee visited our joint venture, MBDA, to
discuss technology innovation and engage with early
careers employees.
Middle left: Members of
the Board visited our
munitions business in
Glascoed, UK.
Middle right: Our Chair
and Environmental, Social
and Governance
Committee Chair visited
our Kingdom of Saudi
Arabia business. During
the visit, they hosted a
Q&A session with senior
leaders and undertook a
tour of an operational
airbase.
Bottom left: Non-
executive directors visited
Malloy Aeronautics,
acquired in 2024, touring
the facilities and
engaging the employees
to assess cultural and
strategic alignment.
| Strategic report | Governance | Financial statements | Additional information | 87 | ||
| Our people | |||||
| More information page 50 | |||||
| Employees of BAE Systems. | Why we engage The security, safety, wellbeing, skills, capabilities and commitment of our people are critical to ensuring the long- term viability of our business and delivering the innovation needed to solve our customers’ complex challenges. Effective engagement enables our employees to contribute to improving business performance and helps us to create an environment in which everyone is safe, valued and can fulfil their potential. |
||||
| What’s important to them | How we engaged at Board level | How we engaged across the Group | |||
| – Safety and wellbeing – Security – Career progression, training and development – Remuneration, reward and recognition – How we work together – Business conduct – Decarbonisation strategy – Contribution to the communities where we work |
– Multiple site visits during the year covering the UK, US, Kingdom of Saudi Arabia and Australia, undertaken in accordance with the national security requirements of the UK and other relevant nations. Whether a site visit is with the full Board, a Board Committee, or individual directors, they will meet with employees and senior leaders to engage on a range of topics. Read more on page 86. – Updates to the Board on employee engagement, employee safety, recruitment, talent identification, employee pay and inclusion, along with additional work being undertaken to enhance internal ‘speak up’ awareness programmes and incident reporting. |
– In-person and virtual meetings, briefings, conferences, toolbox talks, safety and security stand-downs, events and listening forums at all levels. – Regular leadership updates through videos and events throughout the year (including in relation to financial and business performance). – Digital channels including our Employee App, intranet, email and TV systems. – Engagement forums with trade unions in Australia and the UK, and labour unions in the US. |
|||
| Key actions taken by the Board in 2025 | |||||
| – The Senior Independent Director visited the Electronic Systems business in Rochester, UK, meeting executives, early career employees and touring the operations facility. – The Chair and ESG Committee Chair visited operations in the Kingdom of Saudi Arabia, meeting senior leaders and touring an operational airbase. – Non-executive directors visited Malloy Aeronautics, acquired in 2024, touring the facility and engaging with employees to assess cultural and strategic alignment. – Informal engagement with a global cohort of high- potential employees who gave members of the Board a view of employee experiences. |
|||||
| Our customers and end-users | |||||
| More information page 22 | |||||
| Governments and their procurement bodies, large prime contractors and commercial businesses. The people who use our products and services, often members of the armed forces and security services. |
Why we engage Understanding our customers’ needs and challenges is central to our strategy and how and where we invest in technologies and infrastructure. Our end-users protect people, information, infrastructure and nations. Delivering on our customer commitments is critical to our mission to protect those who protect us and drives our focus on operational excellence. |
||||
| What’s important to them | How we engaged at Board level | How we engaged across the Group | |||
| – Value for money – Trust – Quality of our products and services – Risk management – Timely delivery – Safety and wellbeing – Supporting operational capability and operability – Reliability of our teams to rectify issues quickly – Socio-economic value – Reducing product GHG emissions |
– Regular updates on customer relationships from the Chief Executive, who meets regularly with our principal customers. – President and Chief Executive Officer of BAE Systems, Inc. provided feedback to the Board on BAE Systems, Inc.’s customers to the extent allowed by national security considerations. |
– Participated in major events including Defence & Security Equipment International exhibitions in the UK and Japan, the Association of the United States Army exposition in the US and Indo Pacific International Maritime exposition in Australia. – International summits, like the Shangri-La Dialogue in Singapore and Pacific Future Forum in Japan provided strategic access to key customers and stakeholders. – Bespoke technology event series which provided an opportunity to engage customers around evolving capability requirements. – Customer meetings, programme reviews, site visits and programme milestone events. – Close working with end-users at customer facilities, bases and sites. – Regular dialogue with senior military leaders as well as senior ministers and political officials in our key markets. |
|||
| Key actions taken by the Board in 2025 | |||||
| – The Board reviewed a number of business proposals where the financial threshold was above that delegated to management. – The Board undertook a review of the acquisition of Ball Aerospace (now SMS), which included a review of the evolving customer priorities. |
| 88 | BAE Systems plc Annual Report 2025 |
| Our stakeholders and work of the Board continued |
| Our suppliers | |||||
| More information page 60 | |||||
| The companies we work with to deliver products and services to our customers. |
Why we engage Our suppliers and an effective, efficient and resilient supply chain are essential to enable us to deliver for our customers and end-users. Engaged suppliers perform at a much higher level, knowing they are regarded as valued partners and critical to mutual success. |
||||
| What’s important to them | How we engaged at Board level | How we engaged across the Group | |||
| – Labour and skills requirements – Cost of materials and operations – Terms of trade – Timely payment – Supply chain resilience and continuity of supply – GHG emissions and decarbonisation strategy 1 |
– The Board received regular updates and information on particular supply chain matters from the Chief Executive and Chief Financial Officer. A deep dive into the LCM Framework was also undertaken by the Innovation and Technology Committee and attended by the full Board. |
– Direct engagement with our suppliers, including at major trade exhibitions and industry conferences, along with specific subject matter engagement throughout the year. – This enabled us to maintain close relationships to help ensure continuity of supply, more proactively mitigate supply chain disruptions arising from global events and support our suppliers by providing extended demand visibility and expertise to find mutual solutions to identified supply challenges. |
|||
| Key actions taken by the Board in 2025 | |||||
| – Board received information on, and discussed, the Group’s supply chain within the context of the five-year risk landscape, focusing on matters including geopolitics, economics, the environment, technology, regulation and resource. |
| Our partners | |||||
| More information page 24 | |||||
| Other industry companies, trade bodies or academic institutions with whom we work. |
Why we engage We benefit from collaborating with others to address industry-wide challenges and develop technologies, products and services for our customers. |
||||
| What’s important to them | How we engaged at Board level | How we engaged across the Group | |||
| – R&D investment – Product and service development – Collaboration on low-emission products – Developing common standards, including an approach to reduce industry GHG emissions 1 – Access to market and customer opportunities – Sharing best practices and common standards, including on ESG issues |
– Environmental, Social and Governance Committee updated on the resilience of our supply chain, with a focus on decarbonisation and modern slavery and human rights. – Environmental, Social and Governance Committee also reviewed the community impact and investments made across the Group. |
– Official incorporation of the GCAP joint venture (Edgewing), a trilateral global defence collaboration with our industry partners Leonardo (Italy) and JAIEC (Japan) to support the GCAP delivery. – Maintained regular dialogue with industry partners, think tanks, trade bodies and customers around challenges that require a multi-partner approach, including evolving global events, multi-domain integration, resilient use of space for intelligence and communications, and progress on our sustainability agenda. |
|||
| Key actions taken by the Board in 2025 | |||||
| – Members of the Innovation and Technology Committee, along with other directors, visited the MBDA site in Stevenage, UK, to discuss technology innovation and interact with executives and early‑career employees. |
|||||
| Our investors | |||||
| More information page 20 | |||||
| Investors who provide capital to the business. |
Why we engage A strong investor base and continued access to capital is critical to the long-term success of the Group. It is important to ensure the owners of our shares and potential investors have a full understanding of our business, including the strategy, growth potential and risks as well as the overall performance of the business in order to make informed investment decisions. |
||||
| What’s important to them | How we engaged at Board level | How we engaged across the Group | |||
| – Profitability, growth potential and cash generation – Capital allocation and shareholder returns – Operational performance – Quality of management – ESG considerations – Share price performance |
– Executive directors attended investor roadshows following full-year and half-year results to discuss Group performance with key shareholders. – Our Chair and Senior Independent Director consulted with shareholders to discuss the updated Directors’ Remuneration policy and engaged through various ad hoc investor meeting requests. – The AGM in May 2025 provided an opportunity for investors to engage with Board members. |
– We executed a comprehensive investor programme, comprising a mixture of in-person and virtual engagements in the UK, US and other key international markets. – The programme included meetings, attendance at investor conferences, bank-led Q&A sessions and major trade shows, including DSEI in the UK, the Association of the United States Army exposition in the US and Paris Airshow in France. – Conducted an investor group tour of our Glasgow, UK, Naval Ships production facilities, including the Janet Harvey Hall. – Hosted an Air Sector Capital Markets Day in Warton, UK, with 50+ attendees from our investment community. The event showcased the current portfolio and the continued strong growth potential for the sector, including a flying display from two Typhoon combat aircraft followed by a demonstration of our T-150 UAS. |
|||
| Key actions taken by the Board in 2025 | |||||
| – Approved the revised Remuneration policy for proposal to investors for approval at the 2025 AGM. – Approved a final dividend of 20.6p per share in respect of 2024 and an interim dividend of 13.5p per share in respect of the first half of 2025. |
- Relates to the UK, Australia and Kingdom of Saudi Arabia businesses.
| Strategic report | Governance | Financial statements | Additional information | 89 | ||
| Our communities and the environment | |||||
| More information page 56 | |||||
| The people who live where we work, the environment in which we operate and the charitable organisations we support. |
Why we engage We are committed to the communities and environment in which we operate. In many locations where we have major sites, we are one of the largest employers in the area and have a responsibility to support the local communities where we operate both economically and socially. We also recognise that our operations have an impact on the environment and we have a responsibility to mitigate impacts from our operations. As one of the world's largest defence and security companies, we are dedicated to supporting members of our armed forces’ communities and strengthening the STEM talent pipeline. |
||||
| What’s important to them | How we engaged at Board level | How we engaged across the Group | |||
| – Employment and economic contribution – Education outreach and skills development, especially for young people – Community engagement and delivering meaningful local impact – ESG considerations – Collaboration on low-emission products – Developing common standards, including an approach to reduce industry GHG emissions – Support for our armed forces’ communities, including veterans and military families |
– Chief Executive provided an update on ESG matters at each scheduled Board meeting. – Group ESG, Culture & Business Transformation Director attended a Board meeting where they provided an update on the ESG agenda, aligned to business priorities. – Continued to monitor the Group’s sustainability agenda and ESG agenda in conjunction with the Environmental, Social and Governance Committee. |
– Extensive education outreach programme, including STEM ambassadors in key markets, school roadshows in the UK and sponsorship of the international FIRST Championship in the US. – Continued support for local communities through sponsorships, donations and employee volunteering, including supporting Feeding Britain, which works to combat hunger in communities across the UK, and the launch of a new community grant programme in Australia. – Sustained partnerships with armed forces charities, including Legacy in Australia, the Royal British Legion’s Poppy Appeal and The Great Tommy Sleep Out in the UK. |
|||
| Key actions taken by the Board in 2025 | |||||
| – As Chair of Movement to Work, which helps people in to work in the UK, the Chief Executive hosted the annual Movement to Work CEO Summit and Youth Employability Awards. – President and Chief Executive Officer of BAE Systems, Inc. attended the 2025 FIRST® Championship. |
|||||
| Our regulators | |||||
| More information page 59 | |||||
| Governmental bodies that oversee industry or business activities. |
Why we engage We maintain constructive dialogue and relationships with those who oversee the regulations which can impact our business. |
||||
| What’s important to them | How we engaged at Board level | How we engaged across the Group | |||
| – Relevant laws and regulations – Appropriate compliance programmes |
– Received and reviewed legal compliance reports from the Group General Counsel and senior members of the Legal Function. – Received and reviewed correspondence from other regulators, including the UK Government. |
– Open and constructive engagement with various regulators, including meetings and discussions with UK, US and Australian regulators in support of efforts to drive efficient compliance, improve bilateral and multilateral defence trade cooperation and support our licensing strategy. – Participation in industry association initiatives to work with regulators to the same end. – Regulator attendance and presentations at external conferences and engagement events alongside regulators. |
|||
| Key actions taken by the Board in 2025 | |||||
| – The Company, along with other UK FTSE companies, received a letter from the UK Government outlining the Cyber Governance Code of Practice and its recommendations. As part of its review, the Board was updated on the Group’s alignment with the Cyber Governance Code of Practice. Given the importance of this topic, the Board requested that this be an agenda item for discussion every six months. – Considered Board tenure and made changes to Committee composition, in line with the provisions of the UK Corporate Governance Code and the Company’s Articles of Association. |
|||||
| Our pension scheme members | |||||
| More information page 182 | |||||
| Members and trustees of our pension schemes. |
Why we engage We are committed to fulfilling our obligations to current and former employees in our pension schemes. We and the Trustees of our defined benefit and defined contribution pension schemes engage with scheme members regularly to ensure they are informed about how we continue to do so and ensure that they have access to all the information they need to manage their pension arrangements. |
||||
| What’s important to them | How we engaged at Board level | How we engaged across the Group | |||
| – Member benefits – Funding position and investment strategy for our defined benefit pension schemes – Group performance |
– Approved increases to employer contribution rates for defined contribution benefits. – Approved reductions to employee contribution rates for defined benefit members. |
– Continued to engage with our UK members via dedicated pensions websites, ensuring they have access to key scheme documents and pensions information. – Newsletters made available to all defined benefit members to keep them updated and engaged in their pension planning. – Face-to-face and virtual engagement sessions for employee members around the UK, supported by a series of videos and guides to help them better understand their pensions. |
|||
| We also engage with other non-profit organisations and public interest groups who have a focus on business or defence and security issues to address factors that can impact our business and how we operate. |
| 90 | BAE Systems plc Annual Report 2025 |
| Applying the 2024 UK Corporate Governance Code |
Applying Principles of Good Governance: The Company has applied the Principles
in the Code. Using the section headings in the Code, the following provides details of
how we have applied those Principles and references other parts of these reports to
provide more detail. The statements reference the Code Principles.
| Section 1 – Board leadership and Company purpose | |
| Principles | Reference |
| A. | A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. The board should ensure that the necessary resources, policies and practices are in place for the company to meet its objectives and measure performance against them. |
| Dividends paid and capital allocation policy objectives Page 15 |
| Governance framework Page 82 |
| Annual Board performance review Page 95 |
| B. | The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are all aligned. All directors must act with integrity, lead by example and promote the desired culture. |
| Our purpose Page 3 |
| Our strategic framework Page 16 |
| Responsible business Page 48 |
| Governance framework Page 82 |
| Audit and Risk Committee report Page 97 |
| Environmental, Social and Governance Committee report Page 101 |
| C. | Governance reporting should focus on board decisions and their outcomes in the context of the company’s strategy and objectives. Where the board reports on departures from the Code’s provisions, it should provide a clear explanation. |
| Our strategic framework Page 16 |
| Governance framework Page 82 |
| D. | In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties. |
| Our stakeholders and work of the board Page 85 |
| Environmental, Social and Governance Committee report Page 101 |
| E. | The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern. |
| Our strategic framework Page 16 |
| Ethics and compliance Page 59 |
| Our stakeholders and work of the Board Page 85 |
| Section 2 – Division of responsibilities | |
| Principles | Reference |
| F. | The chair leads the board and is responsible for its overall effectiveness in directing the company. They should demonstrate objective judgement throughout their tenure and promote a culture of openness and debate. In addition, the chair facilitates constructive board relations and the effective contribution of all non-executive directors, and ensures that directors receive accurate, timely and clear information. |
| Chair’s governance letter Page 76 |
| Annual Board performance review Page 95 |
| G. | The board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision making. There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business. |
| Chair’s governance letter Page 76 |
| Board of directors Page 77 |
| Governance framework Page 82 |
| H. | The non-executive directors should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account. |
| Board of directors Page 77 |
| Board information Page 81 |
| I. | The board, supported by the company secretary, should ensure that it has the policies, processes, information, time and resources it needs in order to function effectively and efficiently. |
| Governance framework Page 82 |
| Annual Board performance review Page 95 |
| Strategic report | Governance | Financial statements | Additional information | 91 | ||
| Section 3 – Composition, succession and evaluation | |
| Principles | Reference |
| J. | Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan for the board and senior management should be maintained. Both appointments and succession plans should be based on merit and objective criteria. They should promote diversity, inclusion and equal opportunity. |
| Board information Page 77 |
| Nominations Committee report Page 93 |
| K. | The board and its committees should have a combination of skills, experience and knowledge. Consideration should be given to the length of service of the board as a whole and membership regularly refreshed. |
| Board of directors Page 77 |
| Board information Page 81 |
| Nominations Committee report Page 93 |
| L. | Annual evaluation of the board should consider its performance, composition, diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively. |
| Nominations Committee report Page 93 |
| Annual Board performance review Page 95 |
| Section 4 – Audit, risk and internal control | |
| Principles | Reference |
| M. | The board should establish formal and transparent policies and procedures to ensure the independence and effectiveness of internal and external audit functions and satisfy itself on the integrity of financial and narrative statements. |
| Audit and Risk Committee report Page 96 |
| N. | The board should present a fair, balanced and understandable assessment of the company’s position and prospects. |
| Directors’ responsibility statement Page 133 |
| O. | The board should establish and maintain an effective risk management and internal control framework and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives. |
| Our risk management framework Page 64 |
| Our principal risks Page 65 |
| Governance framework Page 82 |
| Section 5 – Remuneration | |
| Principles | Reference |
| P. | Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values and be clearly linked to the successful delivery of the company’s long-term strategy. |
| Remuneration Committee report Page 104 |
| Annual remuneration report Page 112 |
| Q. | A formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established. No director should be involved in deciding their own remuneration outcome. |
| Remuneration Committee report Page 104 |
| Directors’ remuneration policy Page 109 |
| R. | Directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances. |
| Remuneration Committee report Page 104 |
| 92 | BAE Systems plc Annual Report 2025 |
| Compliance with the 2024 UK Corporate Governance Code provisions continued |
The Company is subject to the principles and provisions of the Code, a copy of
which is available at frc.org.uk. The Company was compliant with the provisions
of the Code throughout 2025. The following statements are made in compliance
with the Code.
Risk management and internal
control statement
The Board is responsible for the oversight of
the effectiveness of the Group’s risk
management and internal control
framework. It has delegated responsibility for
monitoring and reviewing the effectiveness
of this framework to the Audit and Risk
Committee, which reports to the Board on its
findings so that all directors can take a view
on the matter.
An overview of the processes used to identify,
evaluate and manage the principal risks can
be found on pages 62 to 63. These processes
are an integral part of our governance and
are therefore included within the Operational
Framework, details of which can be found on
page 82. The Operational Framework
mandates the OAS process, which is owned
by the Group’s Internal Audit function and is
one of the principal processes the Board uses
in monitoring the effectiveness of control
systems.
The OAS process is designed to provide
assurance with regard to compliance with the
policies and processes which the Operational
Framework mandates. It is a key element of
the Group’s governance. The Risk
Management policy and the LCM framework
direct employees and line and functional
leaders on the approach to effectively
managing business and project risks. Twice a
year, the line leaders for our business and the
heads of our functions are required to
critically analyse compliance relative to a
scoring framework, which sets standards
against which compliance must be assessed.
Line and functional leaders are required to
assure themselves of the level of compliance
for a business and submit, as required,
supporting information and data to provide
evidence of compliance asked for.
The output from the OAS process is reviewed
by (and subject to challenge from) the
Internal Audit function relative to its
understanding of matters within particular
businesses. The output from the risk
management and OAS processes is provided
to the Board and is reviewed in detail by the
Audit and Risk Committee.
The report to the directors on the output
from the risk management and OAS
processes provides granular graphical and
narrative analysis of compliance against the
requirements of the Operational Framework,
and as such is an important part of how the
Board monitors and reviews the Company’s
risk management and internal control
framework. Further details of the Board’s
monitoring and review process can be found
in the Audit and Risk Committee report on
page 96.
The risk management and internal control
framework detailed in the Operational
Framework was in place throughout the year,
and the Board, having reviewed its
effectiveness, believes it accords with FRC
Guidance.
Viability statement and going
concern
As required by the provisions of the Code, the
Board has undertaken an assessment of the
future prospects of the Group, taking into
account the Group’s current position and
principal risks. This assessment considered
both the Group’s long-term prospects and
also its ability to continue in operation and
meet its liabilities as they fall due over its five-
year business planning period. This can be
found on page 73 of the Strategic report.
Directors
In compliance with the Code, all directors are
subject to annual re-election by shareholders.
The Board considers all of the non-executive
directors (except the Chair) named on pages
78 to 79 of this report to be independent for
the purposes of the Code. The Chair was also
independent on appointment.
The Board regularly reviews all of the
directors’ external commitments to ensure
that they have sufficient time to dedicate to
the Company. Prior to making Board
appointments, the Board considers other
demands on an individual’s time to ensure
that, following appointment, they can meet
their Board responsibilities. Non-executive
directors are required to seek prior approval
before taking on additional external
appointments. The Board also considers
whether there are any matters that could
have a bearing on a non-executive director’s
independence pursuant to Provision 10 of the
Code. The following disclosure is made on
these matters:
Director independence
During our conversations on Board
succession, we considered the length of
service of the Board as a whole and how best
to ensure that we retained the right balance
of skills, experience and knowledge. We also
specifically considered the succession for
Dame Elizabeth Corley, who reached a tenure
of nine years on the Board in February 2025,
and the importance of independence of mind
and objective judgement from non-executive
directors. The Board reflected on the
insightful perspectives Dame Elizabeth Corley
provided during her tenure based on her
corporate memory, which, coupled with her
external background and knowledge,
enriched Board discussions. The Board was
unanimous in its agreement that it
considered Dame Elizabeth Corley to be
independent. Dame Elizabeth Corley stepped
down from the Board at the end of
November 2025.
| Strategic report | Governance | Financial statements | Additional information | 93 | ||
| Nominations Committee report |
| Members during 2025 | Member since | ||
| Cressida Hogg (Chair) | November 2022 | ||
| Nick Anderson | November 2020 | ||
| Crystal E Ashby | September 2021 | ||
| Angus Cockburn | November 2023 | ||
| Dame Elizabeth Corley | Retired November 2025 |
||
| Jane Griffiths | April 2020 | ||
| Ewan Kirk | June 2021 | ||
| Stephen Pearce | June 2019 | ||
| Nicole Piasecki | June 2019 | ||
The Committee ensures that
plans are in place for orderly,
well-planned succession for
executive management.
Cressida Hogg
Chair of the Nominations Committee
Dear Shareholders
I am pleased to present this report of the
Nominations Committee and provide a
summary of our activities during 2025.
The Committee’s Terms of Reference can be
found on the Company’s website and provide
further details of the Committee’s
responsibilities.
The Committee leads the process for
appointments to Board and executive
director roles, ensures plans are in place
for orderly, well-planned succession for
executive management1 and oversees
the development of a diverse succession
pipeline of candidates. It also makes
recommendations to the Board on certain
corporate governance matters.
Board and succession planning
The Committee regularly monitors the
composition of the Board and its Committees
to ensure that there remains a suitable
balance of skills and experience to oversee
the delivery of the Group’s strategy and
discharge each Committee’s responsibilities
effectively.
The Committee must also consider the
specific nationality restrictions for certain
executive and non-executive roles within any
succession planning. National security
considerations limit the pool of talent
available when considering candidates for
certain positions. In addition, the Special
Share provisions in the Company’s Articles of
Association require that a majority of the
members of the Board must be British
nationals and that also applies to the
membership of Board Committees. These
nationality requirements are factored into the
Committee’s long-term plans for managing
Board and Committee composition.
During the year, the Committee focused on
the succession for Dame Elizabeth Corley,
who reached a tenure of nine years on the
Board in February 2025, and the longer-term
succession of our other non-executive
directors. The Committee considered the skills
and experience that the Board would be
losing with the retirement of Dame Elizabeth
and worked with MWM Consulting2 to help
assist with the nomination and appointment
of John Pettigrew, who joins the Board in
February 2026. Committee members held
meetings with John Pettigrew in advance of
making the recommendation to the Board.
At the beginning of 2025, the Committee
reviewed the Board Committee composition
as part of Board succession planning to
ensure potential gaps and areas for
strengthening are identified and addressed
as appropriate. In February 2025, changes
were made to committee memberships, with
Ewan Kirk joining the Audit and Risk
Committee, Angus Cockburn joining the
Environmental, Social and Governance
Committee, while John Pettigrew will be
joining the Audit and Risk Committee. Dame
Elizabeth Corley stood down from these two
committees.
The Committee is cognisant that the balance
of women on the Board has now fallen below
the 40% target set by the UK FCA, following
the retirement of a female director during
2025. The Committee will be mindful of this
position as it continues with its succession
planning in the year ahead. Following the
retirement of Dame Elizabeth Corley, the
proportion of women on the Board stood at
36%.
The Committee ensures and receives reports
on plans in place for appropriate executive
management succession. As you would
expect, all companies must have resilience
to maintain momentum through any
unexpected management change. Therefore,
the Committee also considers the succession
plans for our most senior leaders; the Chief
Executive, the Chief Financial Officer and the
President and Chief Executive Officer of BAE
Systems, Inc., along with all Executive
Committee members and the Company
Secretary. During the year, we considered the
critical success components of these roles and
the potential succession talent from both
inside and outside the business.
On an annual basis, the Committee discusses
the senior succession candidates with the
Chief Executive. The Committee will have also
met with some of these candidates during
the year at site visits or specific engagements
before Board meetings. The Committee
reported to the Board that our talent pipeline
is being strengthened, with greater focus on
development and clear succession routes for
key executives below the level of the
Executive Committee. Senior Finance
Executive pipeline and succession planning
was undertaken at the Audit and Risk
Committee meeting, with a detailed
presentation across many finance roles.
More executives are being identified and
developed for specific positions and short-
term emergency cover.
-
Executive management refers to members of the Executive Committee and the Company Secretary.
-
MWM Consulting is an executive search agency which has no other connection with the Company or
any individual director.
| 94 | BAE Systems plc Annual Report 2025 |
| Nominations Committee report continued |
Director external appointments
Directors are permitted to undertake
additional external appointments and we
have a clear process for the evaluation and
Board consideration of new roles. As part of
the nominations process, the role is reviewed
for any actual or potential conflict of interest
and, if any such conflict arises, whether this
could be suitably managed. The time
commitment is also assessed to determine if
the role would impact the director’s ability to
properly fulfil their duties as a director of BAE
Systems. My appointment as President of the
Confederation of British Industry was
considered by Nicole Piasecki as Senior
Independent Director and approved by the
Board with her recommendation.
On an annual basis, the Committee considers
all non-executive directors’ time
commitments to ensure that there are no
concerns with overboarding. This review
considers the number of appointments, the
scope and size of the company in which the
position is held, as well as the most recent
published guidelines and recommendations.
The Board remains confident that all Board
members continue to have sufficient time
to dedicate to their duties.
Board diversity
The Board recognises that diversity is an
important factor in its effectiveness and
strives to maintain a diverse Board, which
includes, among other things, an appropriate
balance of gender, ethnicity, skills, knowledge
and experience.
The Board’s Diversity and Inclusion policy,
which the Committee routinely reviews,
outlines the approach to diversity and
inclusion for BAE Systems’ Board of directors
and is available to view on the Company’s
The Committee regularly considers the
composition of committees, including the
needs for particular attributes, skills and
experience, when undertaking non-executive
search activities. The membership of the
Board’s Audit and Risk, Remuneration and
Nominations committees is drawn from
the wider membership of the Board and
therefore the membership of these bodies is
broadly aligned with the Board’s Diversity
and Inclusion policy.
Although the Committee strives to maintain
the targets set within the Board’s Diversity
and Inclusion policy, it must also take full
account of the Company circumstances and
the unique national security requirements
to which the Company must adhere. Further
information on the Board’s approach to
diversity can be found on pages 80 to 81.
Cressida Hogg CBE
Chair of the Nominations Committee
The Nominations Committee’s year
– Discussed succession plans for executive
roles.
– Considered non-executive director
succession planning and recommended the
appointment of John Pettigrew.
– Discussed the role specification and
candidate profile for future non-executive
director search.
– Discussed senior succession plans.
– Considered external appointments for
members of the Board as appropriate.
– Discussed non-executive director planning
for the medium to long term.
– Considered the composition of the Board
Committees.
| Strategic report | Governance | Financial statements | Additional information | 95 | ||
| Board performance review |
Delivery against the 2025 ambitions
From the 2024 Board performance review, certain areas of focus were identified. Progress in these areas is provided below.
| Area of focus from the 2024 review | Progress | |
| People | More agenda time was allocated to the Nominations Committee for its discussion on senior succession and the talent pipeline. The Audit and Risk Committee also held a detailed discussion on succession and talent management within the finance function. |
|
| Strategy | The June strategy session included increased focus on external perspectives, increased insight on the impact of new technology, customers and products. Feedback from the directors was captured during the session, which has been used to scope materials for future updates. |
|
| Site visits | During the year the following sites were visited by some, or in some instances all, directors: MBDA, Malloy Aeronautics, Electronic Systems in Rochester, the Maritime and Land facility in Australia and sites in the Kingdom of Saudi Arabia. In addition, a director with a higher level of security clearance spent time with the cyber team looking at classified security issues, cyber preparedness and a threat review. An overview of this visit was shared with the Board. The Chair also visited many other facilities across the business. |
|
2025 Board performance
review process
The Board undertakes an annual
performance review of the effectiveness of
the Board, its Committees, the Chair and
individual directors, and conducts an
externally facilitated review at least every
third year with the assistance of
an independent facilitator.
In 2025, the annual performance review of
the effectiveness of the Board and its
Committees was conducted internally. The
Chair led the process, which was facilitated by
the Company Secretary. Questionnaires were
circulated via an electronic platform, with
responses anonymised and the conclusions
discussed by the Board. In addition, The Chair
held one-on-one discussions with each Board
member to gather views on Board
performance.
The internal performance review considered
a number of matters, including the
composition of the Board and its
committees, culture, the effectiveness of
| The process 1. Questionnaire agreed and distributed electronically to Board members 2. One-on-one discussions between the Chair and Board members 3. Outcome of questionnaires provided to the Board and Committee members and discussed at a meeting of the Board in December 2025 4. Action plan agreed following discussion of the reports |
||
meetings and the quality of information
flow to the Board. Through one-on-one
discussions, the Chair was able to consider
whether each director continues to
contribute effectively. No director was
involved in the review of their own individual
performance.
Each of the directors is considered to be
an effective member of the Board and,
accordingly, the Board recommends to
shareholders the re‑election of the directors
standing at the 2026 AGM.
The performance of the Chair of the Board
was also evaluated, with questions covering
areas such as effectiveness both inside and
outside of the Board meetings, interactions
with internal and external stakeholders, and
key strengths.
The Company Secretary collated the
Chair performance review results and shared
these with the Senior Independent Director,
Nicole Piasecki. After engaging with other
Board members, Nicole Piasecki discussed the
feedback with the Chair.
Performance review outcomes
The Board and Committee member feedback indicated that the performance review was objective and rigorous and that the Board and its
Committees are considered to operative effectively. Key topics were discussed for the year ahead for the Board and each Committee, based on
director feedback. Feedback also indicated that there are good personal relationships and a high degree of mutual respect among directors.
| Areas of focus for 2026 | Proposed action | |
| People | The Board agreed to deepen its discussion on the Company’s talent management and leadership development in 2026. |
|
| Risk | The risk management process is considered to work well. However, the Board will continue to spend time on the evolution of the risk process, emerging risk, cyber and organisation resilience. |
|
| Strategy | The complexity of market dynamics continues to change at pace. The Board’s strategic discussion will include time on competitor dynamics, new entrants to market and defence technology developments. |
|
| 96 | BAE Systems plc Annual Report 2025 |
| Audit and Risk Committee report |
| Members during 2025 | Member since | ||
| Stephen Pearce (Chair) | January 2020 | ||
| Angus Cockburn | November 2023 | ||
| Dame Elizabeth Corley | Retired February 2025 |
||
| Jane Griffiths | January 2024 | ||
| Ewan Kirk | February 2025 |
The Committee exercises
rigorous oversight over the
Group’s internal controls and risk
management systems through
targeted deep dives into critical
risk areas.
Stephen Pearce
Chair of the Audit and Risk Committee
Dear Shareholders
As announced in February 2026, I have
advised the Board that I will retire at the end
of November 2026, therefore, this is my last
report as Chair of the Audit and Risk
Committee. In this report, I will provide you a
summary of the main discussions of the Audit
and Risk Committee for the year ended 31
December 2025. During the year, the
Committee has maintained focus on the key
areas which are summarised on page 100.
The Committee keeps under review the
relationship with the external auditors,
including the terms of engagement, fees,
independence and the effectiveness of the
external audit process. Similarly, we monitor
the effectiveness of the Group’s Internal
Audit function.
On behalf of the Board, we undertake regular
reviews of the Group’s risk management and
internal control framework, in relation to the
Group’s financial and non-financial reporting
processes and associated disclosures, fraud
and other risks, as well as the Group’s
Principal Risks.
The Committee Terms of Reference can be
found on the Company’s website.
Committee composition
and attendees
In accordance with the Code, all members of
the Audit and Risk Committee are
independent and, as Chair of the Audit and
Risk Committee, I have recent and relevant
financial experience.
Our biographies on pages 77 to 79 provide a
summary of our skills and our experience,
which highlights that collectively, the
Committee members have the knowledge,
skills, experience and financial literacy to
effectively discharge our duties as an Audit
and Risk Committee. When John Pettigrew
joins the Board in February 2026, he will also
become a member of the Committee and the
Board is satisfied that he also has recent and
relevant financial experience which will
complement the existing skills and balance of
the Committee.
In 2025, we held five formal meetings
attended by Committee members, the Chair
of the Board and Internal and External Audit
teams. Each meeting was followed by a
private session with the same participants,
excluding management. Our formal meetings
are also attended by the Chief Executive, the
Chief Financial Officer, the Group General
Counsel, the Company Secretary and the
Group Financial Controller.
| The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 The Company has complied with the Statutory Audit Services Order issued by the UK Competition and Markets Authority for the financial year ended 31 December 2025. |
||
I report back to the Board, after each
meeting, on our discussions, highlighting
relevant matters and providing
recommendations where appropriate/
necessary to the Board, on behalf of the
Committee.
Before each meeting, I have a pre-meeting in
order to ensure that the key areas of focus are
properly reviewed and discussed during the
Committee meeting. I meet with the Chief
Financial Officer, the Internal Audit Director,
the Group Financial Controller, the Audit
Partners from Deloitte LLP and the Deputy
Company Secretary (the Committee
Secretary). Outside of the meeting cycle, I
maintain regular conversation with the
Internal Audit Director and the Audit
Partners, and regularly engage with members
of the global finance teams.
Climate-related
financial reporting
The Committee continues to monitor
developments in reporting frameworks and
regulatory guidance, receiving regular
updates from the management team on
emerging global initiatives and evolving
climate‑related disclosure requirements
across the jurisdictions in which the Group
operates. This ensures that our assurance
approach remains aligned with, and
proportionate to, regulatory change.
As part of its remit, the Committee oversees
the Group’s internal and external assurance
processes for data disclosed on behalf of the
Group, including sustainability‑related
information that informs, and is linked to, the
financial statements. Climate‑related
reporting requirements under TCFD form part
of this remit.
To support continuity and oversight of the
Board’s strategic intent, particularly in relation
to resource and energy efficiency, the Chair of
the Environmental, Social and Governance
Committee and the Chair of the Audit and
Risk Committee each serve as members of the
opposite Committee. This cross‑membership
structure strengthens alignment, facilitates
holistic oversight, and ensures that the
evolution of ESG data capabilities is
appropriately governed as regulation and
stakeholder expectations continue to
progress.
| Strategic report | Governance | Financial statements | Additional information | 97 | ||
In line with our responsibilities, we have
continued to assess the potential impact of
climate‑related transition activities and
physical risks on the Group’s reporting. For
the year ended 31 December 2025, we
concluded that these factors did not have a
material impact on the Group’s Consolidated
Financial Statements. Recognising that the
external environment and associated risk
landscape are dynamic, the Committee will
maintain close and ongoing oversight as
these areas evolve.
Provision 29
As part of our ongoing preparations for the
implementation of Provision 29, the
Committee reviewed the methodology
adopted to identify material controls and to
assess their effectiveness and the
enhancements made to the Operational
Framework. We approved the Group’s
material control list which we noted was, in
general, a codification of existing, well-
established internal control processes.
The Committee also reviewed the outcomes
of several dry-run exercises which were built
on existing assurance processes and
supplemented by additional confirmation
work where required. The results provided
valuable insight into the effectiveness of the
current controls and established a clear
roadmap for any activity to be undertaken
during 2026 to assist the Board with its new
reporting requirement under Provision 29.
Risk management
and internal controls
The Group’s Risk Management policy and
internal control framework are structured to
manage, rather than eliminate, the risk of failing
to achieve strategic and financial objectives.
Accordingly, these arrangements provide
reasonable, though not absolute, assurance
against material misstatement or loss.
The Board maintains ultimate responsibility
for the effectiveness of the Group’s risk
management and internal control
framework. Comprehensive details of the
Group’s risk management process and
principal risks are set out on pages 64 to 72.
The Committee exercised rigorous oversight
of these arrangements through targeted
deep dives into critical risk areas, including
Export Control, the Group’s ethics and
whistleblowing programme, progress on
preparations for the implementation of
Provision 29, findings from the OAS and other
matters relating to risk management and
internal controls.
This approach is reinforced by structured
processes such as Business Reviews (see page
82), ongoing monitoring of the IBP and the
OAS process, all of which underpin the
assessment of the risk management and
internal control framework’s effectiveness.
The Committee ensures continuous
scrutiny of risk management and internal
controls through established governance
mechanisms, guided by the Risk Management
policy and implemented via the Group’s
assurance model. Regular reporting from
Internal Audit and other specialist functions
enables the Committee to challenge and
engage with senior subject matter experts.
A key focus for the Committee is internal
controls over financial reporting. We
continued to receive updates on the progress
of the modernisation of the Group’s global
finance function, which the Chief Financial
Officer has initiated, to streamline processes
and share best practice across the Group. We
were pleased to hear of the milestones being
achieved within the year, in developing a
more collaborative, innovative culture
focused on continuous improvement and in
enhancing assurance over external financial
reporting.
These reporting and assurance processes
provide the Committee with robust
oversight and support its responsibility
to confirm that the Annual Report and
Financial Statements are prepared in full
compliance with applicable standards and
regulatory requirements. Additionally, on
behalf of the Board, the Committee also
reviews the Company’s whistleblowing
processes, including the procedures for
the proportionate and independent
investigation of reported concerns.
This work forms part of the Board’s broader
oversight of the Company’s culture and its
assessment of how effectively the desired
culture is embedded. Following its review, the
Committee is satisfied that the mechanisms in
place are adequate and effective in enabling
individuals to raise concerns appropriately.
External audit
Deloitte LLP has served as the Group’s
external auditor for eight years, following its
appointment at the 2018 Annual General
Meeting. Claire Faulkner is currently in her
third year as Lead Audit Partner.
The Committee regularly reviews Deloitte’s
role and the scope of work it undertakes.
Its reports provide valuable insight into
discussions held with management on key
contracts, significant judgements and major
programmes, as well as its assessment
of the Group’s control environment.
We agreed the scope and fees for Deloitte’s
external audit plan, covering its review of the
half-year financial statements and the audit
of the full-year financial statements. In doing
so, we considered key audit risks and other
areas of particular focus for the Group.
The audit and non-audit fees for 2025 are
provided in note 3 to the Consolidated
financial statements on page 154.
Assessing the effectiveness of external audit
| Who we surveyed to inform our assessment on the effectiveness of the Group’s External Auditor | ||||||||
| Senior Finance Executives | Internal Audit Director | |||||||
| What we surveyed | ||||||||
| Partners & Audit Teams |
Planning Scope & Execution |
Communication & Reporting |
Challenge & Insight |
|||||
| Outcome | ||||||||
| The Committee noted that the output of the review was broadly positive and consistent with prior years. Participants felt that the external auditor provided robust and constructive challenge and overall delivered an effective audit. On the basis of the review, following the 2025 year-end audit, the Committee proposed to the Board that it recommends that shareholders support the re‑appointment of Deloitte LLP at the 2026 AGM. |
||||||||
| 98 | BAE Systems plc Annual Report 2025 |
| Audit and Risk Committee report continued |
Auditor independence
and effectiveness
In overseeing the relationship with the
external auditor, the Committee conducts
an annual assessment of its effectiveness,
technical competence and the quality of its
audit input. This evaluation informs our
consideration of whether a competitive
tender process for the external audit would
be appropriate.
On behalf of the Committee, management
facilitated a questionnaire seeking feedback
on the external auditor’s performance and
whether it continue to meet expectations.
Our assessment of the external auditor’s
effectiveness is undertaken based on the
requirements of the Code, including following
the 'Audit Committees and the External
Audit: Minimum Standard' published by the
FRC in May 2023, as explained in this report.
We reviewed and discussed the results of
this assessment and concluded that Deloitte
remains effective in its role as external
auditor. Having considered Deloitte’s
continued objectivity, independence and
effectiveness, the Committee believes it is in
the best interests of the Company’s
shareholders for Deloitte LLP to remain as
external auditor for the forthcoming financial
year. A high-level summary of the auditor
effectiveness review is provided below. The
Committee remains mindful of its obligations
under the Audit Services for Large Companies
Market Investigation (Mandatory Use of
Competitive Tender Processes and Audit
Committee Responsibilities) Order 2014,
which governs the frequency and oversight of
external audit tenders.
Deloitte was appointed as external auditor
for the year ended 31 December 2018 and, in
accordance with these requirements, the
Company must re-tender its external audit
services for the year ended 31 December
2028. The Committee, with the support of
senior management, has commenced
planning for the next audit tender process
with the aim of completing the tender in
2026.
Non-Audit Services policy
The Group has a policy on non-audit services
that aligns with the FRC’s 2019 Revised
Ethical Standard of Permitted Audit-Related
and Non-Audit Services. The policy prohibits
the auditor from undertaking certain
activities and places restrictions on the
employment of former employees of the
auditor. The policy permits the provision of
certain audit-related services and permitted
non-audit services up to limits that are pre-
approved by the Committee, with specific
approvals required beyond such limits.
In 2025, we considered and approved three
non-audit services (relating to the Half Year
Review, Climate Reporting and Assurance
and extended controls assessment) which
were compatible with the general standard
of independence for auditors. Prior to
approving any non-audit work, the
Committee considered the nature of the
services and concluded that the provision of
these services did not impair the
independence of the external auditor.
Internal audit
The Internal Audit function undertakes a
broad range of reviews across the Group,
providing independent assurance on the
design and effectiveness of internal control
processes and systems. Its purpose, authority
and responsibilities are codified in the
Internal Audit Charter, which the Committee
reviews annually.
The Internal Audit Director (whose
appointment is reserved for the Committee)
and the VP Internal Audit, BAE Systems, Inc.
attend Committee meetings to provide
regular insight into the effectiveness of risk
assessment and internal control and risk
management frameworks, as well as key
processes.
As a Committee, we review and approve
the Internal Audit plan and any subsequent
adjustments, ensuring appropriate resourcing
and alignment of the plan to the Group’s
Principal Risks and areas critical to the
operation of material controls. The plan
remains flexible and evolves to reflect
changes in the risk environment, with all
amendments presented to and agreed by
the Committee.
We also monitor the effectiveness of the
Internal Audit function through multiple
sources, including feedback from the annual
assessment, the quality and depth of Internal
Audit reports, direct interactions with the
Internal Audit Director and outputs from the
bi-annual OAS. Based on these evaluations,
the Committee is satisfied that the Internal
Audit function continues to operate
effectively.
Assessing the effectiveness of Internal Audit
| Who we surveyed to inform our assessment on the effectiveness of the Internal Audit function | ||||||||
| Executive Committee members |
Sector Leadership | Audit Review Board Chairs | Audit Committee members | |||||
| What we surveyed | ||||||||
| Purpose | People & Processes | Stakeholders Reporting | Areas of Improvement | |||||
| Outcome | ||||||||
| The Committee noted the feedback from the survey and were pleased with the positive comments. Overall, the feedback highlighted strong performance, professionalism, better alignment of audit plans to the Group’s risks and recent improvements in quality and impact of audits. The function is widely regarded and well respected, and respondents praised the team’s integrity, collaboration and commitment to high standards, as well as initiatives such as onboarding apprentices and enhancing career pathways. |
||||||||
| Strategic report | Governance | Financial statements | Additional information | 99 | ||
Overview of the process to ensure that the Group’s Annual Report, taken as a whole, is fair, balanced and understandable and
provides information necessary for shareholders to assess the Group’s position and performance, business model and strategy
| 1 | 2 | 3 | 4 | |||||||||||
| Fulsome guidance issued to all the contributors at an operational level. |
A verification and certification process dealing with the factual content of the reports. |
Thorough reviews undertaken at different levels in the Group that aim to ensure consistency and overall balance. |
A comprehensive review by the directors and the Executive Committee. |
|||||||||||
Financial statements
and narrative reporting
A core part of our remit is to oversee internal
and external assurance processes relating
to sustainability disclosures linked to the
financial statements, including those aligned
with TCFD. Following our assessment of
climate-related transition activities and
physical risks, the Committee concluded that
there was no material impact on the Group’s
Consolidated financial statements for the
year ended 31 December 2025. We will
continue to monitor this position closely as
part of our ongoing responsibilities.
This review forms part of our broader
oversight of significant matters relating to the
Annual Report, including the going concern
and viability statements. For the 2025 Annual
Report, the Committee assessed whether the
report is fair, balanced and understandable,
and whether it provides investors with the
information necessary to evaluate the
Group’s position, performance, business
model and strategy.
In agreeing the parameters of the going
concern statement, we reviewed supporting
reports (see page 73) and the Board’s
assessment of the Group’s prospects (see the
viability statement on page 73). These
assessments are underpinned by reasonably
plausible but severe downside scenarios
linked to the Group’s principal risks, including
their impact on future cash flows,
profitability, financial covenants, solvency and
liquidity. We also considered the period
covered by the viability statement and remain
of the view that a five-year horizon is most
appropriate, reflecting the business planning
cycle and the long-term nature of several
Group programmes.
To support our assessment of whether
the Annual Report and Accounts are fair,
balanced and understandable, the
Committee draws on a range of year-round
processes and specific verification activities.
We receive regular updates from
management on developments in financial
and non-financial reporting, the internal
control environment, key findings and
internal verification processes undertaken
during the Annual Report’s preparation.
Together, these processes enable the
Committee to evaluate the integrity and
completeness of disclosures within the
Annual Report. After careful review and
consideration of all relevant information,
the Committee was satisfied that, taken
as a whole, the 2025 Annual Report and
Accounts are fair, balanced and
understandable and we confirmed this view
to the Board.
The principal areas of judgement considered
concerning the 2025 financial statements are
set out below.
Margin recognition
The estimation of contract margin and the
level of revenue and profit to recognise in a
single accounting period requires the exercise
of management judgement. The Committee
reviewed key estimates and judgements
applied in determining the financial status
of the more significant programmes.
Pensions
Accounting for pensions and other post-
employment benefits involves making
estimates when measuring the Group’s
retirement benefit obligations. These
estimates require assumptions to be made
about uncertain events, such as discount
rates, inflation rates and longevity. As at
31 December 2025, a number of the Group’s
pension schemes remain in an accounting
surplus.
The Group has recognised the surpluses on
the basis that the future economic benefits
are unconditionally available to the Group.
These were recognised after deducting a
25% withholding tax, which would be levied
prior to the future refunding of any surplus,
and were presented on a net basis, as this is
not deemed to be an income tax of the
Group. We reviewed this presentation and
concluded that this estimate is appropriate
based on the Group’s current ability to access
its defined benefit surpluses.
We reviewed the methodology used to
allocate a proportion of the net post-
employment benefit surpluses to equity
accounted investments and concluded that
this continues to be appropriate with
reference to agreement between the
Company and the retirement benefit
schemes.
Taxation
Computation of the Group’s tax expense and
liability, the provisioning for potential tax
liabilities and the level of deferred tax asset
recognition are underpinned by
management judgement and estimation of
the amounts that could be payable.
Although the Board determines the tax
policy, we reviewed the Group’s tax strategy.
Twice during the year, we reviewed the
Group’s tax expense and tax provisions and
discussed these with the Group Tax Director.
Stephen Pearce
Chair of the Audit and Risk Committee
| 100 | BAE Systems plc Annual Report 2025 |
| Audit and Risk Committee report continued |
The Audit and Risk Committee’s year1
– Reviewed the Annual Report and Accounts
and specific disclosures, including viability
and going concern, for recommendation to
the Board.
– Received a presentation from the Group
Financial Controller and Group Treasurer in
respect of work supporting the viability and
going concern statements.
– Considered the accounting, financial
control and audit issues reported by the
external auditor that flowed from the year-
end audit work and half-year review work.
– Reviewed the effectiveness of the external
audit process.
– Received a report from the Group Tax
Director.
– Reviewed external auditor independence
and the nature and value of non-audit
services.
– Agreed the external audit engagement
letter.
– Considered outputs from the six-monthly
OAS reviews.
– Reviewed the Company’s compliance with
ESG reporting, including compliance with
TCFD. Considered development of ESG-
related disclosures, including climate
change and TCFD reporting requirements.
– Agreed the 2025 external audit plan and
scope.
– Agreed the external audit fee proposal.
– Considered any emerging accounting
issues prior to the half year.
– Reviewed the Non-Audit Services policy.
– Reviewed the nature and value of non-
audit services.
– Reviewed the ESG assurance map.
– Reviewed the Half yearly financial
statements and specific disclosures,
including going concern, for
recommendation to the Board.
– Conducted a deep dive into the Group’s
business ethics and received a report that
includes key indications in relation to
whistleblowing reports.
– Reviewed the effectiveness of the risk
management and internal control
framework and the overall risk profile of the
Group (including emerging risks), and
ratified the Group’s principal risks for
recommendation to the Board.
– Received updates on the preparation for
compliance in 2026 with the updated
Provision 29 of the Code.
– Agreed the Group’s provisional list of
material controls and the associated
assurance requirements for
recommendation to the Board.
– Reviewed improvements made to risk
management processes.
– Considered any emerging accounting
issues prior to the year end.
– Considered the external auditor’s controls
report.
– Considered the output of the Internal Audit
Director’s report.
– Considered and approved the Internal
Audit strategy, charter, mandate and
2026 audit plan.
- The Committee holds a quarterly session with the Internal Audit Director and external auditor without management present. The Audit and Risk Committee Chair
also meets with the Chief Financial Officer, the Internal Audit Director and the external auditor on an ad hoc basis.
| Strategic report | Governance | Financial statements | Additional information | 101 | ||
| Environmental, Social and Governance Committee report |
| Members during 2025 | Members since | |||
| Jane Griffiths (Chair) | September 2020 | |||
| Nick Anderson | November 2020 | |||
| Crystal E Ashby | September 2021 | |||
| Dame Elizabeth Corley | Retired February 2025 |
|||
| Stephen Pearce | January 2024 | |||
| Angus Cockburn | February 2025 |
We are continuing to
focus on resource efficiency,
developing energy and
infrastructure strategies
to reduce our GHG emissions
across our operations, while
supporting our business growth.
Jane Griffiths
Chair of the Environmental,
Social and Governance Committee
Dear Shareholders
I am pleased to present this report of the
Environmental, Social and Governance
Committee and provide a summary of our
activities during 2025.
The Committee provides oversight of the
management of business responsibility
matters, including climate, social and safety,
and the review of progress against objectives
and targets. Together with the Audit and Risk
Committee and the Remuneration
Committee, we support the Board in fulfilling
its responsibility to monitor and assess the
extent to which the Company’s desired
culture has been embedded across the
Group. This is achieved through our oversight
and assessment of the Group’s health and
safety culture, workplace environment,
anti‑corruption and ethical practices, and the
Group’s approach to engagement with its
supply chain and the local communities in
which it operates. The Committee’s Terms of
Reference can be found on the Company’s
website and provide further details of the
Committee’s responsibilities.
At each meeting, we reviewed and
challenged the updates from Executive
Committee members and senior leadership,
against delivery of the Group’s ESG
programme and various initiatives. During
the year, we met three times and, after each
Committee meeting, I reported to the Board
on the Committee’s activities, and the key
matters discussed along with any
recommendations from the Committee.
Environment and climate
transition
Environmental factors, including those
related to climate change, impacts three
of the Group’s principal risks. As such, climate
transition and climate resilience remained
an important area of discussion during our
meetings in 2025.
Following updates from the Environment,
Climate & Infrastructure Director, we were
able to better understand and provide insight
on the impact of climate change on the
Group’s activities to the Board. We also
discussed the various transition risks and
opportunities and considered areas such as
climate resilience and the potential disruption
to sites and facilities, and customer
operations.
We are pleased that the Group is making
good progress around our workstream of
building climate resilience. As reported in the
Group’s half-yearly results announcement,
we are continuing to focus on resource
efficiency, developing energy and
infrastructure strategies to reduce our GHG
emissions across our operations, while
supporting our business growth. Further
detail can be found on
Workplace environment
We discussed the various initiatives that were
undertaken throughout the year to create
and maintain a positive and welcoming
atmosphere, in line with the overall culture.
Strategic workforce planning was a
continued area of focus for the Board and,
at the Committee level, the workplace
environment remained one of our continued
priorities.
Employee and product safety have long been
key areas of focus for the Group, the Board
and this Committee. During the year, the
Committee reviewed the Group’s global
safety performance for 2025, presented by
our Group ESG, Culture & Business
Transformation Director. We were pleased
with the decrease in recordable injuries
during the year. In 2025, the recordable injury
rate was 432, which was a decrease of 6%
from 2024.
Achievement of improvements in both safety
and our approach to an inclusive workplace
are factors the Remuneration Committee
considered when determining whether to
apply any reduction to the annual incentive
plan for senior executives, subject to
applicable laws. The objectives may reduce
(but not increase) the incentive payments if
performance is not at the expected levels. We
help monitor, measure and determine the
level of performance achieved against all ESG
objectives and make a recommendation to
the Remuneration Committee.
Anti-corruption framework
We are committed to high standards of
business conduct and responsible behaviour.
Our Code of Conduct and Supplier Code of
Conduct outline clear expectations for all our
employees and suppliers. Our Code of
Conduct strictly prohibits any form of bribery
or corruption. Our ongoing anti-corruption
programme is designed to identify, manage
and mitigate corruption risks, supporting the
Group’s adherence to applicable legal and
regulatory requirements.
During the year, the Committee considered
the Group’s business practices in relation to
anti-corruption and noted the arrangements
and actions in place to ensure effective
oversight. Particular attention was paid
to controls that had been implemented to
manage anti-corruption risks, especially in
respect of the use of advisers.
A summary of our key policies can be found
on the Company’s website.
| 102 | BAE Systems plc Annual Report 2025 |
| Environmental, Social and Governance Committee report continued |
Supply chain
In the year, the Committee was updated on
the resilience of the supply chain, with a
particular focus on decarbonisation and
modern slavery.
In February 2025, the Committee reviewed
the Group’s policy on compliance with the
Company’s Modern Slavery Act statement.
The Committee reviewed the steps taken in
relation to the preparation of the Modern
Slavery Act statement (the “Statement”) and
concluded that the processes and policies in
connection with the Statement were robust
and effectively embedded in supply chain
processes.
The Company’s Statement is available
to view on the Company’s website.
Communities
The communities in which we operate and
the Group’s impact are regularly reviewed
by the Committee. During our meetings,
we discussed the community impact and
investments being made across the Group.
£5.8m was invested in STEM education
initiatives, £3.3m donated in support of
armed forces charities and heritage projects,
and £2.9m was provided to local community
projects.
Jane Griffiths
Chair of the Environmental, Social and
Governance Committee
The Environmental, Social and Governance Committee’s year
– Reviewed the Group’s approach to anti-
corruption compliance.
– Discussed the progress of the Group’s
environment and climate transition –
decarbonisation strategy.
– Received an update on the Group’s social
value activities, particularly in respect of
skills and education, communities and
employee wellbeing.
– Reviewed business conduct matters,
including the Company’s Modern Slavery
Act statement for in-scope entities.
– Reviewed the 2025 key strategic objectives
and approach for 2026.
– Considered the initial proposed objectives
and annual incentive targets for 2026.
| Strategic report | Governance | Financial statements | Additional information | 103 | ||
| Innovation and Technology Committee report |
| Members during 2025 | Members since | ||
| Ewan Kirk (Chair) | October 2021 | ||
| Nick Anderson | October 2021 | ||
| Dame Elizabeth Corley | Retired November 2025 |
||
| Nicole Piasecki | October 2021 |
We engaged with a broad
range of colleagues, which
highlighted both the strength
of the innovation culture
and the depth of the talent
pipeline being developed
across the organisation.
Ewan Kirk
Chair of the Innovation
and Technology Committee
Dear Shareholders
In this report, I provide a summary of our key
discussions over the past year and the insights
gained. During the year, we held two
meetings: a site visit to our MBDA joint
venture and a teach‑in session focused on the
Company’s LCM framework.
Overview of activities
Our site visit enabled us to explore the
evolving landscape of our business
operations, shaped by shifting geopolitics,
customer expectations, technology
investments and the Group’s overall strategic
direction. We engaged with a broad range of
colleagues from the executive team to
early‑career professionals, which highlighted
both the strength of the innovation culture
and the depth of the talent pipeline being
developed across the organisation.
Demonstrations during the visit provided
valuable visibility into emerging technologies,
their capabilities and the opportunities they
present for efficiency and enhanced
performance.
Following discussions throughout the year on
various programmes and bids, we undertook
an in‑depth briefing on the Group’s LCM
framework. This session offered a clearer
understanding of the governance and risk
management approach applied at each stage
of LCM. We were particularly keen to explore
the extent of agility within the process,
recognising that different projects may
require tailored approaches within the
established framework. We were reassured
to learn how the process can be adapted to
ensure an appropriate and proportionate
application for each project.
Evolution of the Committee
During the year, the Board undertook a
review of the role of the Committee within
the context of its broader responsibilities.
Since its inception, the Committee has
provided effective oversight of the Group’s
application of science, engineering and
technology and has supported the successful
use of our intellectual property and
know‑how in pursuit of our commercial
objectives. The Committee’s programme of
site visits and “deep dives” has enabled
Committee and Board members to get a
better understanding of the Group’s
technologies, innovation culture and
alignment with the Group’s strategic
priorities. Over time, these activities have
increasingly been attended by the full Board,
reflecting the importance and broader
interest in these topics.
As noted by the Chair at the start of this
report, the Board has taken the decision to
disband the Committee, believing that a
more impactful and richer interaction can be
achieved through an alternative approach to
the Board’s engagement with technology
and innovation. From 2026, although the
Committee will no longer be operational, my
responsibilities in supporting the Board Chair
in shaping agenda items for Board discussion
on technology, engineering and science
related matters will continue. In addition, I
will engage with subject matter experts from
the senior management team to identify and
review key areas of technological focus in
support of our strategy. I will also provide
independent oversight on these matters as
they are prepared for Board discussion.
I would like to express my gratitude to my
fellow Committee members for their
contributions and the executive colleagues
who have facilitated our site visits, technology
reviews and provided thoughtful and
engaging discussions throughout the year.
Ewan Kirk
Chair of the Innovation
and Technology Committee
| 104 | BAE Systems plc Annual Report 2025 |
| Remuneration Committee report |
| – Group underlying EPS up 12% – Free cash flow of over £2bn in 2025 – Group order intake of £36bn – TSR of 136% over three years |
| Members during 2025 | Members since | ||
| Nicole Piasecki (Chair) | May 2022 | ||
| Angus Cockburn | January 2024 | ||
| Dame Elizabeth Corley | Retired November 2025 |
||
| Ewan Kirk | March 2023 |
| Contents | ||||
| Remuneration Committee report | 104 | |||
| Quick read summary | 106 | |||
| 2026 remuneration framework | 111 | |||
| Annual remuneration report | 112 |
Remuneration Committee
We achieve our objectives with an
executive remuneration programme that:
– offers competitive pay that enables us to
retain and attract top talent;
– emphasises pay for performance that
drives superior financial results and value
creation;
– provides strong alignment with the
interests of our shareholders;
– mitigates unnecessary and excessive risk-
taking; and
– considers the needs of our entire
workforce.
Dear Shareholders
On behalf of the Board, I am pleased to
present the Remuneration Committee’s
report for 2025.
The Remuneration Committee is responsible
for determining the policy for, and setting,
directors’ remuneration to support strategy
and sustainable success. A new
Remuneration policy was approved by
shareholders at the 2025 AGM, with more
than 97% of votes in favour. Thank you for
your support, which has helped us to retain
key employees and strengthen the link
between pay and performance. A summary
of the new remuneration policy is included
on page 109 with a full copy on the
This report discloses the performance and
operation of the Remuneration policy, and
the resulting remuneration outcomes for
2025, including decisions made by the
Committee. The ‘quick read’ section on pages
106 to 108 summarises the outcomes for
each remuneration element and the resulting
total remuneration for each executive
director.
Pay and performance in 2025
BAE Systems has delivered another year
of strong operational and financial
performance, with each of our key
performance indicators exceeding target.
Within this context, the Committee has
determined the following outcomes for the
annual bonus and long-term incentive plans
for performance periods ended 31 December
2025.
Annual bonus
75% of executive directors’ annual bonus
opportunity is determined by financial
performance and 25% by the achievement of
key strategic objectives.
The financial performance measures are
linked to our strategy to sustain and grow our
business and deliver growth in shareholder
value. The performance targets are set in line
with the IBP, around which an appropriate
range is set for threshold (below which no
bonus is paid) and stretch (at which
maximum bonus is paid) to ensure sufficient
challenge without motivating excessive risk-
taking.
For 2025, the Group financial outcomes for
earnings, cash and order intake exceeded
stretch, and most of the key strategic
objectives were achieved, resulting in annual
bonus outcomes near maximum for the
executive directors.
The Committee is required to assess bonus
outcomes against a range of factors beyond
the specific performance measures, including
overall business performance, safety record
and workforce culture. The Committee
retains discretion to apply downward
moderation where circumstances warrant,
though not to increase awards above the
formulaic outcome. Having reviewed the
2025 results holistically, the Committee
concluded that the formulaic bonus
outcomes are appropriate and require no
adjustment.
The annual bonus performance measures
and outcomes are shown on page 114. Two-
thirds of the bonus amount will be paid in
cash and one-third is deferred into shares for
a further three years (until 2029) in
accordance with our Remuneration policy.
Long-term incentive
Performance Shares granted to executive
directors in 2023 are dependent upon EPS
growth, cash flow, total shareholder return
(TSR) out-performance, return on capital
employed (ROCE) and ESG.
For the three-year performance period ended
31 December 2025, TSR grew by 136%
making BAE Systems one of the highest
performing shares in the FTSE 100. Average
annual EPS growth was 11.9% per annum,
with free cash flow of £7.5bn over the period,
ROCE of 26.7%, and resource efficiencies
achieved through the reduction in GHG
emissions by 25%, exceeding the stretch
targets set for these objectives in 2023.
Accordingly, the Performance Shares have
vested at 100% of maximum for each of the
executive directors.
The Committee assessed the formulaic
vesting calculations in the context of overall
business performance, competitive
performance and the macroeconomic
environment. The Committee concluded that
the vesting outcomes appropriately reflect
the Company’s strong performance over the
period and determined that no adjustments
are necessary.
| Strategic report | Governance | Financial statements | Additional information | 105 | ||
| For the three-year performance period ended 31 December 2025, TSR grew by 136% making BAE Systems one of the highest performing shares in the FTSE 100. |
The long-term incentive performance
measures and outcomes are shown on page
116. The release of shares is deferred for a
further two-year period, so that shares vest
five years after grant for UK-based executive
directors and in three equal tranches on the
third, fourth and fifth anniversaries of grant
for the US executive director.
Wider workforce
The policies and practices applying to the
wider workforce are broadly the same as
those applying to executive directors,
although quantum and participation may
vary by location and grade. The Committee
actively reviews and considers wider
workforce pay before determining executive
director remuneration.
During 2025, pay increases for employees
across our operating locations were in line
with their local competitive markets. UK
employees received average base pay
increases of between 3% and 3.6% (UK-
based executive directors received 3%). The
average increase for US employees was 4%
(and the US executive director received 4%).
Most employees are eligible to receive a
performance-related bonus and may also
receive life insurance, ill-health insurance,
medical and wellbeing benefits, shopping
discounts and access to a 24/7/365 days
employee assistance programme. In the UK,
there is also a financial assistance facility
through a credit union owned and operated
by BAE Systems’ employees and retirees.
Employee retirement plans vary by location.
UK employees participate in the Company’s
defined contribution or defined benefit
pension arrangements, with a Section 401(k)
plan in the US, and superannuation plans in
Australia.
Long-term incentive share awards are
granted each year to around 800 employees,
mostly senior executives (to three reporting
levels below the executive directors) plus
selected high-performing and high-potential
employees whose specialist skills and
innovation we want to retain.
In addition, employees in participating
countries can become shareholders in BAE
Systems plc through an annual award of
shares dependent upon group financial
performance, worth up to £613 in 2025, with
a further £638 of shares to be awarded to
each eligible employee in 2026. They can also
acquire further shares, including free
matching shares, through the UK and
International all-employee Share Incentive
Plans.
Executive director pay in 2026
With effect from 1 January 2026, the UK
executive directors received base pay
increases of 3%, and the US executive
director received a base pay increase of 4%,
each in line with the average percentage
increase for the wider workforce in the same
locality.
Pension contributions for Brad Greve in 2025
were 9% of base pay, but increased to 10%
of base pay with effect from 1 January 2026,
aligned with the increase in employer
contributions for the UK workforce.
The annual bonus structure and opportunity
for executive directors remains unchanged
for 2026, with the financial performance
measures based on earnings, cash and order
intake, with key strategic objectives linked to
the delivery of the Group’s strategic priorities.
The long-term incentive plan performance
measures for 2026 will continue to include
EPS, cash, TSR and ROCE. Since 2023,
reduction of GHG emissions has also formed
part of our long-term incentive framework.
In 2026 grants, we will replace the GHG
measure with an operational delivery metric,
reflecting our commitment to meeting
customer requirements and expanding
production capacity in response to evolving
defence priorities (see page 117).
Committee changes
Dame Elizabeth Corley retired from the Board
and this Committee in November 2025, after
nine years of dedicated service. I would like to
thank Elizabeth for her knowledge, insight
and challenge, which have helped the Group
navigate complex matters and achieve great
results.
In conclusion
The Company delivered strong performance
in 2025, and we are proud that employees
across the organisation shared in that success.
As global military demand and capability
requirements continue to grow and intensify,
we remain committed to setting ambitious
targets that drive both operational excellence
and shareholder value, underpinned by
robust governance principles.
I trust that you will find this report
a clear and comprehensive account of the
Committee’s deliberations and decisions
regarding directors’ remuneration,
demonstrating our commitment to
transparency and sound governance
practices. Thank you for your continued
confidence in our strategy and your
investment in our shared future.
On behalf of the Board
Nicole Piasecki
Chair of the Remuneration Committee
| Summary of key decisions and outcomes – 2026 base pay increases are 3% for the UK executive directors and 4% for the US executive director, each in line with the wider workforce in the same locality. – 2025 annual bonus outcomes for executive directors are 99.5% of maximum. – Performance Shares granted in 2023 will vest at maximum. – The Remuneration policy has operated as intended throughout the year in the context of Group performance and overall pay outcomes, with no malus or clawback applied in the last financial year. |
||
| 106 | BAE Systems plc Annual Report 2025 |
| Quick read summary |
Remuneration policy summary and 2025 implementation
This section summarises the key features of the current Remuneration policy approved by shareholders
at the 2025 AGM. Please refer to the 2024 Annual Report (available on the Company’s website) for full details.
| Remuneration element and time horizon |
Policy summary | 2025 implementation |
Base pay
Operation
Base pay is reviewed annually, usually with effect
from 1 January, taking into account; the scope of
the role; the individual’s skills, experience and
performance; competitive market data; pay and
conditions elsewhere in the Group; and overall
business performance. There is no obligation to
increase base pay upon any such review.
Opportunity
There is no maximum base pay, but ordinarily any
increases will not exceed the average percentage
increase for the wider workforce in the same
locality.
Performance
Personal performance will be taken into
consideration.
| Base pay | Effective 1 January 2025 |
Effective 1 January 2026 |
2026 % increase |
| Charles Woodburn | £1,270,800 | £1,309,000 | 3% |
| Brad Greve | £807,500 | £832,000 | 3% |
| Tom Arseneault | $1,189,000 | $1,236,560 | 4% |
| UK workforce (average) | 3% - 3.5% | ||
| US workforce (average) | 4% |
Pension
Operation
UK-based executive directors may participate in the
defined contribution pension plan, receive a cash
allowance in lieu, or some combination thereof. US-
based executive directors may participate in the US
defined benefit pension plans and US Section
401(k) defined contribution plan. Base pay is the
only element of pensionable remuneration.
Opportunity
The maximum employer contribution for the Chief
Executive is aligned with the weighted average
available to the UK workforce (14% of base pay).
The maximum employer contribution for the Chief
Financial Officer and any other new UK-based
executive director is the level available to the
majority of UK defined contribution plan members
(9% of base pay in 2025, increased to 10% of base
pay from 1 January 2026). The maximum annual
accrual for the US defined benefit pension plan is
$1,500 and the maximum 401(k) contribution is
6% of base pay, capped at applicable US regulatory
limits.
Performance
No performance conditions.
| Pension contributions | During 2025 (% of base pay) |
Effective 1 January 2026 (% of base pay) |
| Charles Woodburn | 14% | 14% |
| Brad Greve | 9% | 10% |
| Tom Arseneault | US DB + 401(k) | US DB + 401(k) |
| See Page 113 |
Benefits
Operation
In line with other employees and senior executives,
appropriate to the market to assist employees in
their duties and to ensure their safety and security.
Opportunity
The maximum value is the actual cost of providing
the benefits, subject to the limits of those benefit
plans and any tax or regulatory limits.
Performance
No performance conditions.
| Benefits during 2025 include: |
| – Transportation |
| – Financial and tax support |
| – Medical and other insured benefits |
| See Page 113 |
| Strategic report | Governance | Financial statements | Additional information | 107 | ||
| Remuneration element and time horizon |
Policy summary | 2025 implementation |
Annual incentive plan
Operation
Performance is assessed over a one-year period.
Performance measures are aligned with the
Group’s strategic priorities, with appropriately
stretching targets. Two-thirds of any bonus award
is paid in cash, with one-third of the total net bonus
deferred into shares for three years.
Opportunity
Nil bonus for performance below threshold; 25%
of maximum at threshold; 50% of maximum at
target; 100% of maximum at stretch; with payout
on a straight-line basis for performance between
these points.
Performance
A combination of financial performance (with at
least 75% weighting) and key strategic objectives.
Malus and clawback applies to cash awards and
deferred shares.
| Annual incentive | At maximum (% of base pay) |
Actual 2025 (% of max) |
Actual 2025 (£/$) |
| Charles Woodburn | 225% | 99.5% | £2,845,003 |
| Brad Greve | 200% | 99.5% | £1,606,925 |
| Tom Arseneault | 225% | 99.5% | $2,661,873 |
2025 performance measures
| A | EPS/Earnings | 45% | ||
| B | Cash | 22.5% | ||
| C | Order intake | 7.5% | ||
| D | Key strategic objectives | 25% | ||
| 100% | ||||
Long-term incentives
Performance Shares
Restricted Shares
(US executive director
Operation
Performance Shares have a performance period of
three years, plus a further two-year deferral period.
For UK-based executive directors the shares vest
five years after grant and for the US executive
director the shares vest in three equal tranches on
the third, fourth and fifth anniversaries of grant.
The US executive director also receives Restricted
Shares, subject to remaining employed for three
years from the grant date, with a requirement to
retain those shares for a further two-year clawback
period.
Opportunity
Nil vesting for performance below threshold; 25%
of maximum at threshold; 50% of maximum at
target; 100% of maximum at stretch; with vesting
on a straight-line basis for performance between
these points.
Performance
For Performance Shares, an appropriate mix of
financial and other measures linked to long-term
strategic priorities. Malus and clawback applies.
| Performance Shares | Maximum opportunity (% of base pay) |
2023 grant (% of base pay) |
Vesting of 2023 awards based on performance period ended 2025 (% of max) |
| Charles Woodburn | 500% | 370% | 100% |
| Brad Greve | 400% | 335% | 100% |
| Tom Arseneault | 440%1 | 440%1 | 100% |
- plus Restricted Shares awarded at 150% of base pay.
2023 grant performance measures (performance period ended 2025)
| A | EPS | 30% | ||
| B | Cash | 30% | ||
| C | TSR | 15% | ||
| D | ROCE | 15% | ||
| E | ESG | 10% | ||
| 100% |
2025 grant performance measures
| A | EPS | 30% | ||
| B | Cash | 30% | ||
| C | TSR | 15% | ||
| D | ROCE | 15% | ||
| E | ESG | 10% | ||
| 100% |
Minimum
Shareholding
Requirement (MSR)
To ensure long-term commitment and investment
in the Company, aligning executive pay with
shareholder returns. Executive directors may not
sell, except for tax, any vested shares until their MSR
is met in full and must maintain their post-
employment MSR for at least two years after
leaving employment with the Group (one year for
the US executive director).
| Full MSR (% of base pay) |
Post-employment MSR (% of base pay) |
Actual shareholding 31 December 2025 (% of base pay) |
|
| Charles Woodburn | 500% | 500% for two years |
1,280% |
| Brad Greve | 400% | 400% for two years |
579% |
| Tom Arseneault | 425% | 300% for one year |
2,403% |
| 108 | BAE Systems plc Annual Report 2025 |
| Quick read summary continued |
2025 performance outcomes
| Actual performance against targets | Weighting | |||||||||
| Annual bonus | Threshold | Target | Stretch | Actual performance |
UK executive directors |
US executive director |
% of maximum achieved |
|||
| l | Group underlying EPS | 67.5p | 71.1p | 73.2p | 76.0p | 45% | 15% | 100% | ||
| l | Group free cash flow | £349m | £599m | £1,099m | £2,213m | 22.5% | 7.5% | 100% | ||
| l | Group order intake | £24.3bn | £25.6bn | £26.9bn | £36.4bn | 7.5% | 2.5% | 100% | ||
| l | Inc. underlying EBIT | $2,160m | $2,280m | $2,355m | $2,474m | 30% | 100% | |||
| l | Inc. free cash flow | $636m | $786m | $1,086m | $1,890m | 15% | 100% | |||
| l | Inc. order intake | $14.64bn | $15.40bn | $16.16bn | $21.11bn | 5% | 100% | |||
| l | Key strategic objectives | See page 113 |
25% | 25% | 98% | |||||
| 100% | 100% | 99.5% | ||||||||
| Long-term incentives | ||||||||||
| l | Annual average EPS growth (3-year) | 3% p.a. | 5% p.a. | 7% p.a. | 11.9% p.a. | 30% | 30% | 100% | ||
| l | Free cash flow | £3.8bn | £4.0bn | £4.5bn | £7.5bn | 30% | 100% | |||
| l | Inc. operating cash flow | $4.41bn | $4.54bn | $4.91bn | $5.8bn | 30% | 100% | |||
| l | TSR vs FTSE 100 | 34.1% (median) |
97.5% (80th percentile) |
136.8% | 15% | 15% | 100% | |||
| l | ROCE | 19.20% | 19.45% | 19.70% | 26.73% | 15% | 15% | 100% | ||
| l | ESG (reduction in GHG emissions) | 5% | 12.6% | 14% | 25% | 10% | 10% | 100% | ||
| 100% | 100% | 100% |
| See page 115 |
| Key | l | Below target | l | Between target and stretch | l | At or exceeds stretch |
Note: Actual results have been adjusted to be on a comparable basis with the targets, including alignment of foreign exchange rates. Free cash flow for the
annual bonus is measured on a quarterly basis, with achievement reflecting performance throughout the year.
Total remuneration
The charts below show the breakdown of total remuneration received by the executive directors for 2024 and 2025, and their maximum
total remuneration opportunity for 2025.
Charles Woodburn
(£’000)
Brad Greve
(£’000)
Tom Arseneault
(£’000)
| Fixed (base pay, benefits and pension) | |||
| Annual incentive plan | |||
| Performance Shares | |||
| Other (Restrictive Shares, Free Shares and Matching Shares in the all-employee Share Incentive Plan) |
The values for the Performance Shares vested in 2024 and disclosed in the 2024 Annual Report were based on the three-month average share price to
31 December 2024 (£12.665). The value of the tranche vesting in 2025 for Tom Arseneault has been restated to reflect the actual share price at vesting on 24
March 2025 (£15.94). The totals for Charles Woodburn and Brad Greve include £1,000 (rounded) classified as ‘Other’ representing the value of shares
acquired through the all-employee Share Incentive Plan (SIP).
| Strategic report | Governance | Financial statements | Additional information | 109 | ||
| Remuneration policy summary |
The policy table below summarises key aspects of the remuneration policy approved by shareholders at the 2025 AGM.
The full remuneration policy was published in the 2024 Annual Report which is available on the Company’s website.
| Base pay | Pension | Benefits | Annual incentive plan (AIP) | ||||
| Purpose and link to strategy | Purpose and link to strategy | Purpose and link to strategy | Purpose and link to strategy | ||||
| Provides a fixed level of earnings, appropriate to the market and requirements of the role. |
Provides a basis for an income in retirement. |
Provides benefits and allowances appropriate to the market to assist employees in their duties and to ensure their safety and security. |
Incentivises and rewards the achievement of annual financial performance and the delivery of key strategic objectives. |
||||
| Operation | Operation | Operation | Operation | ||||
| Reviewed annually, usually with effect from 1 January, taking into account: – the scope of the role; – the individual’s skills, experience and performance; – competitive market data; – pay and conditions elsewhere in the Group; and – overall business performance. There is no obligation to increase base pay upon any such review, and any decision to increase base pay will take into account the associated impact on overall quantum. |
UK-based executive directors may: – participate in the defined contribution pension plan; – receive a cash allowance in lieu; or – some combination thereof. US based executive directors may participate in: – the US defined benefit pension plans; and – US Section 401(k) defined contribution plan. Base pay is the only element of pensionable remuneration. |
In line with other employees, benefits may include: – health allowance, including medical and dental benefits; – life insurance; – ill-health and disability insurance; – financial and tax support; and – all-employee Share Incentive Plan participation. In line with other senior executives, executive directors may receive a non-pensionable cash allowance in lieu of a company car. From time to time, the executive directors may use a chauffeur-driven car and a company aircraft. |
In normal circumstances: – performance is assessed over a one‑year period; – performance measures and weightings are set each year, to be relevant and aligned with the Group’s strategic priorities; – performance targets are set to be appropriately stretching, taking into account forecasts in the business plan, budgets, prior- year performance and market expectations; – bonus awards are determined after the end of the performance period, taking into consideration performance against targets and individual performance; – two-thirds of any bonus award is paid in cash, with one-third of the total net bonus deferred into shares for three years, with dividends or dividend equivalents paid during the deferral period; and – malus and clawback applies to cash awards and deferred shares. |
||||
| Opportunity | Opportunity | Opportunity | Opportunity | ||||
| There is no maximum base pay, but ordinarily any increases will not exceed the average percentage increase for the wider workforce in the same locality. In specific circumstances, the Committee may award increases above this level, for example where: – base pay for a recently appointed executive director has been set with a view to allowing progression in the role over time; or – there has been a significant increase in the size or scope of an executive director’s role or responsibilities. |
The maximum employer contribution for the: – Chief Executive is aligned with the weighted average available to the UK workforce. – Chief Financial Officer and any other new UK-based executive director is the level available to the majority of UK defined contribution plan members. – President and Chief Executive Officer of BAE Systems, Inc. maximum annual accrual for the US defined benefit pension plans is $1,500 and the maximum 401(k) contribution is 6% of base pay, capped at applicable US regulatory limits. |
The maximum value is the actual cost of providing the benefits which, for insured benefits, may vary from year to year. The maximum opportunity for the all- employee Share Incentive Plan is the same for all participants, capped at applicable UK HMRC limits. |
The maximum opportunity for the: – Chief Executive is 225% of base pay; – Chief Financial Officer and any other UK-based executive director is 200% of base pay; – President and Chief Executive Officer of BAE Systems, Inc. is 225% of base pay. The performance payout range is: – nil bonus for performance below threshold; – 25% of maximum at threshold; – 50% of maximum at target; and – 100% of maximum at stretch; with – payout on a straight-line basis for performance between these points. The Committee will consider the calculated outcome in the context of a range of factors (not just the specific performance measures) including overall business performance, safety and workforce culture, and may apply a ‘bonus moderator’ to reduce (but not increase) the bonus if there are any factors that warrant a reduction. |
||||
| Performance | Performance | Performance | Performance | ||||
| Personal performance will be taken into consideration in determining any base pay increase. |
No performance conditions. | No performance conditions. | A combination of: – financial performance (with at least 75% weighting); and – key strategic objectives. |
| 110 | BAE Systems plc Annual Report 2025 |
| Remuneration policy summary continued |
| Long-term incentives (LTI) | Minimum shareholding requirement (MSR) | Non-executive director (NED) fees | |||
| Purpose and link to strategy | Purpose and link to strategy | Purpose and link to strategy | |||
| Provides a direct and transparent link between executive pay and the delivery of long-term performance. |
Ensures long-term commitment and investment in the Company, aligning executive pay with shareholder returns. |
Provides an appropriate reward to attract and retain high-calibre NEDs with the relevant skills, knowledge and experience. |
|||
| Operation | Operation | Operation | |||
| Performance Shares: – a performance period of three years, plus a further two-year deferral period; – for UK-based executive directors, shares vest five years after grant; for the US executive director, shares vest in three equal tranches on the third, fourth and fifth anniversaries of grant; – performance measures and weightings are set each year, to be relevant and aligned with the delivery of shareholder returns over the long term; – performance targets are set to be appropriately stretching, taking into account forecasts in the strategic plan, prior performance and market expectations; – dividends or dividend equivalents accrue during the performance and deferral periods based on the number of shares that have vested, but excluding any shares that have lapsed; and – malus and clawback applies. Restricted Shares: – for US executive director only, subject to remaining employed for three years from the grant date, plus a further two-year clawback period; and – notional reinvested dividends accrue during the vesting period. |
Executive directors may not sell, except for tax, any vested shares until their MSR is met in full. Executive directors must maintain their MSR (or their actual shareholding at the date of leaving, if lower) for at least two years after leaving employment with the Group (one year for the US executive director). The sale of shares prior to the MSR being met may be permitted in extenuating situations, for example, a change to personal circumstances, ill health, etc. |
NED fees are determined by the Chair and executive directors. NEDs receive a base fee, with an additional fee for: – the Senior Independent Director (SID); – Committee Chair (except Nominations Committee); and – Committee membership (except Nominations Committee). The Chair’s fee is determined by the Committee. NED and Chair fees are reviewed periodically, taking into account: – responsibility of each role; – time commitment; – practice in other comparable companies; and – the average increase for the wider workforce. |
|||
| Opportunity | Opportunity | Opportunity | |||
| The maximum Performance Shares annual grant for the: – Chief Executive is 500% of base pay; – Chief Financial Officer and any other UK-based executive director is 400% of base pay; – President and Chief Executive Officer of BAE Systems, Inc. is 440% of base pay. The performance payout range for Performance Shares is: – nil vesting for performance below threshold; – 25% of maximum at threshold; – 50% of maximum at target; and – 100% of maximum at stretch; with – vesting on a straight-line basis for performance between these points. The Committee will assess the formulaic vesting calculation, and may amend the vesting outcome in the context of a range of factors including overall business and share price performance. The President and Chief Executive Officer of BAE Systems, Inc. additionally receives an annual grant of Restricted Shares equivalent to 150% of base pay. There are no performance conditions for Restricted Shares, other than continued employment for at least three years from the grant date with a further two-year clawback period. |
The Minimum Shareholding Requirement (comprising shares owned outright) for the: – Chief Executive is 500% of base pay; – Chief Financial Officer and any other UK-based executive director is 400% of base pay; – President and Chief Executive Officer of BAE Systems, Inc. is 425% of base pay. Post-employment shareholding requirements for the: – Chief Executive is 500% of base pay for two years; – Chief Financial Officer and any other UK-based executive director is 400% of base pay for two years; – President and Chief Executive Officer of BAE Systems, Inc. is 300% of base pay for one year. |
There is no cap on the amount of NED fees payable, but fees are reviewed periodically taking account of the factors listed above and may be increased at appropriate intervals. NEDs are not eligible to participate in any Company pension arrangements or any performance-related incentives. The Chair may be provided with a chauffeur- driven car. This may be used for non-Company business, providing that the cost of the benefit is paid for by the Chair. Travel and subsistence expenses (including any associated tax cost) incurred on Company business by a director or their accompanying partner may be reimbursed. Directors’ and Officers’ insurance cover is provided. |
|||
| Performance | Performance | Performance | |||
| For the Performance Shares, an appropriate mix of financial and other measures based on the key performance indicators that drive our financial ambitions, linked to long-term strategic priorities with the majority determined by financial metrics. |
Not applicable. | No performance conditions. |
| Strategic report | Governance | Financial statements | Additional information | 111 | ||
| 2026 remuneration framework |
The table and charts below provide an overview of the 2026 remuneration framework for the executive directors.
| Charles Woodburn Chief Executive |
Brad Greve Chief Financial Officer |
Tom Arseneault President and Chief Executive Officer of BAE Systems, Inc. |
||||
| Base pay | £1,309,000 | £832,000 | $1,236,560 | |||
| Pension and benefits |
Pension | Defined contribution (14% of base pay) |
Defined contribution (10% of base pay) |
US defined benefit and Section 401(k) defined contribution |
||
| Benefits | Transportation Financial and tax support Medical and other insured benefits |
|||||
| Annual incentive | Target / maximum opportunity (% base pay) |
112.5% / 225% | 100% / 200% | 112.5% / 225% | ||
| Deferral | One-third deferred into shares for three years | |||||
| Performance Shares | Grant (% base pay) | 500% | 400% | 440% | ||
| Vesting | Three-year performance period, plus a further two-year deferral, vests in year 5 |
Three-year performance period with vested shares released one-third in years 3, 4, and 5 |
||||
| Restricted Shares | Grant (% base pay) | n/a | 150% | |||
| Vesting | n/a | Three-year service condition plus two-year clawback period |
||||
| Minimum Shareholding Requirement |
In-employment (% base pay) | 500% | 400% | 425% | ||
| Post-employment (% base pay) | 500% for two years | 400% for two years | 300% for one year | |||
Total remuneration – fixed and variable (at maximum)
Charles Woodburn
Chief Executive
| A | Fixed | 14% | |||||
| Base pay | 12% | ||||||
| Pension/benefits | 2% | ||||||
| B | Variable and other | 86% | |||||
| Annual incentive | 27% | ||||||
| Performance Shares | 59% |
Brad Greve
Chief Financial Officer
| A | Fixed | 16% | ||||
| Base pay | 14% | |||||
| Pension/benefits | 2% | |||||
| B | Variable and other | 84% | ||||
| Annual incentive | 28% | |||||
| Performance Shares | 56% |
Tom Arseneault
President and Chief Executive Officer
of BAE Systems, Inc.
| A | Fixed | 12% | ||||
| Base pay | 11% | |||||
| Pension/benefits | 1% | |||||
| B | Variable and other | 88% | ||||
| Annual incentive | 24% | |||||
| Performance Shares | 48% | |||||
| Restricted Shares | 16% |
| 112 | BAE Systems plc Annual Report 2025 |
| Annual remuneration report |
How our approach to remuneration aligns with strategy
Our remuneration approach has been designed to incentivise and reward delivery of the Group strategy and the achievement of long-term
sustainable performance. In accordance with the provisions of the UK Corporate Governance Code 2024 (the Code), the Committee has
continued to consider our approach to executive remuneration to ensure that our policies, structures and performance measures have clear
strategic rationale.
The Committee considers it important that the performance measures for the annual incentive and long-term incentive arrangements are
directly aligned to the Group’s KPIs and other strategic priorities, as shown in the table below.
| Alignment with the Group’s KPIs and other strategic objectives | ||||||||||||
| Group KPIs and strategic objectives |
Earnings per share (EPS) |
Cash | Order intake | TSR | ROCE | Environmental, social and governance |
Key strategic objectives | |||||
| Links to strategy | ||||||||||||
| Annual incentive | 45% | 22.5% | 7.5% | 25% | ||||||||
| Long-term incentive | 30% | 30% | 15% | 15% | 10% | |||||||
| Links to strategy | |||||||
| Sustain and grow our defence business. Continue to grow our business in adjacent markets. |
Develop and expand our international business. Inspire and develop our workforce to drive success. |
Enhance financial performance and deliver sustainable growth in shareholder value. Advance and integrate our sustainability agenda. |
|||||
‘Single figure’ of remuneration – executive directors (audited)
The following table shows the single total figure of remuneration for each executive director in respect of qualifying services for the 2025
financial year, together with comparatives for 2024.
| Fixed | Variable | ||||||||||||
| LTI1 | |||||||||||||
| Base pay | Benefits | Pension | Total fixed |
AIP | Face value | Share appreciation |
Total LTI |
Other2 | Total variable |
Total | |||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||
| 2025 | |||||||||||||
| Charles Woodburn | 1,271 | 41 | 178 | 1,490 | 2,845 | 4,368 | 3,693 | 8,061 | 1 | 10,907 | 12,397 | ||
| Brad Greve | 808 | 37 | 72 | 917 | 1,607 | 2,513 | 2,124 | 4,637 | 1 | 6,245 | 7,162 | ||
| Tom Arseneault | 902 | 72 | 14 | 988 | 2,018 | 3,931 | 3,280 | 7,211 | 2,667 | 11,896 | 12,884 | ||
| 2024 | |||||||||||||
| Charles Woodburn | 1,234 | 42 | 173 | 1,449 | 2,734 | 4,014 | 3,483 | 7,497 | 1 | 10,232 | 11,681 | ||
| Brad Greve | 784 | 38 | 63 | 885 | 1,544 | 2,042 | 1,772 | 3,814 | 1 | 5,359 | 6,244 | ||
| Tom Arseneault | 895 | 50 | 15 | 960 | 1,977 | 2,222 | 2,286 | 4,508 | 1,339 | 7,824 | 8,784 |
- The 2025 values for LTI are calculated based on the three-month average share price to 31 December 2025 (£17.991) as these awards are yet to vest. The
vesting values for 2024 were based on the three-month average share price to 31 December 2024 (£12.665) but the value of the tranche vesting in 2025
for Tom Arseneault has been restated to reflect the actual share price at vesting on 24 March 2025 (£15.94).
- Other includes the value of shares acquired through the all-employee Share Incentive Plan (SIP) comprising £638 Free Shares for Charles Woodburn and
Brad Greve in 2025, and £786 Matching Shares from their voluntary investment in the SIP; and the value at grant of the 2025 Restricted Shares award for
Tom Arseneault (150% of base pay).
Tom Arseneault is paid in US dollars with the disclosed figures for 2025 converted to pounds sterling at the average exchange rate for 2025.
| Strategic report | Governance | Financial statements | Additional information | 113 | ||
Base pay (audited)
| Base pay for 2025 and 2026 | |||||
| Effective 1 January 2025 | Effective 1 January 2026 | % increase | |||
| Charles Woodburn | £1,270,800 | £1,309,000 | 3% | ||
| Brad Greve | £807,500 | £832,000 | 3% | ||
| Tom Arseneault | $1,189,000 | $1,236,560 | 4% | ||
Benefits (audited)
| Transportation1 | Financial and tax support | Medical and other insured benefits2 |
Total | ||||||||
| 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | ||||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||||
| Charles Woodburn | 25 | 26 | 8 | 8 | 8 | 8 | 41 | 42 | |||
| Brad Greve | 21 | 22 | 8 | 8 | 8 | 8 | 37 | 38 | |||
| Tom Arseneault | 41 | 19 | 12 | 12 | 19 | 19 | 72 | 50 |
- Transportation benefits include company car or cash allowance and deemed private use of chauffeur-driven car for UK executive directors, and deemed
private use of chauffeur‑driven car and company aircraft for the US executive director.
- Medical and other insured benefits include private medical insurance and other insured benefits for UK executive directors, and private medical and
executive medical benefits, dental benefits, life insurance and disability benefits for the US executive director.
| Benefits for 2026 Benefits provided for 2026 are unchanged and in line with the Remuneration policy. |
||
Pension (audited)
Charles Woodburn receives pension contributions equal to 14% of base pay, aligned to the weighted average pension contributions of the
UK workforce. During 2025, Brad Greve received pension contributions equal to 9% of base pay, in line with the level available to the majority of
UK defined contribution plan members. For Charles Woodburn and Brad Greve, the maximum contribution to a UK pension was limited by the
Annual Allowance (£10,000 for 2025) with the amount in excess of the Annual Allowance paid as a taxable cash allowance.
Tom Arseneault participates in the US defined benefit pension plan and the US Section 401(k) defined contribution plan as follows:
| Arrangement | Accrued benefit at 1 January 2025 | Accrued benefit at 31 December 2025 |
| BAE Systems ERP Qualified Plan – life pension | $39,348 per annum | $39,348 per annum |
| BAE Systems ERP 2006 Qualified Plan – lump sum | $86,000 | $87,000 |
| 12/31/2004 BRP Restoration Plan – life pension | $5,283 per annum | $5,283 per annum |
| 2007 BRP – ten-year pension | $99,920 per annum | $99,361 per annum |
| Section 401(k) | $1,953,446 | $2,324,876 |
The accrued defined benefit for Tom Arseneault is an annual pension and lump sum payable at retirement (normal retirement age 65) prior to
any reduction for early retirement. Tom Arseneault also participates in a Section 401(k) defined contribution arrangement for US employees in
which the Company will match his contributions up to a maximum contribution of 6% of base pay, subject to US regulatory limits (2026
$35,750; 2025 $31,000). In 2025, the Company paid contributions of $18,900 into this arrangement. The accrued Section 401(k) benefit for Tom
Arseneault is the total value of his Section 401(k) account including both employee and company contributions as well as investment returns.
| Pension for 2026 The pension arrangements for Charles Woodburn and Tom Arseneault are unchanged for 2026 and in line with the Remuneration policy. From 1 January 2026, Brad Greve has received pension contributions equal to 10% of base pay, in line with the increased level available to the majority of UK defined contribution plan members for 2026. The maximum contribution up to the Annual Allowance will be paid into the Company’s defined contribution pension plan, with the excess paid as a taxable cash allowance. |
||
Payments to former directors and for loss of office (audited)
There were no payments to former directors in 2025. There were no payments for loss of office in 2025.
| 114 | BAE Systems plc Annual Report 2025 |
| Annual remuneration report continued |
Annual incentive plan (audited)
The 2025 annual bonuses are based on performance for the year ended 31 December 2025, with 75% of bonus opportunity determined by
financial performance and 25% based on the achievement of key strategic objectives.
The figures in the table below represent the total annual bonus amounts to be paid, including the cash amount (two-thirds of total) payable in
March 2026, and the balancing amount (one-third of total) deferred into BAE Systems shares for three years to be released in March 2029.
Malus and clawback may be applied to cash awards and deferred shares.
2025 annual bonus for Charles Woodburn and Brad Greve
| 2025 performance range and outcome | Weighted outcome (%) | ||||||||||
| Performance measure | Threshold (25% max) |
Target (50% max) |
Stretch (100% max) |
Actual performance |
Percentage of maximum achieved |
Weighting | Charles Woodburn |
Brad Greve |
|||
| Financial | |||||||||||
| l | Group underlying EPS | 67.5p | 71.1p | 73.2p | 76.0p | 100% | x | 45% | \= | 45% | 45% |
| l | Group free cash flow | £349m | £599m | £1,099m | £2,213m | 100% | x | 22.5% | \= | 22.5% | 22.5% |
| l | Group order intake | £24.3bn | £25.6bn | £26.9bn | £36.4bn | 100% | x | 7.5% | \= | 7.5% | 7.5% |
| Key strategic objectives | |||||||||||
| l | Charles Woodburn | 98% | x | 25% | \= | 24.5% | |||||
| l | Brad Greve | 98% | x | 24.5% | |||||||
| Total (% of maximum) | 100% | 99.5% | 99.5% | ||||||||
| x | x | ||||||||||
| Maximum bonus opportunity (% of base pay) | 225% | 200% | |||||||||
| x | x | ||||||||||
| 2025 base pay | £1,270,800 | £807,500 | |||||||||
| \= | \= | ||||||||||
| 2025 annual bonus | £2,845,003 | £1,606,925 |
| See page 115 |
2025 annual bonus for Tom Arseneault
| 2025 performance range and outcome | Weighted outcome (%) | ||||||||||
| Performance measure | Threshold (25% max) |
Target (50% max) |
Stretch (100% max) |
Actual performance |
Percentage of maximum achieved |
Weighting | Tom Arseneault | ||||
| Financial | |||||||||||
| l | Group underlying EPS | 67.5p | 71.1p | 73.2p | 76.0p | 100% | x | 15% | \= | 15% | |
| l | Group free cash flow | £349m | £599m | £1,099m | £2,213m | 100% | x | 7.5% | \= | 7.5% | |
| l | Group order intake | £24.3bn | £25.6bn | £26.9bn | £36.4bn | 100% | x | 2.5% | \= | 2.5% | |
| l | Inc. underlying EBIT | $2,160m | $2,280m | $2,355m | $2,474m | 100% | x | 30% | \= | 30% | |
| l | Inc. free cash flow | $636m | $786m | $1,086m | $1,890m | 100% | x | 15% | \= | 15% | |
| l | Inc. order intake | $14.64bn | $15.40bn | $16.16bn | $21.11bn | 100% | x | 5% | \= | 5% | |
| l | Key strategic objectives | 98% | x | 25% | 25% | ||||||
| Total (% of maximum) | 100% | 99.5% | |||||||||
| x | |||||||||||
| Maximum bonus opportunity (% of base pay) | 225% | ||||||||||
| x | |||||||||||
| 2025 base pay | $1,189,000 | ||||||||||
| \= | |||||||||||
| 2025 annual bonus | $2,661,873 | £2,018,252 |
| See page 115 |
| Key | l | Below target | l | Between target and stretch | l | At or exceeds stretch |
Note: Actual results have been adjusted to be on a comparable basis with the targets, including alignment of foreign exchange rates. Free cash flow is
measured on a quarterly basis, with achievement reflecting weighted average performance throughout the year.
A ‘bonus moderator’ may be applied to the whole of the bonus calculation, to reduce (but not increase) the bonus if there are any factors that
warrant a reduction. Having reviewed the 2025 results holistically, the Committee concluded that the formulaic bonus outcomes are
appropriate and require no adjustment.
| Strategic report | Governance | Financial statements | Additional information | 115 | ||
Key strategic objectives
Achievement of key strategic objectives represents 25% of the annual bonus opportunity. These objectives relate to the delivery of the
Group’s strategic priorities as listed below. Executive directors and Executive Committee members are collectively responsible for shared
strategic objectives.
| Objective | Assessment | ||
| l | Enhance financial performance and deliver sustainable shareholder growth – Drive efficiencies and effectiveness. |
– Improved margin expansion through efficiencies, with standardisation of end-to-end functional processes. – Further progress in SMS integration synergies. |
|
| l l |
Sustain and grow our defence and security business. – Enable enhanced international and effectiveness outcomes for digital, cyber and technology continuity. – Improve delivery of resourcing capability and recruitment demand plans. |
– Continuous improvements in technology capabilities. – Recruitment demand accuracy enhancements delivered, with improved recruitment fulfilment during 2025. |
|
| l l l |
Continue to grow our business in adjacent markets – Enable growth in adjacent markets. – Demonstration of key technology milestones. – Increase adjacent market portfolio mix. |
– Further margin accretive opportunities identified and delivered. – Key technology milestones achieved. |
|
| l | Develop and expand our international business – Pursue growth internationally. |
– Further progress of non-core growth targets. – Additional margin accretive opportunities successfully adding to our international market share. |
|
| l l |
Inspire and develop our workforce to drive success – Succession development. – Organisational effectiveness. |
– Increased developmental moves, with focus on key talent. – Leadership programme interventions increased. |
|
| l l l |
Advance and integrate our sustainability agenda – Resource efficiency: progress strategy for longer-term energy management and resilience to drive operational efficiencies; and integrate natural hazard resilience measures. – Safety: sustain relentless focus on reducing safety incident severity; and reduction in recordable injury rate. – Social & Governance: maintain rigorous standards of governance and assurance. |
– Significant improvements in energy management and improved waste streams. – Natural hazard resilience measures aligned. – Further improvements in safety, with reductions in recordable injury rates. |
|
| Key | l | Below target | l | Between target and stretch | l | At or exceeds stretch |
| Key strategic objective achievement (% of maximum) |
|
| Charles Woodburn | 98% |
| Brad Greve | 98% |
| Tom Arseneault | 98% |
| Annual incentive plan for 2026 Annual bonus opportunity for 2026 is unchanged and in line with the Remuneration policy. The Remuneration Committee is of the view that bonus targets are commercially sensitive and that it would be detrimental for the Company to disclose them in advance. The targets will be disclosed retrospectively after the end of the financial year. |
||
| 116 | BAE Systems plc Annual Report 2025 |
| Annual remuneration report continued |
Long-term incentives (audited)
The table below summarises the achievement of Performance Shares vesting in respect of the three-year performance period ended
31 December 2025.
| Actual performance against targets | Percentage of maximum achieved |
Weighting | Weighted vested outcome (%) |
||||||||
| Key performance indicators | Threshold (25% vesting) |
Target (50% vesting) |
Stretch (100% vesting) |
Actual performance |
UK executive directors |
US executive director |
UK executive directors |
US executive director |
|||
| l | Annual average EPS growth (3-year) |
3% p.a. | 5% p.a. | 7% p.a. | 11.9% p.a. | 100% | 30% | 30% | 30% | 30% | |
| l | Free cash flow | £3.8bn | £4.0bn | £4.5bn | £7.5bn | 100% | 30% | 30% | |||
| l | Inc. operating cash flow | $4.41bn | $4.54bn | $4.91bn | $5.8bn | 100% | 30% | 30% | |||
| l | TSR | 34.1% (median) |
97.5% (80th %ile) |
136.8% | 100% | 15% | 15% | 15% | 15% | ||
| l | ROCE | 19.20% | 19.45% | 19.70% | 26.73% | 100% | 15% | 15% | 15% | 15% | |
| l | ESG (reduction in GHG emissions) |
5% | 12.6% | 14% | 25% | 100% | 10% | 10% | 10% | 10% | |
| 100% | 100% | ||||||||||
| Overall vesting | 100% | 100% |
| Key | l | Below target | l | Between target and stretch | l | At or exceeds stretch |
Note: Actual results have been adjusted to enable like-for-like measurement with the same basis upon which the original performance targets were set in
2023, including alignment of foreign exchange rates.
For the three-year performance period ended 31 December 2025, EPS, cash flow, TSR, ROCE and ESG performance exceeded the stretch targets
set in 2023 and therefore the vesting outcome for the Performance Shares is 100% of maximum for each of the executive directors.
Before approving the vesting outcomes, the Committee considered overall business performance, competitive performance and the
macroeconomic environment. Having considered these factors, the Committee was satisfied that the calculated vesting outcomes and values for
the performance period ended 31 December 2025 are appropriate and did not consider it necessary to apply any adjustments.
| Long-term incentives for 2026 Long-term incentive opportunities for 2026 are unchanged and in line with the Remuneration policy. For 2026, the ESG (reduction in GHG emissions) performance measure will be replaced with an Operational Delivery metric, with a 10% weighting. The performance measures and weightings are shown on the next page. |
||
| Strategic report | Governance | Financial statements | Additional information | 117 | ||
Description of share plans
Performance Shares
Performance Shares have a performance period of three years, plus a further two-year deferral period. For UK-based executive directors the
shares vest five years after grant and for the US executive director the shares vest in three equal tranches on the third, fourth and fifth
anniversaries of grant. Dividends or dividend equivalents accrue during the performance and deferral periods based on the number of shares
that have vested, but excluding any shares that have lapsed.
The description of the performance conditions for awards granted since 2023, and for awards to be granted in 2026, are shown below.
| Weighting | Awards | Threshold (25% vesting) |
Target (50% vesting) |
Stretch (100% vesting) |
|
| EPS | |||||
| Average annual diluted underlying EPS growth over three years. | 30% | 2023 & 2024 | 3% pa | 5% pa | 7% pa |
| 2025 & 2026 | 4% pa | 6% pa | 8% pa | ||
| Cash | |||||
| For UK executive directors, three-year cumulative free cash flow (FCF) at a Group level and for the US executive director, three- year operating cash flow (OCF) in respect of BAE Systems, Inc. |
30% | 2023, 2024, 2025 & 2026 |
Due to commercial sensitivity, the targets will be disclosed retrospectively after the end of each performance period |
||
| TSR | |||||
| Vesting is determined by (i) the Company’s TSR measured against other companies in the FTSE 100 index and (ii) whether there has been a sustained improvement in the Company’s underlying financial performance. |
15% | 2023, 2024, 2025 & 2026 |
Median | 80th percentile | |
| ROCE | |||||
| Comparison in ROCE versus IBP. Due to commercial sensitivity, the target will be disclosed retrospectively after the end of each performance period. |
15% | 2023, 2024, 2025 & 2026 |
25bps reduction |
Consistent | 25bps improvement |
| ESG | |||||
| Reduce Group GHG emissions (Scope 1 and 2) aligned to a science-based pathway of 1.5°C, year-on-year over ten years against baseline year of 2020. |
10% | 2023, 2024, & 2025 |
5% reduction | 12.6% reduction | 14% reduction |
| Operational Delivery Customer requirements and production capacity metrics. |
2026 | Due to commercial sensitivity, the targets will be disclosed retrospectively after the end of each performance period |
Awards vest on a straight-line basis for performance between threshold, target and stretch.
Restricted Shares
Restricted Shares are not subject to any performance conditions. They are designed primarily for senior US executives to ensure their
remuneration is competitive in the local market, where these types of awards are more prevalent, and to mitigate retention risks of certain key
executives. The shares are subject to a condition that the participant must remain employed by the Group at the vesting date (usually three years
after the award date). Restricted Shares accrue notional reinvested dividends during the vesting period. Awards made to the US executive
director are subject to a further two-year clawback period after the initial three-year vesting period.
Malus and clawback
Malus and/or clawback may be applied to any bonus, deferred bonus and long-term incentive awards 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 performance of the Company over the performance period.
The table below sets out the time period for which malus and clawback will apply for each incentive arrangement:
| Malus | Clawback | Rationale | ||
| Annual bonus | Until payment | These periods have been selected as they are the most reflective of the period of assessment of individual and company performance in relation to the respective incentives, during which malus triggers would apply. |
||
| Deferred bonus | Until the end of the three-year deferral period |
|||
| Long-term incentives | Until the awards vest | Until two years after vesting (or if sooner, the fifth anniversary of grant) |
The longer period applicable to long-term incentive awards provides the Remuneration Committee with the ability to apply malus and/or clawback in the event that circumstances are unknown for some time. |
No malus or clawback has been applied in the last financial year for any executive director.
| 118 | BAE Systems plc Annual Report 2025 |
| Annual remuneration report continued |
Statement of directors’ shareholdings and share interests
Scheme interests awarded during the financial year (audited)
| Scheme | Date of grant | Number of shares |
Basis of award (% of base pay) |
Face value of award 1 £ |
Exercise price £ |
Date to which performance is measured (three years to) |
| Charles Woodburn | ||||||
| Performance Shares | 20-Mar-25 | 281,049 | 370% | £4,701,950 | nil | 31-Dec-27 |
| Performance Shares | 13-May-25 | 99,191 | 130% | £1,652,026 | nil | 31-Dec-27 |
| Brad Greve | ||||||
| Performance Shares | 20-Mar-25 | 161,693 | 335% | £2,705,124 | nil | 31-Dec-27 |
| Performance Shares | 13-May-25 | 31,514 | 65% | £524,866 | nil | 31-Dec-27 |
| Tom Arseneault | ||||||
| Performance Shares | 20-Mar-25 | 243,144 | 440% | £4,067,799 | n/a | 31-Dec-27 |
| Restricted Shares | 20-Mar-25 | 84,459 | 150% | £1,412,999 | n/a | n/a |
- The value of the award is calculated on the grant date by reference to the middle market quotation at close on the preceding day, being £16.730 for
grants made on 20 March 2025, and £16.655 for grants made on 13 May 2025.
Note: For UK executive directors, Performance Shares are structured as nil-cost options, which vest on the fifth anniversary of grant. For the US executive
director, Performance Shares are conditional share awards vesting on the third, fourth and fifth anniversary of grant. All Performance Shares are subject to the
attainment of performance conditions, with 25% vest at threshold; 50% vest at target; and 100% vest at stretch performance. Further details on the
performance conditions is set out on page 117.
Minimum Shareholding Requirement (MSR) (audited)
Executive directors are required to establish and maintain a minimum personal shareholding equal to a fixed percentage of their base pay as set
out in the table below.
Where an executive director leaves employment for any reason, a post-employment shareholding requirement will apply. Executive directors
will be required to sign a contract upon leaving employment to ensure compliance with this requirement. Any case of non-compliance will be
dealt with by the Committee.
The table below sets out the MSR and actual shareholdings (as a percentage of base pay) as at 31 December 2025.
| MSR | Actual | Achieved MSR? | Post-employment MSR | |
| Charles Woodburn | 500% | 1,280% | Yes | 500% for two years |
| Brad Greve | 400% | 579% | Yes | 400% for two years |
| Tom Arseneault | 425% | 2,403% | Yes | 300% for one year |
The actual MSR is calculated based on the share price on 31 December 2025 (£17.14).
| Minimum Shareholding Requirement (MSR) from 2026 The in-employment and post-employment shareholding requirements (as a percentage of base pay) are unchanged for 2026 and in line with the Remuneration policy. |
||
| Strategic report | Governance | Financial statements | Additional information | 119 | ||
Share interests as at 31 December 2025 (audited)
The interests of the executive directors in the shares of BAE Systems plc, or scheme interests in relation to those shares, were:
| Shares | Scheme interests: Options and awards over shares | |||||||
| Share awards with performance conditions (Performance Shares) |
Share awards without performance conditions (Restricted Shares) |
Share options with performance conditions (Performance Shares) |
Share options with performance conditions, vested but unexercised |
Share options without performance conditions, vested but unexercised (see note below) |
Total scheme interests |
|||
| Charles Woodburn | 949,333 | – | – | 2,667,925 | – | – | 2,667,925 | |
| Brad Greve | 272,712 | – | – | 1,409,433 | – | – | 1,409,433 | |
| Tom Arseneault | 1,263,892 | 1,316,717 | 337,136 | – | – | 621,065 | 2,274,918 |
Note: The share options without performance conditions were granted to Tom Arseneault prior to him being appointed an executive director and are vested
but unexercised, with exercise prices ranging from £4.85 to £5.818 per share and expiry dates ranging from 20 March 2028 to 20 March 2029.
The interests of the non-executive directors in the shares of BAE Systems plc on 31 December 2025 were:
| Shares | |
| Chair | |
| Cressida Hogg | 13,698 |
| Non-executive directors | |
| Nick Anderson | 14,000 |
| Crystal E Ashby | – |
| Angus Cockburn | 2,000 |
| Dame Elizabeth Corley1 | 19,000 |
| Jane Griffiths | 10,117 |
| Ewan Kirk | 20,000 |
| Stephen Pearce | 10,000 |
| Nicole Piasecki2 | 3,132 |
-
Holding shown at date retired from Board (30 November 2025).
-
Shares held in the form of 783 American Depositary Shares.
The interests of directors include those of their connected persons.
Since 31 December 2025, Charles Woodburn has acquired an additional 10 shares and Brad Greve has acquired an additional 11 shares through
the all-employee Share Incentive Plan (SIP). Their beneficial shareholdings at the latest practicable date for inclusion in this report (15 February
2026) were 949,343 and 272,723 shares respectively. There have been no other changes in the interests of the directors in the shares of BAE
Systems plc between 31 December 2025 and 15 February 2026.
Share Options – options exercised during 2025 (audited)
| Exercised during the year |
Exercise price £ | Date of grant | Date of exercise | Market price at exercise £ |
|
| Charles Woodburn - 2020 Performance Shares | 877,344 | nil | 25-May-20 | 28-Mar-25 | 15.6458 |
| Brad Greve - 2020 Performance Shares | 494,439 | nil | 25-May-20 | 7-Apr-25 | 14.9663 |
| Tom Arseneault - 2017 Share Options | 267,026 | 6.490 | 21-Mar-17 | 12-Mar-25 | 15.5694 |
| Tom Arseneault - 2020 Performance Shares | 165,890 | nil | 25-Mar-20 | 26-Mar-25 | 15.6790 |
| Tom Arseneault - 2021 Performance Shares | 160,277 | nil | 25-Mar-21 | 26-Mar-25 | 15.6790 |
| Tom Arseneault - 2022 Performance Shares | 109,223 | nil | 24-Mar-22 | 24-Mar-25 | 15.9437 |
| Tom Arseneault - 2022 Restricted Shares | 177,590 | nil | 24-Mar-22 | 24-Mar-25 | 15.9437 |
– The Share Options granted to Tom Arseneault were granted prior to him being appointed as an executive director and do not have performance
conditions. Options are normally exercisable between the third and tenth anniversary of their grant. Share options granted to Tom Arseneault from 2015
onwards are subject to a two-year clawback period after the initial three-year vesting period.
– The 2020 Performance Shares granted to Charles Woodburn and Brad Greve vested in full based on TSR and EPS performance conditions. The awards were
structured as nil-cost options and accrued notional reinvested dividends during the performance and deferral periods. The shares vested on the fifth
anniversary of grant and were exercisable until the seventh anniversary of their grant.
| 120 | BAE Systems plc Annual Report 2025 |
| Annual remuneration report continued |
Executive directors’ service contracts
All executive directors have rolling service agreements which may be terminated in accordance with the terms of those agreements.
Dates of appointment for executive directors:
| Name | Date of appointment | Expiry of current term |
| Charles Woodburn | 1 July 2017 | 12 months’ notice by either party |
| Brad Greve | 1 April 2020 | 12 months’ notice by either party |
| Tom Arseneault1 | 1 April 2020 | 60 days’ notice by either party |
- 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.
In accordance with the Code, all directors are subject to annual election or re-election at the Company’s AGM.
Chair and non-executive directors – letters of appointment
The Chair and non-executive directors have letters of appointment, which are contracts for services, and not a contract for employment. The
non‑executive directors are normally appointed for an initial three-year term that, subject to review, may be extended subsequently for further
such terms. Non-executive directors do not have notice periods. The dates of their original appointment and expiry of their current term are
shown below:
| Name | Date of appointment | Expiry of current term |
| Cressida Hogg | 4 May 2023 | Close of the AGM in 2029 |
| Nick Anderson | 1 November 2020 | 31 October 2026 |
| Crystal E Ashby | 1 September 2021 | 1 September 2027 |
| Angus Cockburn | 6 November 2023 | 5 November 2026 |
| Dame Elizabeth Corley | 1 February 2016 | 30 November 2025 (retired) |
| Jane Griffiths | 1 April 2020 | 1 April 2029 |
| Ewan Kirk | 1 June 2021 | 31 May 2027 |
| Stephen Pearce | 1 June 2019 | 1 June 2026 |
| Nicole Piasecki | 1 June 2019 | 1 June 2026 |
| Strategic report | Governance | Financial statements | Additional information | 121 | ||
‘Single figure’ of remuneration for the Chair and non-executive directors (audited)
| Fixed | |||||||||
| Committee membership as at 31 December 2025 |
Fees £’000 |
Benefits £’000 |
Other £’000 |
Total remuneration £’000 |
|||||
| 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | ||
| Chair | |||||||||
| Cressida Hogg | 716 | 700 | — | — | — | — | 716 | 700 | |
| Non-executive directors | |||||||||
| Nick Anderson | 136 | 129 | 17 | 14 | — | — | 153 | 143 | |
| Crystal E Ashby | 115 | 110 | 23 | 18 | — | — | 138 | 128 | |
| Angus Cockburn | 155 | 129 | 8 | 5 | — | — | 163 | 134 | |
| Dame Elizabeth Corley1 | 130 | 153 | 5 | 3 | — | — | 135 | 156 | |
| Jane Griffiths | 152 | 146 | 9 | 7 | — | — | 161 | 153 | |
| Ewan Kirk | 170 | 146 | 5 | 4 | — | — | 175 | 150 | |
| Stephen Pearce | 152 | 146 | 20 | 20 | — | — | 172 | 166 | |
| Nicole Piasecki | 190 | 182 | 22 | 21 | — | — | 212 | 203 | |
| Lord Mark Sedwill2 | — | 74 | — | — | — | — | — | 74 |
-
Retired from the Board on 30 November 2025.
-
Retired from the Board on 10 September 2024.
The amounts for ‘Benefits’ relate to travel and subsistence expenses.
| Committee Chair | Innovation and Technology Committee |
||||
| Audit and Risk Committee | Nominations Committee | ||||
| Environmental, Social and Governance Committee |
Remuneration Committee | ||||
Chair of the Board
The fee for the Chair of the Board is determined by the Remuneration Committee. Cressida Hogg’s fee was reviewed in February 2026 and will
be increased by 3% to £743,000 per annum with effect from 1 April 2026.
Non-executive directors
Fees for the non-executive directors were reviewed in February 2026 by the Chair and executive directors. It was agreed that with effect from 1
April 2026, the base fee and Committee membership fees will be increased by 3%, in line with the average percentage increase for the wider
workforce in the UK, and the Senior Independent Director and the Committee Chair fees will be increase by 6.4% to £40,000 per annum to
better reflect the time commitment required and align with the practice in other comparable companies.
| Effective 1 April 2024 |
Effective 1 April 2025 |
2025 % increase |
Effective 1 April 2026 |
2026 % increase |
|
| Base fee | £92,500 | £95,300 | 3% | £98,200 | 3% |
| Additional fees | |||||
| Senior Independent Director | £36,500 | £37,600 | 3% | £40,000 | 6.4% |
| Committee Chair (except Nominations Committee) | £36,500 | £37,600 | 3% | £40,000 | 6.4% |
| Committee membership (except Nominations Committee) | £20,000 | £20,600 | 3% | £21,200 | 3% |
| 122 | BAE Systems plc Annual Report 2025 |
| Annual remuneration report continued |
Annual percentage change in directors’ remuneration
The table below shows the percentage change in remuneration for executive directors, non-executive directors and an average employee
comparator group (being those employed by BAE Systems plc on a full-time equivalent basis). The percentage changes represent the change in
remuneration, as reported in the single figure of remuneration for each year, and therefore may show a significant increase or decrease when
compared with pay for a part-year.
| 2024/2025 % change |
2023/2024 % change |
2022/2023 % change |
2021/2022 % change |
2020/2021 % change |
|||||||||||||||
| Base pay/ fees |
Benefits | Annual bonus |
Base pay/ fees |
Benefits | Annual bonus |
Base pay/ fees |
Benefits | Annual bonus |
Base pay/ fees |
Benefits | Annual bonus |
Base pay/ fees |
Benefits | Annual bonus |
|||||
| Executive directors |
|||||||||||||||||||
| Charles Woodburn |
+3.0 | -3.4 | +4.0 | +4.5 | +3.3 | +4.6 | +4.0 | +11.0 | +4.9 | +2.5 | +56.4 | +2.9 | +12.7 | +17.7 | +39.1 | ||||
| Brad Greve | +3.0 | -3.8 | +4.1 | +4.5 | +6.6 | +4.9 | +14.1 | +14.2 | +43.6 | +5.6 | +79.3 | +6.0 | +36.0 | +44.2 | +68.7 | ||||
| Tom Arseneault | +0.8 | +46.0 | +2.1 | +1.7 | –17.1 | +1.9 | +3.3 | +7.1 | +4.0 | +15.0 | +24.1 | +15.8 | +27.9 | +156.9 | +115.4 | ||||
| Current non- executive directors |
|||||||||||||||||||
| Cressida Hogg | +2.3 | n/a | n/a | +43.9 | n/a | n/a | +3,333.6 | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | ||||
| Nick Anderson | +5.1 | +21.5 | n/a | +17.2 | +86.2 | n/a | +29.5 | +642.4 | n/a | 0.0 | –42.7 | n/a | +500.0 | +81.0 | n/a | ||||
| Crystal E Ashby | +4.4 | +26.0 | n/a | +11.6 | +171.8 | n/a | +16.2 | +51.7 | n/a | +200.0 | n/a | n/a | n/a | n/a | n/a | ||||
| Angus Cockburn |
+20.0 | +56.5 | n/a | +703.2 | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | ||||
| Dame Elizabeth Corley |
-15.1 | +57.0 | n/a | +26.2 | +101.8 | n/a | +42.7 | +69.7 | n/a | 0.0 | –47.6 | n/a | +1.5 | 0.0 | n/a | ||||
| Jane Griffiths | +4.1 | +35.6 | n/a | +21.9 | +94.9 | n/a | +9.1 | +288.3 | n/a | 0.0 | –82.2 | n/a | +72.5 | 0.0 | n/a | ||||
| Ewan Kirk | +16.1 | +19.1 | n/a | +11.5 | +45.8 | n/a | +19.4 | +101.7 | n/a | +75.8 | +92.6 | n/a | n/a | n/a | n/a | ||||
| Stephen Pearce | +4.1 | +2.6 | n/a | +21.9 | +2,326.6 | n/a | +9.1 | –20.3 | n/a | 0.0 | –50.0 | n/a | +1.1 | +90.4 | n/a | ||||
| Nicole Piasecki | +4.0 | +5.4 | n/a | +28.0 | +95.6 | n/a | +40.7 | +72.2 | n/a | +19.2 | n/a | n/a | +1.5 | –100.0 | n/a | ||||
| Former non- executive directors |
|||||||||||||||||||
| Sir Roger Carr | n/a | n/a | n/a | n/a | n/a | n/a | –65.2 | 0.0 | n/a | 0.0 | 0.0 | n/a | 0.0 | 0.0 | n/a | ||||
| Dame Carolyn Fairbairn |
n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | –58.2 | n/a | n/a | n/a | n/a | n/a | ||||
| Chris Grigg | n/a | n/a | n/a | n/a | n/a | n/a | +29.6 | n/a | n/a | 0.0 | n/a | n/a | +7.3 | 0.0 | n/a | ||||
| Ian Tyler | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | –65.2 | –8.8 | n/a | +1.1 | +8.9 | n/a | ||||
| Lord Mark Sedwill |
n/a | n/a | n/a | –25.5 | –100.0 | n/a | +597.4 | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a | ||||
| Average employee |
+4.5 | +4.5 | +1.1 | +4.5 | +4.5 | +2.8 | +6.0 | +6.0 | +63.3 | +4.5 | +4.5 | +9.2 | +1.5 | +1.5 | +28.4 |
Where figures are £nil (as is often the case for non-executive directors), the percentage change is shown as n/a.
Remuneration reflects part-years as follows: 2020 remuneration for Brad Greve, Tom Arseneault, Nick Anderson and Jane Griffiths; 2021
remuneration for Crystal E Ashby, Dame Carolyn Fairbairn and Ewan Kirk; 2022 remuneration for Cressida Hogg, Lord Mark Sedwill, Dame
Carolyn Fairbairn and Ian Tyler; 2023 remuneration for Angus Cockburn and Sir Roger Carr; and 2024 remuneration for Lord Mark Sedwill.
Average employee figures are determined by the median based on a full-time equivalent with annual bonus estimate based on the expected
financial outturn for 2025.
| Strategic report | Governance | Financial statements | Additional information | 123 | ||
Pay ratio in relation to the Group Chief Executive
The table below provides the ratio between the ‘single figure’ of remuneration for the Chief Executive and the total remuneration of UK
employees at the upper quartile (75th percentile), median (50th percentile) and lower quartile (25th percentile).
| Pay ratio | ||||
| Year | Method | 25th percentile | Median | 75th percentile |
| 2025 | B | 234:1 | 195:1 | 136:1 |
| 2024 | B | 232:1 | 183:1 | 157:1 |
| 2023 | B | 264:1 | 191:1 | 181:1 |
| 2022 | B | 256:1 | 185:1 | 168:1 |
| 2021 | B | 171:1 | 140:1 | 99:1 |
| 2020 | B | 121:1 | 103:1 | 89:1 |
| 2019 | B | 90:1 | 72:1 | 59:1 |
| 2018 | B | 61:1 | 48:1 | 38:1 |
| 25th percentile | 50th percentile | 75th percentile | ||
| Total pay and benefits | £53,026 | £63,476 | £90,954 | |
| Base pay | £41,155 | £50,163 | £61,227 |
Pay ratio commentary
Between 2024 and 2025 the ratio of total remuneration for the Chief Executive compared to UK employees increased at median, but reduced at
the 75th percentile. The Chief Executive and other senior employees have a greater proportion of pay that is variable with performance,
whereas other employees typically have a greater proportion of fixed pay which does not vary with performance. Consequently, as 2025 was a
year of strong operational and financial performance, the variable pay outcome for the Chief Executive was greater than for the median
employee, resulting in an increased pay ratio at median. However, the Chief Executive’s pay did not increase at the same rate as for some other
senior employees, including at the 75th percentile, resulting in a reduced pay ratio at the 75th percentile for 2025.
Since 2018, there has been a general upward trend in the median pay ratio, which reflects progressive improvements in financial performance
and increased variable pay through the performance-related annual and long-term incentive plans.
The ratio at each of the three quartile positions is consistent with our pay, reward and progression policies, with the ratio decreasing as the Chief
Executive’s remuneration is compared with that of progressively more senior employees.
Methodology
The Companies (Miscellaneous Reporting) Regulations 2018 permit different options for calculating the pay ratio. We have chosen Option B
for calculating the pay ratio for 2025, consistent with our gender pay reporting, which is considered the most appropriate methodology for
reporting. The total full-time equivalent pay and benefits for the relevant employees have been calculated on the same basis as the Chief
Executive’s ‘single figure’ of remuneration as at 31 December 2025. For pension-related benefits, employer pension costs have been estimated
using the employer contribution rates applicable to the member’s pension plan. No other estimates or adjustments have been used in the
calculation and no remuneration items have been omitted.
Bonus amounts for 2025 are not able to be calculated for some employees until after publication of this report and therefore it is not possible to
determine exact 2025 total remuneration for all UK employees within the timescale required for calculating the pay ratio using Option A.
To ensure a sufficiently robust representation at each quartile, the average total pay and benefits of a number of employees centred around
each quartile is calculated. Any anomalies arising in the pay and benefit amounts (for example, if an employee left part way through the year)
are adjusted or excluded.
Gender and ethnicity pay
The 2025 UK gender pay gap and ethnicity pay gap reports are available on the Company’s website. For our UK workforce, the average
(median) gender pay gap was 7.4% (2024 8.1%) and the average (median) ethnicity pay gap was 7.7% (2024 6.0%).
| 124 | BAE Systems plc Annual Report 2025 |
| Annual remuneration report continued |
Total Shareholder Return (TSR) performance and Chief Executive pay
The chart below shows the value at 31 December 2025 of £100 invested in BAE Systems shares on 31 December 2015, compared to £100
invested in the FTSE 100 on the same date. If invested in BAE Systems that shareholding would be worth £488.34 on 31 December 2025,
compared to £233.15 if invested in the FTSE 100.
The FTSE 100 was chosen as the comparator because it is a broad equity index of which BAE Systems is a constituent member and reflects the
investment interests of our UK shareholder base. In addition, comparative TSR performance with the FTSE 100 is a performance measure for the
Long-Term Incentive (LTI) awards.
Value at 31 December 2025 of £100 investment at 31 December 2015
Change in Chief Executive’s remuneration over ten years
| 2016 | 20171 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | |
| Chief Executive total remuneration (£’000) | ||||||||||
| Charles Woodburn | — | 1,279 | 2,416 | 3,747 | 6,0802 | 7,071 | 12,008 | 13,451 | 11,681 | 12,397 |
| Ian King | 3,463 | 2,086 | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a |
| 3,463 | 3,365 | 2,416 | 3,747 | 6,0802 | 7,071 | 12,008 | 13,451 | 11,681 | 12,397 | |
| Bonus paid as a percentage of maximum | ||||||||||
| Charles Woodburn | — | 75.8% | 65.6% | 95.6% | 78.7% | 97.1% | 97.5% | 98.4% | 98.5% | 99.5% |
| Ian King | 82.3% | 75.9% | n/a | n/a | n/a | n/a | n/a | n/a | n/a | n/a |
| LTI vesting as a percentage of maximum | ||||||||||
| Charles Woodburn | – | – | nil | 10.9% | 100%2 | 57.9% | 100% | 97.9% | 95.6% | 100% |
| Ian King | nil | 11.3% | – | – | – | – | – | – | – | – |
- In 2017, Charles Woodburn succeeded Ian King as Chief Executive. Ian King’s remuneration is shown from the start of 2017 until 30 June 2017 and Charles
Woodburn’s remuneration is shown from 1 July 2017 to the end of that year.
- Total remuneration includes the value of shares vesting that were granted to Charles Woodburn prior to his appointment as Chief Executive.
Relative importance of spend on pay
The chart below shows the relative importance of expenditure on pay1 compared to returns to shareholders2. Underlying EBIT3 is shown
for information.
-
Wages and salaries increased by approximately 3.5% per employee in 2025, excluding the impact of exchange translation.
-
Returns to shareholders comprise dividends to ordinary shareholders paid in the year and share repurchases in 2024 (£555m) and 2025 (£502m).
-
Underlying EBIT is the Group’s principal measure of operational profitability as defined in the Alternative performance measures section on page 216.
| Strategic report | Governance | Financial statements | Additional information | 125 | ||
Remuneration for employees below the Board
General remuneration policy
Our Remuneration policy aims to ensure all employees are rewarded fairly and appropriately for their contribution to attract and retain the best
talent with competitive market pay and a range of useful benefits for employees and their dependants.
This means that our total reward packages include a competitive level of base pay, short-term and long-term incentives (where applicable) and a
range of health, wealth and lifestyle benefits aligned with the relevant local markets.
Summary of our remuneration structure and rationale for employees below the Board
| Remuneration element | Executive Committee | Senior executives | Middle management | Wider workforce | |||||||
| Base pay | Provides a fixed level of earnings, appropriate to the market and requirements of the role. Normally reviewed annually with increases ordinarily in line with the wider workforce in the same locality. |
Provides a fixed level of earnings, subject to negotiation with recognised trade unions, and/or in line with market and/or performance. |
|||||||||
| Pension and benefits |
To assist employees in their duties, by providing a range of health, wealth and lifestyle benefits, including retirement savings, in line with the relevant local market. |
||||||||||
| Annual incentives |
Cash | Incentivises and rewards the achievement of annual financial performance and the delivery of key strategic objectives (KSOs). |
Incentivises and rewards the achievement of annual financial performance and individual/team objectives linked to KSOs, and behaviours. |
Typically rewards business results and individual/team achievements (UK only). |
|||||||
| Deferral | Compulsory deferral of part of annual bonus into shares, increasing alignment with long-term shareholder interests. |
||||||||||
| Share ownership & Long-term incentives |
Free shares | Eligible employees in participating countries receive an annual award of shares (or cash equivalent in some countries), based on Group financial performance. |
|||||||||
| Share Incentive Plan (SIP) |
Eligible employees in participating countries may receive free matching shares when investing their own money in the all- employee SIP or international equivalent. |
||||||||||
| Performance Shares |
Performance Shares with a performance period of three years, providing a direct and transparent link between pay and the delivery of long-term performance. |
||||||||||
| Restricted Shares |
Restricted Shares are predominantly provided in the US to be market competitive and usually subject to remaining employed for at least three years from the grant date. |
||||||||||
Engagement with key stakeholders
In line with our commitment to full transparency and engagement with our shareholders on executive remuneration, the Chair of the
Remuneration Committee periodically consults with shareholders and shareholder representative bodies to seek feedback on executive pay and
any contemplated changes to the remuneration policy or structure. During 2024 and 2025, the Committee Chair engaged directly with major
shareholders to seek their views regarding the proposed changes to the remuneration policy presented to shareholders at the 2025 AGM.
Feedback received at that time and subsequent feedback received has been shared with all Committee members and proved extremely
valuable in informing the Committee regarding shareholder views.
This report is the principal means through which we communicate and engage with employees regarding executive remuneration alignment
with the wider workforce. Over 63,000 of the Company’s employees are now shareholders in the Company and they receive email
communications with a direct link to this report on the Company’s website and an invitation to vote on the resolutions at the AGM, including
those resolutions on executive remuneration.
Effective engagement enables employees to contribute to improving business performance and helps us to create an environment in which
everyone is safe, valued and can fulfil their potential. We use a range of channels to engage with employees , including surveys and insight
sessions, in-person and virtual meetings, briefings, conferences, toolbox talks, safety and security stand-downs, events and listening forums at all
levels. Additionally, employee share and incentive plan communications, regular leadership updates through videos and live-streaming
throughout the year (including financial and business performance updates) and digital channels, including our employee app, intranet, email
and TV systems are also used.
| 126 | BAE Systems plc Annual Report 2025 |
| Annual remuneration report continued |
Remuneration Committee composition and advisers
During 2025, the Committee members comprised Nicole Piasecki (Chair), Angus Cockburn, Dame Elizabeth Corley and Ewan Kirk. Committee
attendance is shown on page 81. The Committee received material assistance and advice on Remuneration policy from the Group Reward
Director, Roger Fairhead, and the Group Human Resources Director, Tania Gandamihardja. Charles Woodburn in his role as Chief Executive
and Brad Greve as Chief Financial Officer also provided input that was of material assistance to the Committee.
PwC has been appointed by the Committee as its independent adviser and also attends Committee meetings during the year. The Committee
is aware that PwC provides other services to the Company, including tax and pensions advice, and other consultancy services. The Committee
is satisfied that the PwC LLP engagement partner and team who provide remuneration advice to the Committee do not have connections with
the Group or the individual directors that could impair their independence or objectivity. PwC is a member of the Remuneration Consultants
Group (RCG) and is a signatory to the RCG’s code of conduct. Fees in respect of services provided to the Committee for 2025 were £111,000
determined on a fixed fee/hourly basis.
Statement of voting
Shareholder voting on the resolutions to approve the Annual remuneration report and the Directors’ Remuneration policy at the 7 May 2025
AGM were:
Annual remuneration report (2025)
| Votes for | % | Votes against | % | Total votes cast | Votes withheld (abstentions) |
| 2,032,090,304 | 96.59 | 71,736,961 | 3.41 | 2,103,827,265 | 731,774 |
Directors’ Remuneration policy (2025)
| Votes for | % | Votes against | % | Total votes cast | Votes withheld (abstentions) |
| 2,061,161,446 | 97.97 | 42,639,415 | 2.03 | 2,103,800,861 | 749,449 |
The Directors’ Remuneration policy approved at the 2025 AGM was published in the 2024 Annual Report and is available on the Company’s website
at baesystems.com/annual-report.
| The Remuneration Committee’s year | ||||||||||||
| February | June | September | December | |||||||||
| 3 February | |||
| Committee (Videoconference) | |||
| – Considered feedback from shareholders in relation to the Remuneration policy review. – Received an update on provisional 2024 financial performance relating to the incentive plans. – Assessed achievement of 2024 key strategic objectives. – Approved 2025 key strategic objectives. – Approved 2025 base pay increases for Executive Committee members. |
|||
| 17 February | |||
| Committee (London, UK) | |||
| – Determined 2024 annual bonuses for executive directors and executive committee members. – Approved 2024 all-employee share award. – Determined vesting outcome for 2022 long- term incentive awards. – Agreed the 2025 performance measures and targets. – Approved grant of 2025 long-term incentive awards. – Approved proposed new Remuneration policy to be submitted for a shareholder vote at the 2025 AGM. – Approved 2024 Directors’ remuneration report. |
| June | |||
| Committee (Washington, USA) | |||
| – Reviewed AGM voting outcomes. – Considered UK, US and Global market developments. |
|||
| September | |||
| Committee (London, UK) | |||
| – Reviewed the pay and incentive arrangements for key executives and other employees with identified specialist skills. |
| December | |||
| Committee (London, UK) | |||
| – Received an update on 2025 UK gender and ethnicity pay gaps. – Received a performance update on 2025 annual incentive and in-flight long-term incentive awards. – Approved executive directors’ base pay increases from 1 January 2026. – Considered the structure, weightings and financial metrics for the 2026 annual incentive plans and long-term incentive awards. |
| Directors’ Remuneration Report The Directors’ Remuneration Report was approved by the Board of directors on 17 February 2026 . Nicole Piasecki Chair, Remuneration Committee |
||
| Strategic report | Governance | Financial statements | Additional information | 127 | ||
| Statutory and other regulatory information |
Company registration
BAE Systems plc is a public company limited
by shares registered in England and Wales
with the registered number 01470151.
Directors
The directors who served during the 2025
financial year are listed on pages 77 to 79.
Dame Elizabeth Corley also served during the
year, retiring as a non-executive director on
30 November 2025.
Dividend
An interim dividend of 13.5p per share was
paid on 3 December 2025. On 17 February,
the directors proposed a final dividend
of 22.8p per ordinary share. Subject to
shareholder approval, the final dividend will
be paid on 4 June 2026 to shareholders on
the share register on 24 April 2026.
AGM
The Company’s 2026 AGM is scheduled to be
held on 7 May 2026.
Disclosures required under UK Listing
Rule 6.6
There are no disclosures required to be made
under UK Listing Rule 6.6 which have not
already been disclosed elsewhere in this
Report. Details of long-term incentives can
be found within the Annual remuneration
report on page 112 and details of dividend
waivers can be found in note 25 of the
Consolidated financial statements on
page 195.
Office of Fair Trading undertakings
As a consequence of the merger between
British Aerospace and the former Marconi
Electronic Systems businesses in 1999, the
Company gave certain undertakings to the
Secretary of State for Trade and Industry
(now the Secretary of State for Business
and Trade). In February 2007, the Company
was released from the majority of these
undertakings and the remainder have
been superseded and varied by a new
set of undertakings. Compliance with the
undertakings is monitored by a compliance
officer. Further information regarding the
undertakings and the contact details of the
compliance officer may be obtained through
the Company Secretary at the Company’s
registered office or through the Company’s
Trade unions
We have structures in place to work with
trade union representatives in our local
markets, where it is appropriate and legally
acceptable. Of our UK workforce, 64% are
covered by collective bargaining agreements
and of this section of the workforce,
approximately 55% are trade union
members. In the US, approximately 9%
of the workforce is covered by a collective
bargaining agreement and in Australia,
this is approximately 20%.
| Other information that is relevant to the Directors’ report (which covers pages 74 to 133), and which is incorporated by reference into this report |
|||||
| Further information | Reference | ||||
| Disclosures in relation to the use of financial instruments |
Financial statements page 172 | ||||
| Disclosures in relation to the Company’s culture |
Our investment in our people and our communities page 50 Ethics and compliance page 59 Governance framework page 82 Audit and Risk Committee report page 96 Environmental, Social and Governance Committee report page 101 |
||||
| Particulars of important events affecting the Group which have occurred since 31 December 2024 |
Chief Executive’s review page 8 Segmental review page 37 |
||||
| An indication of likely future developments in the business of the Group |
Chief Executive’s review page 8 Our investment in technology page 24 Segmental review page 37 |
||||
| An indication of the activities of the Group in the field of R&D |
Our business model page 14 | ||||
| Actions taken to introduce, maintain or develop arrangements aimed at employees |
Our investment in people and communities page 50 | ||||
| GHG emissions and energy consumption data |
Climate and the environment page 57 Other information on page 221 |
||||
| Employee engagement (including regarding employee interests) |
Our investment in people and communities page 50 | ||||
| Fostering business relationships with suppliers, customers and others |
Our stakeholders page 85 | ||||
| 128 | BAE Systems plc Annual Report 2025 |
| Statutory and other regulatory information continued |
Employment of disabled persons
In 2025, we remained committed to fostering
an inclusive workplace where employees in
the UK, including those with disabilities,
can thrive. We welcome applications from
candidates with disabilities and seek to give
full and fair consideration to applicants and
candidates for promotion having regard to
the requirements of the role and the
aptitudes and abilities of candidates. We
strive to support colleagues who become
disabled during their employment, including
making reasonable adjustments, redesigning
roles where appropriate and offering
training. We also consider adjustments to
remove or reduce barriers that employees
may face with the aim of creating an
environment where everyone can progress
and succeed and have measures in place
to help line managers create inclusive
workplaces including training. We work with
external partners to provide expert guidance
and accreditation, including:
– US Disability Index score of 100 (maintained
from 2024)
– UK accredited Disability Confident
Employer
– Saudi Arabia Mowaamah Gold Certificate
for disability friendly workplace
Employee involvement in share schemes
We encourage our colleagues in the UK and
other participating countries to benefit from
the Company’s performance by enrolling in
one of our employee share incentive plans.
These employees receive an information
pack when they become eligible to purchase
shares or to receive the annual free shares
award. Reminders are sent to non-
participating eligible employees on an
annual basis. An annual grant of free
shares is awarded to eligible employees in
participating countries on an auto-enrolment
basis. Information regarding the plans can be
found on our dedicated intranet sites.
Profit forecast
In its Half-yearly Report 2025 published
on 30 July 2025, the Company made the
following statement in respect of the year
ending 31 December 2025, which is regarded
as a profit forecast for the purposes of UK
Listing Rule 6.2.23 and which replaced the
profit forecast made in the Company’s 2024
Annual Report:
“Whilst the Group is subject to geopolitical
and other uncertainties, the Group 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.
Given the strong operational performance in
the first half, we are upgrading our sales and
underlying EBIT guidance for the full year by
100bps each. Sales are now expected to
increase in the range of 8% to 10% while
underlying EBIT is expected to increase in the
range of 9% to 11%. The share price increase
since the start of the year is expected to result
in fewer shares being repurchased, which,
along with a marginally higher tax rate,
means our guidance for EPS growth remains
unchanged between 8% to 10%. Our free
cash flow target remains >£1.1bn.
Guidance is provided on a constant currency
basis using an exchange rate of $1.28:£1,
which is in line with the actual 2024
exchange rate.”
For the year ended 31 December 2025, sales
were £30,662m and underlying EBIT was
£3,322m.
See Financial review on page 30 for more
information.
Political donations
During 2025, the Company did not: (i) make
any political donations to a UK political party,
other UK political organisation or any UK
independent election candidate and/or incur
any UK political expenditure; or (ii) make any
contribution to a non-UK political party.
It remains the policy of the Company not to
make any political donations or incur political
expenditure within the normal
understanding of those terms and the
Company has no intention of altering this
policy. However, the definitions of ‘political
donation’ and ‘political expenditure’ within
the UK Companies Act 2006 are very wide
and potentially capture activities that would
not be ordinarily considered to be such but
form part of the Company’s usual business
engagement with key stakeholders and allow
the Company to participate in public debate
and opinion-forming on matters which
affect its business. Consequently, to avoid
inadvertent infringement of the UK
Companies Act 2006, authority will be sought
from shareholders at the 2026 AGM to
make political donations and incur political
expenditure up to a specified limit (as has
been done in prior years).
In accordance with the US Federal Election
Campaign Act, BAE Systems, Inc. provides
administrative support to a federal Political
Action Committee (PAC) in the US, funded
by the voluntary political contributions of
eligible employees. The PAC is not funded by
BAE Systems, Inc. and all decisions regarding
the amounts and recipients of contributions
are directed by a Board of Trustees
comprising employees eligible to contribute
to the PAC. Contributions to political
organisations reported by the PAC during
2025 totalled $547,500 (2024 $559,000).
Distributable reserves
As at 31 December 2025, the distributable
reserves of the Company were £2,454m
(2024 £2,130m).
Issued share capital
As at 31 December 2025, BAE Systems’ issued
share capital of £79,137,769 comprised
3,165,510,735 ordinary shares of 2.5p each
and one Special Share of £1.
Share buyback
During the year, 29,595,214 ordinary shares
of 2.5p each were repurchased under the
buyback programme of up to £1.5bn
announced on 2 August 2023 (which
commenced on 25 July 2024) and such
repurchased shares have been cancelled.
The total consideration for the purchase of
these shares, including commission and
stamp duty, was £502m.
The percentage of called up share capital
(excluding treasury shares) as at 31 December
2025, which the shares repurchased in 2025
represents, is 1.0%.
Treasury shares
As at 1 January 2025, the number of shares
held in treasury totalled 183,673,739 (having
a total nominal value of £4,591,843 and
representing 5.7% of the Company’s called
up share capital as at 31 December 2024).
During 2025, the Company used 19,178,971
treasury shares (having a total nominal value
of £479,474 and representing 0.6% of the
Company’s called up share capital as at
31 December 2025) to satisfy awards under
the Company’s Free and Matching elements
of the Share Incentive Plan (3,019,629 shares
in aggregate), awards under the Free and
Matching elements of the International Share
Incentive Plan (134,210 shares in aggregate),
awards vested under the Performance Shares
element of the Long-Term Incentive Plan
(7,806,773 shares), awards vested under the
Restricted Shares element of the Long-Term
Incentive Plan (2,050,860 shares) and options
exercised under the Share Options element of
the Long-Term Incentive Plan and Executive
Share Option Plan (5,985,037 shares). The
treasury shares used in respect of the Share
Incentive Plan, the International Share
Incentive Plan, and the Performance and
Restricted Shares elements of the Long-Term
Incentive Plan were disposed of by the
Company for nil consideration. As at
31 December 2025, 164,506,971 ordinary
shares of the issued share capital were held in
treasury. The 5,985,037 shares disposed of by
the Company in respect of the Share Options
element of the Long-Term Incentive Plan and
the Executive Share Option Plan were
disposed of by the Company for an
aggregate consideration of £37,281,172.
| Strategic report | Governance | Financial statements | Additional information | 129 | ||
As at 31 December 2025, the number of
shares held in treasury totalled 164,506,971
(having a total nominal value of £4,112,674
and representing 5.2% of the Company’s
called up share capital at 31 December 2025).
The rights to treasury shares are restricted in
accordance with the Companies Act and, in
particular, the voting and dividend rights
attaching to these shares are automatically
suspended.
Rights and obligations of ordinary
shares
The full rights attaching to shares are set out
in the Company’s Articles of Association.
Currently, the voting rights of each ordinary
share carry one vote at a general meeting of
the Company. Subject to the relevant
statutory provisions and the Company’s
Articles of Association, holders of ordinary
shares are entitled to a dividend where
declared or paid out of profits available for
such purposes. Subject to the relevant
statutory provisions and the Company’s
Articles of Association, on a return of capital
on a winding-up, holders of ordinary shares
are entitled, after repayment of the £1 Special
Share, to participate in such a return. There
are no redemption rights in relation to the
ordinary shares.
Rights and obligations of the Special
Share
In the interests of national security, a Special
Share is held on behalf of the Secretary of
State for Business and Trade (the Special
Shareholder). Certain provisions of the
Company’s Articles of Association cannot be
amended without the consent of the Special
Shareholder. These provisions include the
requirement that:
– no foreign person, or foreign persons
acting in concert, can have more than a
15% voting interest in the Company;
– the majority of the directors (including any
alternate directors) must be British citizens,
British Overseas Territories citizens or British
Overseas citizens by virtue of the British
Nationality Act 1981 (British Citizens);
– any Chief Executive or Executive Chair must
be a British Citizen; and
– if the Company has a non-executive Chair
and a non-executive Deputy Chair, then
one of them must be a British Citizen.
The holder of the Special Share is entitled to
attend a general meeting, but the Special
Share carries no right to vote or any other
rights at any such meeting, other than to
speak in relation to any business in respect
of the Special Share. Subject to the relevant
statutory provisions and the Company’s
Articles of Association, on a return of capital
on a winding-up, the holder of the Special
Share shall be entitled to repayment of the
£1 capital paid up on the Special Share in
priority to any repayment of capital to any
other members.
The holder of the Special Share has the right
to require the Company to redeem the
Special Share at par or convert the Special
Share into one ordinary share at any time.
Restrictions on transfer of securities
The restrictions on the transfer of shares in
the Company are as follows:
– the Special Share may only be issued to,
held by and transferred to the Special
Shareholder or their successor or nominee;
– the directors shall not register any
allotment or transfer of any shares to a
foreign person, or foreign persons acting
in concert, who at the time have more than
a 15% voting interest in the Company, or
who would, following such allotment or
transfer, have such an interest;
– the directors shall not register any person
as a holder of any shares unless they have
received: (i) a declaration stating that upon
registration, the share(s) will not be held by
foreign persons or that upon registration
the share(s) will be held by a foreign person
or persons; (ii) such evidence (if any) as the
directors may require of the authority of the
signatory of the declaration; and (iii) such
evidence or information (if any) as to the
matters referred to in the declaration as the
directors consider appropriate;
– the directors may also refuse to register any
instrument of transfer of shares unless the
instrument of transfer is in respect of only
one class of share and it is lodged at the
place where the register of members is
kept, accompanied by a relevant certificate
or such other evidence as the directors may
reasonably require to show the right of the
transferor to make the transfer;
– the directors may refuse to register an
allotment or transfer of shares in favour
of more than four persons jointly;
– where a shareholder has failed to provide
the Company with certain information
relating to their interest in shares, the
directors can, in certain circumstances,
refuse to register a transfer of such shares;
– certain restrictions may from time to time
be imposed by laws and regulations (for
example, insider trading laws);
– restrictions may be imposed whereby
certain of the Group’s employees require
the Company’s approval to deal in shares;
and
– awards of shares made under the
Company’s Long-Term Incentive Plan 2025,
Long-Term Incentive Plan 2014, Deferred
Bonus Plan, Share Incentive Plan,
International Share Incentive Plan, Group
All-Employee Free Shares Plan and
International Profit Sharing Scheme are
subject to restrictions on the transfer of
shares prior to vesting and/or release.
The Company is not aware of any
arrangements between its shareholders
that may result in restrictions on the transfer
of shares and/or voting rights.
Notifiable interests in voting rights
Information provided to the Company by
shareholders pursuant to the UK Disclosure
Guidance and Transparency Rules (DTRs) are
published via a Regulatory Information
Service and is available on the Company’s
website. Up to 31 December 2025, the
Company had been advised of the following
interests in the voting rights attached to
its shares:
| Name of investor | Date of disclosure |
Percentage of total voting rights notified 1 |
| BlackRock, Inc. | 29 June 2021 | 9.90% |
| The Capital Group Companies, Inc. |
25 November 2025 |
10.98% |
| FMR LLC | 23 December 2024 |
4.96% |
| Washington Investment Management, LLC |
14 November 2025 |
3.98% |
- The percentage of voting rights detailed
above was calculated at the time of the
relevant disclosures made in accordance with
Rule 5 of the DTRs.
Between 31 December 2025 and 17 February
2026 (being the latest practicable date for
inclusion in this report), the Company had not
received any additional notifications pursuant
to Rule 5 of the DTRs, other than (1) on 23
January 2026 and 26 January 2026, when
Silchester International Investors LLP and
Invesco Limited, respectively, confirmed that
they did not have a notifiable direct or
indirect interest in the Company as at 31
December 2025; and (2) on 23 January 2026,
when The Capital Group Companies, Inc.
confirmed that its notifiable direct and
indirect interest in the Company was 11.04
per cent.
Exercise of rights of shares in employee
share schemes
The trustees of the employee trusts do not
seek to exercise voting rights on shares held
in the employee trusts other than on the
direction of the underlying beneficiaries.
No voting rights are exercised in relation to
shares unallocated to individual beneficiaries.
The trustees of the employee trusts also
waive their entitlement to receive dividends
in respect of shares that are the beneficial
property of the trusts.
Restrictions on voting deadlines
The notice of any general meeting shall
specify the deadline for exercising voting
rights and appointing a proxy or proxies to
vote in relation to resolutions to be proposed
at the general meeting. The number of proxy
votes for, against or withheld in respect of
each resolution are publicised on the
Company’s website after the meeting.
| 130 | BAE Systems plc Annual Report 2025 |
| Statutory and other regulatory information continued |
Appointment and replacement of
directors
Subject to the nationality requirements
outlined under Rights and obligations of the
Special Share on page 195 and in the
Company’s Articles of Association, the
Company may by ordinary resolution appoint
any person to be a director.
The directors also have the power to make
appointments to the Board at any time. Any
individual so appointed will hold office until
the next AGM and shall then be eligible for
election or re-election.
The Company must have not less than six
directors holding office at all times. If the
number is reduced to below six, then such
number of persons shall be appointed as
directors as soon as is reasonably practicable
to reinstate the number of directors to six.
The Company may by ordinary resolution
from time to time vary the minimum number
of directors.
All directors will stand for election or re-
election in 2026 as required by the
Company’s Articles of Association and in
compliance with the Code.
Amendment of the Company’s Articles
of Association
The Company’s Articles of Association may
only be amended by a special resolution at a
general meeting of shareholders. Where class
rights are varied, such amendments must be
approved by the members of each class of
shares separately.
In addition, certain provisions of the Articles
of Association cannot be amended without
the consent of the Special Shareholder. These
provisions include the requirement that no
foreign person, or foreign persons acting in
concert, can have more than a 15% voting
interest in the Company, the requirement
that the majority of the directors are British,
and the requirement that the Chief Executive
or any executive Chair are British.
Powers of the directors
The directors are responsible for the
management of the business of the Company
and may exercise all powers of the Company
subject to applicable legislation and
regulation, and the Articles of Association.
At the 2025 AGM, the directors were given
the power to buy back a maximum number
of 300,785,866 ordinary shares at a minimum
price of 2.5p each. The maximum price was
the higher of (i) an amount equal to 105% of
the average of the middle market quotations
of the Company’s ordinary shares as derived
from the London Stock Exchange Daily
Official List for the five business days
immediately preceding the day on which
such ordinary shares are contracted to be
purchased, and (ii) the higher of the price of
the last independent trade and the highest
current independent bid on the London
Stock Exchange.
This power will expire at the conclusion of the
2026 AGM or, if earlier, at the close of
business on 30 June 2026. A special
resolution will be proposed at the 2026 AGM
to renew the Company’s authority to acquire
its own shares.
At the 2025 AGM, the directors were given
the power to issue new shares up to a
nominal amount of £24,814,834. This power
will expire at the conclusion of the 2026 AGM
or, if earlier, at the close of business on 30
June 2026. Accordingly, a resolution will be
proposed at the 2026 AGM to renew the
Company’s authority to issue further new
shares.
Conflicts of interest
As permitted under the Companies Act 2006,
the Company’s Articles of Association
contain provisions which enable the Board to
authorise conflicts or potential conflicts that
individual directors may have.
To avoid potential conflicts of interest the
Board requires the Nominations Committee
to check that any individual it nominates for
appointment to the Board is free of potential
conflicts. In addition, the Board’s procedures
and the induction programme for new
directors emphasise a director’s personal
responsibility for complying with the duties
relating to conflicts of interest. The procedure
adopted by the Board for the authorisation
of conflicts reminds directors of the need to
consider their duties as directors and not
grant an authorisation unless they believe,
in good faith, that this would be likely to
promote the success of the Company. As
required by law, the potentially conflicted
director cannot vote on an authorisation
resolution or be counted in the quorum. Any
authorisation granted may be terminated at
any time, and the director is informed of the
obligation to inform the Company without
delay should there be any material change in
the nature of the conflict or potential conflict
so authorised.
Directors’ indemnities
The Company has entered into deeds of
indemnity with all of its current directors and
those persons who were directors for any
part of 2025 which are qualifying indemnity
provisions for the purpose of the Companies
Act 2006.
The directors of BAE Systems Pension Funds
Trustees Limited, BAE Systems 2000 Pension
Plan Trustees Limited, BAE Systems Executive
Pension Scheme Trustees Limited and Alvis
Pension Scheme Trustees Limited benefit
from indemnities in the governing
documentation of the BAE Systems Pension
Scheme, the BAE Systems 2000 Pension Plan,
the BAE Systems Executive Pension Scheme
and the Alvis Pension Scheme, respectively,
which are qualifying indemnity provisions for
the purpose of the Companies Act 2006.
All such indemnity provisions are in force as at
the date of this Directors’ report.
Change of control – significant
agreements
The following significant agreements contain
provisions entitling the counterparties to
exercise termination, alteration or other
similar rights in the event of a change of
control of the Company:
Group
– The Company, BAE Systems, Inc., BAE
Systems (Holdings) Limited and BAE
Systems Holdings Inc. entered into a
renewed SSA, effective date of 5 January
2023, with the US Department of Defense
regarding the management of BAE
Systems, Inc. in order to comply with
the US Government’s national security
requirements. In the event of a change of
control of the Company, the Agreement
may be terminated or altered by the US
Department of Defense.
– The Company and BAE Systems Holdings
Inc. have entered into a £2bn RCF dated 27
September 2023. The facility provides that,
in the event of a change of control of the
Company, the lenders are entitled to
renegotiate terms, or if no agreement is
reached on negotiated terms within a
certain period, to call for the repayment or
cancellation of the facility. The RCF was
undrawn as at 31 December 2025.
Platforms & Services
– In May 2023, BAE Systems Hägglunds AB
entered into a contract with Försvarets
Materielverk and the Ministry of Defence of
the Czech Republic (MoD Czech Republic)
for the manufacture of 246 CV90 MkIV
infantry fighting vehicles. The contract
provides that any change of control of BAE
Systems Hägglunds AB (or its direct or
indirect holding company) is subject to
the MoD Czech Republic’s consent.
Air
– The Company has entered into a Restated
and Amended Shareholders Agreement
with European Aeronautic Defence and
Space Company EADS N.V. (EADS) and
Finmeccanica S.p.A. (Finmeccanica) relating
to MBDA S.A.S. dated 18 December 2001
(as amended). In the event that control of
the Company passes to certain specified
third-party acquirors, the agreement allows
EADS and Finmeccanica to exercise an
option to terminate certain executive
management level nomination and voting
rights, and certain shareholder information
rights of the Company in relation to the
MBDA joint venture. Following the exercise
of this option, the Company would have
the right to require the other shareholders
to purchase its interest in MBDA at fair
market value. The Company and EADS have
agreed that, if Finmeccanica acquires a
controlling interest in the Company, EADS
will increase its shareholding in MBDA to
50% by purchasing the appropriate
number of shares in MBDA at fair market
value.
| Strategic report | Governance | Financial statements | Additional information | 131 | ||
– In April 2019, BAE Systems (Operations)
Limited, Rolls Royce, MBDA and Leonardo
entered into a contract with the UK Ministry
of Defence (MoD) for the Tempest
Programme to develop and mature future
combat air-related technologies and
concepts. Since then further contract
funding has been awarded. This contract
provides that where the MoD has any
concerns about the actual or proposed
change of control of BAE Systems
(Operations) Limited (or its direct or indirect
holding company), which may include, but
is not limited to, such change of control
having an impact on the reputation or
public perception of the MOD or national
security, then the MoD shall advise the
contractor in writing of any concerns it may
have and the MoD may terminate the
contract.
– In June 2021, BAE Systems (Operations)
Limited entered into a contract with the
MoD for the Future Combat Air System
Acquisition Programme Concept and
Assessment Phase Contract to advance the
concepting and technology of the next-
generation Combat aircraft. The total value
of this contract is currently £2.82bn. This
contract provides that where the MoD has
any concerns about the actual or proposed
change of control of BAE Systems
(Operations) Limited (or its direct or indirect
holding company), which may include, but
is not limited to, potential threats of
national security, then the MoD shall advise
the contractor in writing of any concerns it
may have. The MoD may terminate the
contract within six months of it being
notified of such actual or proposed change
of control.
– In March 2022, the Hawk Integrated
Support contract was entered into between
BAE Systems (Operations) Limited and the
MoD for the provision of support services to
the Royal Air Force’s fleet of Hawk fast jet
trainer aircraft and the Royal Air Force
Aerobatic Team aircraft. Where the MoD
has any concerns about the actual or
proposed change of control of BAE Systems
(Operations) Limited (or its direct or indirect
holding company), which may include, but
is not limited to, potential threats of
national security, then the MoD shall advise
the contractor in writing of any concerns it
may have. The MoD may terminate the
contract within six months of such actual or
proposed change of control.
– In December 2024, BAE Systems (Holdings)
Limited entered into a joint venture
agreement with Leonardo S.p.A and Japan
Aircraft Industrial Enhancement Co. Ltd in
connection with GCAP. If there is a change
of control of the Company without the
consent of the other shareholders, the
agreement provides that BAE Systems
(Holdings) Limited would lose its voting
rights, its information rights and its right to
nominate directors to the board of the
GCAP joint venture company, in each case,
until the change of control is reversed.
– In October 2025, BAE Systems (Operations)
Limited entered into a contract with the UK
MoD for the procurement of 20 Typhoon
aircraft for the Turkish Ministry of National
Defence. This contract provided that where
the UK MoD has any concerns about the
actual or proposed change of control of
BAE Systems (Operations) Limited (or its
direct or indirect holding company), which
may include, but is not limited to, potential
threats of national security, then the MoD
shall advice the contractor in writing of any
concerns it may have. The MoD may
terminate the contract within six months of
being notified of such actual or proposed
change of control.
Maritime
– In December 2011, BAE Systems Marine
Limited entered into a contract with the
MoD for the design of the Dreadnought
submarines. Where the MoD considers that
a proposed change of control of BAE
Systems Marine Limited (or its direct or
indirect holding company) would be
contrary to the defence, national interest or
national security of the UK, then the change
of control shall not take place until
agreement is reached with the MoD on
how to proceed. In the event that there is a
change of control notwithstanding the
objection of the MoD on such grounds, the
MoD shall be entitled to terminate the
contract with immediate effect.
– In November 2015, BAE Systems Marine
Limited entered into a contract with the
MoD for the design, construction, testing
and commissioning of Boat 5 of the Astute
Class programme. In March 2016, BAE
Systems Marine Limited entered into a
contract with the MoD for the design,
construction, testing and commissioning of
Boat 6 of the Astute Class Programme. In
March 2018, BAE Systems Marine Limited
entered into a contract with the MoD for
the design, construction, testing and
commissioning of Boat 7 of the Astute Class
Programme. Where the MoD considers that
a proposed change of control of BAE
Systems Marine Limited (or its direct or
indirect holding company) would be
contrary to the defence, national security or
national interest of the UK, then the change
of control shall not proceed until
agreement is established with the MoD. In
the event that there is a change of control
notwithstanding the objection of the MoD
on such grounds, the MoD shall be entitled
to terminate the agreements immediately.
– In September 2016, BAE Systems Marine
Limited entered into a contract with the
MoD for the initial phase of manufacturing
activities for the Dreadnought Class
programme. This contract was extended
and amended in March 2022 to include
continuation of manufacturing and
associated activities on all four boats in the
class. Where the MoD considers that a
proposed change of control of BAE Systems
Marine Limited (or its direct or indirect
holding company) would be contrary to the
defence, national security or national
interest of the UK, then the change of
control shall not proceed until agreement
is established with the MoD. In the
event that there is a change of control,
notwithstanding the objection of the MoD
on such grounds, the MoD shall be entitled
to terminate the agreements immediately.
– In June 2017, BAE Systems Surface Ships
Limited entered into a contract with the
MoD for the manufacture of the first batch
of three Type 26 frigates. This contract was
amended and restated in November 2022
to include the manufacture of the second
batch of five Type 26 frigates. Where the
MoD considers that a proposed change
of control of BAE Systems Surface Ships
Limited (or its direct or indirect holding
company) would be contrary to the
defence, national security or national
interest of the UK or where the change of
control would result in increased costs to
the MoD under the contract, then the
change of control shall not proceed until
agreement with the MoD is established.
If there is a change of control without
notice or notwithstanding the objection
of the MoD on such grounds, then the
MoD may terminate the contract with
immediate effect.
– In December 2018, BAE Systems’ subsidiary,
ASC Shipbuilding Pty Limited, entered into
a contract providing the framework for the
design and manufacture of Hunter Class
frigates for the Royal Australian Navy (Head
Contract). As part of the acquisition of
ASC Shipbuilding Pty Limited from
the Commonwealth of Australia (the
Commonwealth), BAE Systems Australia
Limited entered into a Sovereign Capability
and Option Deed (SCOD). Under the Head
Contract and the SCOD, if there is a change
of control of ASC Shipbuilding Pty Limited
or BAE Systems Australia Limited or, in the
case of the Head Contract, there is a
change of control of the Company as
guarantor, consent is required from the
Commonwealth prior to any change of
control occurring. If there is a change of
control without notice or notwithstanding
an objection, the Commonwealth may
terminate the Head Contract, take any
action to mitigate an actual or potential
threat to Australia’s national security
interests, or exercise its call option under
the SCOD and regain ownership of ASC
Shipbuilding Pty Limited.
| 132 | BAE Systems plc Annual Report 2025 |
| Statutory and other regulatory information continued |
– In November 2020, BAE Systems Global
Combat Systems Munitions Limited and the
MoD entered into a 15-year agreement for
the provision of ammunition to UK forces
(the Next Generation Munitions Solution
(NGMS) agreement) from 2023 to 2037.
Where the MoD has any concerns
regarding a proposed change of control
of BAE Systems Global Combat Systems
Munitions Limited (or its direct or indirect
holding company) and such concerns are
not resolved, then if the change of control
proceeds, the MoD may terminate the
contract.
– In March 2021, BAE Systems Surface Ships
Limited and the MoD entered into the
FMSP Ships Engineering Management and
Delivery agreement for the provision of
surface ship engineering management and
delivery services relating to HM Naval Base
Portsmouth. Where the MoD considers
that a proposed change of control of BAE
Systems Surface Ships Limited (or its direct
or indirect holding company) would be
contrary to the defence, national security or
national interest of the UK, then the change
of control shall not proceed until
agreement with the MoD is established. If
there is a change of control without notice
or notwithstanding the objection of the
MoD on such grounds, the MoD shall be
entitled to terminate the agreement.
– In June 2021, BAE Systems Australia Limited
entered into a contract providing the
framework for the provision of in-service
support for the Hawk aircraft until June
2031. If there is a change of control of
BAE Systems Australia Limited or BAE
Systems plc without consent from the
Commonwealth, the Commonwealth
may terminate the contract.
– In June 2023, BAE Systems Marine Limited
entered into a contract with the MoD for
the funding of facilities required for the
SSN-AUKUS Class programme. In July 2023,
BAE Systems Marine Limited entered into a
contract with the MoD for the
development of the design of the SSN-
AUKUS Class of submarines and long lead
item procurement for that programme.
In each contract where the MoD considers
that a proposed change of control of BAE
Systems Marine Limited (or its direct or
indirect holding company) would be
contrary to the defence, national security
or national interest of the UK, then the
change of control shall not proceed until
agreement is established with the MoD. In
the event that there is a change of control
notwithstanding the objection of the MoD
on such grounds, the MoD shall be entitled
to terminate the agreements immediately.
– In December 2024, BAE Systems Australia
Submarines Pty Ltd signed a Tasking
Statement with the Commonwealth in
connection with the SSN-AUKUS Pillar 1
programme. The Tasking Statement is a
call-off contract from the Mobilisation Deed
framework arrangement that was entered
into in November 2024 between the
Commonwealth, BAE Systems Australia
Submarines Pty Ltd and ASC SSN-AUKUS
Pty Ltd. The Tasking Statement will enable
the commencement of the development
of the SSN-AUKUS Pillar 1 programme
foundations. If there is a change of control
of BAE Systems plc without the consent
of the Commonwealth, then the
Commonwealth may either: (i) terminate
the Enterprise Collaboration Deed/
Mobilisation Deed/Tasking Statement
arrangements; or (ii) agree not to
terminate subject to BAE Systems Australia
Submarines Pty Ltd providing further
information, giving specified undertakings
or entering into further agreements as may
be required by the Commonwealth.
In addition, the Company’s share plans
contain provisions as a result of which options
and awards may vest and become exercisable
on a change of control of the Company in
accordance with the rules of the plans.
Auditor
Deloitte LLP has indicated its willingness to be
re-appointed as the Company’s auditor and a
resolution proposing its re-appointment will
be put to the 2026 AGM.
Statement of directors’ responsibilities
in respect of the Annual Report and the
financial statements
The directors are responsible for preparing
the Annual Report, and the Group and parent
company financial statements in accordance
with applicable law and regulations.
Company law requires the directors to
prepare Group and parent company financial
statements for each financial year. Under that
law, they are required to prepare the Group
financial statements in accordance with UK-
adopted international accounting standards
and applicable law, and have elected to
prepare the parent company financial
statements in accordance with UK accounting
standards, including Financial Reporting
Standard (FRS) 101, Reduced Disclosure
Framework.
Under company law, the directors must not
approve the financial statements unless they
are satisfied that they give a true and fair view
of the state of affairs of the Group and parent
company, and of their profit or loss for that
period. In preparing each of the Group and
parent company financial statements, the
directors are required to:
– select suitable accounting policies and then
apply them consistently;
– make judgements and estimates that are
reasonable, relevant, reliable and prudent;
– for the Group financial statements, state
whether they have been prepared in
accordance with IFRSs as adopted by
the UK;
– for the parent company financial
statements, state whether applicable UK
accounting standards have been followed,
subject to any material departures disclosed
and explained in the parent company
financial statements;
– assess the Group and parent company’s
ability to continue as a going concern,
disclosing, as applicable, matters related
to going concern; and
– use the going concern basis of accounting
unless they either intend to liquidate the
Group or the parent company or to cease
operations, or have no realistic alternative
but to do so.
| Strategic report | Governance | Financial statements | Additional information | 133 | ||
The directors are responsible for keeping
adequate accounting records that are
sufficient to show and explain the parent
company’s transactions and disclose with
reasonable accuracy at any time the financial
position of the parent company and enable
them to ensure that its financial statements
comply with the Companies Act 2006.
The directors are responsible for such internal
control as they determine is necessary
to enable the preparation of financial
statements that are free from material
misstatement, whether due to fraud or error,
and have general responsibility for taking
such steps as are reasonably open to them to
safeguard the assets of the Group and to
prevent and detect fraud and other
irregularities.
Under applicable law and regulation, the
directors are also responsible for preparing a
strategic report, directors’ report, directors’
remuneration report and corporate
governance statement that comply with that
law and regulation.
The directors are responsible for the
maintenance and integrity of the corporate
and financial information included on the
Company’s website. Legislation in the UK
governing the preparation and dissemination
of financial statements may differ from
legislation in other jurisdictions.
Controls over financial reporting
Through implementation of the Operational
Framework, internal control procedures are in
place to support the approval of the financial
statements of the Group.
Management is responsible for reviewing the
financial reports and disclosures to ensure
that they have been subject to adequate
verification and comply with applicable
standards and legislation (including
reviewing data for consolidation into the
Group’s financial statements to ensure that
it gives a true and fair view of the Group’s
results in compliance with applicable
accounting policies).
| Responsibility statement of the directors in respect of the Annual Report and financial statements Each of the directors, whose names and functions can be found on pages 77 to 79 (excluding John Pettigrew), confirms that to the best of their knowledge: – the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company, and the undertakings included in the consolidation taken as a whole; and – the Strategic report and Directors’ report (which together comprise a management report for the purposes of DTR 4.1.8R), taken together, include a fair review of the development and performance of the business, and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. In addition, each of the directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. On behalf of the Board |
||
| Cressida Hogg Chair 17 February 2026 |
||
Where appropriate, management reports its
conclusions to the Audit and Risk Committee,
which debates such conclusions and provides
further challenge. Finally, the Board
scrutinises and approves results
announcements and the Annual Report and
ensures that appropriate disclosures have
been made.
This governance process ensures that both
management and the Board are given
sufficient opportunity to debate and
challenge the financial statements of the
Group and other significant disclosures
before they are made public.
Statement of disclosure
of information to auditor
The directors who held office at the date
of approval of this Directors’ report confirm
that, so far as they are each aware, there is
no relevant audit information of which the
Company’s auditor is unaware; and each
director has taken all the steps that he/she
ought to have taken to make himself/herself
aware of any relevant audit information and
to establish that the Company’s auditor is
aware of that information.
| Directors’ report This Directors’ report was approved by the Board of directors of BAE Systems plc on 17 February 2026 and signed on its behalf by: Anthony Clarke Company Secretary |
||
| 134 | BAE Systems plc Annual Report 2025 |
Financial
statements
Group accounting policies
Material accounting policies are included
within the relevant note to the Consolidated
financial statements.
| Strategic report | Governance | Financial statements | Additional information | 135 | ||
| Independent Auditor’s report to the members of BAE Systems plc |
Report on the audit of
the financial statements
- Opinion
| In our opinion: – the financial statements of BAE Systems plc (the “Company”) and its subsidiaries (the “Group”) give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 December 2025 and of the Group’s profit for the year then ended; – the Group financial statements have been properly prepared in accordance with United Kingdom adopted international accounting standards; – the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including Financial Reporting Standard 101 “Reduced Disclosure Framework”; and – the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. |
||
We have audited the financial statements which comprise pages 141
to 214.
The financial reporting framework that has been applied in the
preparation of the Group financial statements is applicable law and
United Kingdom adopted international accounting standards. The
financial reporting framework that has been applied in the
preparation of the Company financial statements is applicable law
and United Kingdom Accounting Standards, including FRS 101
“Reduced Disclosure Framework” (United Kingdom Generally
Accepted Accounting Practice).
2. Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under
those standards are further described in the Auditor’s responsibilities
for the audit of the financial statements section of our report.
We are independent of the Group and the Company in accordance
with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the Financial Reporting
Council’s (the “FRC’s”) Ethical Standard as applied to listed public
interest entities, and we have fulfilled our other ethical responsibilities
in accordance with these requirements. The non-audit services
provided to the Group and Company for the year are disclosed in note
3 to the consolidated financial statements. We confirm that we have
not provided any non-audit services prohibited by the FRC’s Ethical
Standard to the Group or the Company.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
3. Our application of materiality
3.1. 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:
3.2. 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. In determining the performance materiality,
we considered a number of factors – the history of misstatements, risk
assessment and aggregation risk and the effectiveness of controls.
| Group financial statements |
Company financial statements |
|
| Performance materiality |
70% (2024: 70%) of Group materiality |
70% (2024: 70%) of Company materiality |
3.3. Error reporting threshold
We agreed with the Audit & Risk Committee that we would report to
the Committee all audit differences in excess of £7.5m (2024: £6.5m),
as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds. We also report to the
Audit & Risk Committee on disclosure matters that we identified when
assessing the overall presentation of the financial statements.
| Group financial statements |
Company financial statements |
|
| Materiality | £150m (2024: £130m) | £117m (2024: £86m) |
| Basis for determining materiality |
4.7% of underlying EBIT of £ 3,322m (2024: 4.3% of underlying EBIT of £3,015m). |
0.5% of total assets of £ 22,202m, (2024: 0.4% of total assets of £23,436 m). |
| Rationale for the benchmark applied |
We consider underlying EBIT to be of most relevance to users of the financial statements as it is a key financial reporting metric and is reconciled to the financial statements within this Annual Report. |
We consider total assets to be the key benchmark in assessing the Company’s financial position as its primary purpose is to hold investments. |
Materiality levels used in our audit
| 2025 (£m) | |||
| 2024 (£m) | |||
| Group | Group Materiality | ||
| GPM | Group Performance Materiality | ||
| HCM | Highest Component Materiality* | ||
| LCM | Lowest Component Materiality | ||
| GERT | Group Error Reporting Threshold | ||
| *Excludes the Parent Company |
| 136 | BAE Systems plc Annual Report 2025 |
| Independent Auditor’s report to the members of BAE Systems plc continued |
4. An overview of the scope of our audit
4.1. Identification and scoping of components
We scoped the Group audit by understanding the Group and its
environment, including Group-wide controls, and assessing the risk
characteristics of significant transactions, account balances, and
disclosures. This determined the focus on 25 (2024: 27) components,
covering 78% (2024: 81%) of revenue, 84% (2024: 83%) of profit
before tax (“PBT”) and 86% (2024: 90%) of total assets.
Revenue Profit before tax Total assets
Our calculation of revenue and total asset coverage only includes
components where audit procedures are performed over the revenue
and asset account balances respectively. For profit before tax, our
coverage calculation includes those components where we perform
audit procedures over the majority of balances which constitute PBT.
Deloitte member firms in the US, UK, Kingdom of Saudi Arabia,
Sweden and Australia performed audit procedures under our
supervision, direction and review, leveraging their local regulatory
knowledge within a common Deloitte audit approach. For MBDA, an
equity-accounted investment, we supervised, directed and reviewed
the work of its non-Deloitte auditor. The UK-based Group audit team
directly audited the Company, treasury, post-employment benefits,
litigation, goodwill and tax.
4.2. Our consideration of the control environment
Our controls approach primarily informed our risk assessment and we
tested certain revenue and pension asset valuation controls, as well as
relevant general IT controls. We focused on the Group’s contract
accounting processes, obtaining an understanding of key contract
controls (eg, estimating contract costs and recognising revenue) at
components where revenue was in scope. We also assessed contract
accounting controls for other relevant income statement and balance
sheet balances.
The Group operates various IT systems critical to financial reporting,
including principal Enterprise Resource Planning systems and ancillary
systems. For all components audited, we identified IT systems, relevant
to our audit, gained an understanding of general IT controls in place
and observed improvements made in response to prior control
findings.
We also obtained an understanding of head office controls over
central balances and processes, including post-employment benefit
obligations, consolidation, treasury, tax and planning and budgeting.
During the audit, we relied on certain contract accounting and
pension valuation controls. Where where deficiencies were identified
or remediation was incomplete, we did not rely on those controls for
our audit.
4.3. Our consideration of climate-related risks
Supported by our climate specialists, we have understood the Group’s
assessment of climate-related risks. We conducted an independent
climate risk assessment to evaluate the completeness of identified
risks, with component teams considering local regulatory
environments for potential environmental claims.
As described in the financial statements (pages 147 and 148), key
financial reporting areas impacted include future forecasts and the
recoverability of goodwill. We assessed management’s climate-related
assumptions, their alignment with the Group’s Net Zero targets and
the adequacy of related disclosures.
We concluded that treating climate change as a factor within
goodwill estimates is appropriate given the Group’s current risk and
assessed financial impact.
4.4. Working with other auditors
Our oversight of component auditors (including MBDA) involved
directing their audit planning, understanding their risk assessments
and supervising their work. We issued detailed referral instructions,
and all teams participated in our annual planning workshop led by the
Group audit partner and team.
Supervision included regular communication with component teams
to address audit and accounting matters. The lead audit partner or
senior team members visited component teams in the UK, US,
Australia and Kingdom of Saudi Arabia during the planning and
performance stages to supervise and review their work. We also
reviewed audit documentation to challenge component reporting
and findings and attended closing meetings either in person or
virtually.
For BAE Systems, Inc. components in the US and related entities, which
are subject to a Department of War Special Security Agreement (SSA)
restricting information flow to non-US nationals, we implemented
alternative procedures. These included engaging an independent US
national partner to assist us with the oversight of the US component
audit team.
5. Key audit matters
Key audit matters are those matters that, in our professional
judgement, are of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to fraud)
that we identified.
These matters included those which had the greatest effect on the
overall audit strategy, the allocation of resources in the audit and
directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.
| Strategic report | Governance | Financial statements | Additional information | 137 | ||
5.1. Revenue and margin recognition on long-term contracts
| Key audit matter description |
Refer to page 96 (Audit & Risk Committee Report), Note 1 (Preparation of the Consolidated financial statements) and Note 2 (Segmental analysis and revenue recognition). Revenue: £28,336m (2024: £26,312m) Operating profit: £2,925m (2024: £2,685m) Revenue and margin recognition require significant judgement, particularly for contracts with high estimation uncertainty. Key estimates include forecast costs to complete, assumed learning efficiencies over the life of a programme, scheduled completion dates and appropriateness of contingency held against the risk of future cost growth. As such, revenue and margin recognition on long-term contracts is a key audit matter. To identify high-risk contracts, we conducted a contract risk assessment at each component using data analytics, contract information, prior audit results and external factors such as market and geopolitical conditions. This included meetings with finance and contract managers, attending management’s quarterly business reviews, analysing contract documentation and assessing key judgements. Our assessment identified one programme with a particularly elevated risk of misstatement due to the significant judgement required in estimating the trading margin position, which could impact the 2025 financial statements. |
| How the scope of our audit responded to the key audit matter |
Our contract testing approach included: Testing the relevant controls – We tested relevant financial and IT controls across the Group’s project accounting processes established to ensure that contracts are appropriately forecast, managed, controlled and reported. – We observed the controls in operation by attending a sample of project contract status review meetings, quarterly business review meetings and Group-level meetings to assess the levels of challenge applied to the forecasts. Challenging assumptions and estimates We focused audit effort on contracts with higher judgement, designing contract-specific procedures to address associated risks. To gain assurance over the contract judgements and estimates made, our work included: – Inspection of customer contracts – Inspecting customer contracts to gain an understanding of key contractual terms; – Enquiry – Making enquiries of programme management and other operational personnel to obtain an understanding of the performance of the projects throughout the year and at year-end; – Historical forecasting accuracy – Evaluating historical forecasting accuracy of costs against actual costs, including on similar programmes, and challenging future cost expectations with reference to those data points; – Site visits – Conducting production site visits to inform our challenge of the cost to complete estimates and understanding of contract status; – Tests of detail of costs to date – Testing a sample of expenditure to date; – Tests of detail of estimates to complete – Testing the underlying calculations used in the contract assessments for sensitivity, accuracy and completeness, including the estimated costs to complete the contract alongside associated contingencies. In auditing the cost to complete, we have challenged the key assumptions with reference to previous programmes and current run-rate data, resource availability, supply chain issues (such as inflation and contract delivery schedule) and other factors that could impact on contract and schedule risk; – Inspection and evaluation of external evidence – Examining external evidence to assess contract status, timeframe for delivery and any variation of consideration (including associated recoverability of contract balances), such as customer correspondence. For certain contracts, this evidence was evaluated by meeting with the customer directly; – Legal – Enquiring with in-house legal counsel regarding contract-related litigation and claims and analysing legal opinions where applicable; and – Stand back assessment – Considering whether there were any indicators of management override of controls. or bias in arriving at their reported position, including a stand back assessment of the contract position. |
| Key observations | As a result of the audit procedures outlined above, we consider the judgements made by the Group in recognising revenue and margin to be reasonable. |
5.2. Changes in Key Audit Matters
Last year, following the acquisition of Ball Aerospace in February 2024,
we identified the associated fair value acquisition accounting as a key
audit matter. Given that this was a one-off event in the prior year, we
no longer consider this a key audit matter.
| 138 | BAE Systems plc Annual Report 2025 |
| Independent Auditor’s report to the members of BAE Systems plc continued |
6. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the
directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
Our evaluation of the directors’ assessment of the Group’s and
Company’s ability to continue to adopt the going concern basis of
accounting included:
– obtaining an understanding of the directors’ process for
determining the appropriateness of the going concern basis;
– evaluating the Group’s existing access to sources of financing,
including existing debt and undrawn committed bank facilities;
– obtaining an understanding of relevant controls over the going
concern models prepared by management, including the review of
the inputs and assumptions used in those models;
– testing the accuracy of management’s models, including agreement
to the most recent Board approved budgets and forecasts;
– challenging the key assumptions underpinning these forecasts by:
– reading analyst reports, industry data and other external
information and comparing these with management’s estimates;
– comparing forecast revenue with the Group’s order book and
historical performance;
– evaluating the historical accuracy of forecasts prepared by
management;
– considering potential macro-economic impacts on the forecasts as
a consequence of the current geo-political environment; and
– assessing the sensitivity of the headroom to key assumptions; and
– assessing the appropriateness of the Group’s disclosure concerning
the going concern basis.
Based on the work performed, we have not identified any material
uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the Group's and Company’s
ability to continue as a going concern for a period of at least twelve
months from when the financial statements are authorised for issue.
In relation to the reporting on how the Group has applied the UK
Corporate Governance Code, we have nothing material to add or
draw attention to in relation to the directors’ statement in the
financial statements about whether the directors considered it
appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with
respect to going concern are described in the relevant sections of this
report.
7. Other information
The other information comprises the information included in the
annual report, other than the financial statements and our auditor’s
report thereon. The directors are responsible for the other information
contained within the Annual Report.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated in our
report, we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent with
the financial statements, or our knowledge obtained in the course of
the audit, or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether this gives rise to
a material misstatement in the financial statements themselves. If,
based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to
report that fact.
| We have nothing to report in this regard. | ||
8. Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the
directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view,
and for such internal control as the directors determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for
assessing the Group’s and the Company’s ability to continue as a
going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Group or the Company or to
cease operations, or have no realistic alternative but to do so.
9. Auditor’s responsibilities for the audit of the
financial statements
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance
but is not a guarantee that an audit conducted in accordance with
ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the
basis of these financial statements.
A further description of our responsibilities for the audit of the
financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of
our auditor’s report.
10. Extent to which the audit was considered
capable of detecting irregularities, including
fraud
Irregularities, including fraud, are instances of non-compliance with
laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements in
respect of irregularities, including fraud. The extent to which our
procedures are capable of detecting irregularities, including fraud is
detailed below.
10.1. Identifying and assessing potential risks related to
irregularities
In identifying and assessing risks of material misstatement due to
irregularities, including fraud and non-compliance with laws and
regulations, we considered:
– the Group’s industry, control environment, business performance
and remuneration policies;
– the Group’s own risk assessments of fraud or error;
– enquiries with management, legal counsel, internal audit, directors
and the Audit & Risk Committee regarding their identification of
risks;
– the Group’s policies and procedures for compliance with laws, fraud
detection and internal controls, including bribery, corruption and
whistleblowing policies; and
– discussions among the audit team, including specialists (eg, tax,
valuations, pensions, IT), on potential fraud risks and indicators.
We identified the greatest potential fraud risk in the judgement
involved in estimating costs to complete and its impact on revenue
and margin recognition for long-term contracts. As required under
ISAs (UK), we also addressed the risk of management override.
| Strategic report | Governance | Financial statements | Additional information | 139 | ||
We obtained an understanding of the legal and regulatory
frameworks affecting material amounts and disclosures in the
financial statements, focusing on the UK Companies Act, UK Listing
Rules, pension and tax legislation. Additionally, we considered other
laws critical to the Group’s operations, such as export controls,
defence contracting and anti-bribery legislation.
10.2. Audit response to risks identified
As a result of performing the above, we identified revenue and margin
recognition on long-term contracts as a key audit matter, with the
greatest potential for fraud owing to the level of estimation
uncertainty and management judgement. The key audit matters
section of our report explains the matter in more detail and also
describes the specific procedures we performed in response to that
key audit matter.
Additionally, our response to identified risks included:
– reviewing financial statement disclosures and testing supporting
documentation for compliance with relevant laws and regulations
that have a direct effect on the financial statements;
– enquiring with management, the Audit & Risk Committee and legal
counsel about litigation and claims;
– performing analytical procedures to identify unusual or unexpected
relationships indicating potential fraud risks;
– reviewing governance meeting minutes, internal audit reports and
correspondence with regulatory authorities; and
– addressing the risk of management override by testing journal
entries, assessing potential bias in accounting estimates and
evaluating the rationale for significant or unusual transactions.
We also communicated relevant laws, regulations and fraud risks to
the engagement team, including specialists and component audit
teams and remained vigilant for indications of fraud or non-
compliance with laws and regulations throughout the audit.
Report on other legal and regulatory
requirements
11. Opinions on other matters prescribed by the
Companies Act 2006
| In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: – the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and – the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and the Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors’ report. |
||
12. Corporate Governance Statement
The Listing Rules require us to review the directors' statement in
relation to going concern, longer-term viability and that part of the
Corporate Governance Statement relating to the Group’s compliance
with the provisions of the UK Corporate Governance Code specified
for our review.
| Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit: – the directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out on page 73; – the directors’ explanation as to its assessment of the Group’s prospects, the period this assessment covers and why the period is appropriate set out on page 73; – the directors' statement on fair, balanced and understandable set out on page 133; – the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 63; – the section of the Annual Report that describes the review of effectiveness of risk management and internal control systems set out on page 96; and – the section describing the work of the Audit & Risk Committee set out on page 96. |
||
13. Matters on which we are required to report
by exception
13.1. Adequacy of explanations received and accounting
records
Under the Companies Act 2006 we are required to report to you if, in
our opinion:
– we have not received all the information and explanations we
require for our audit; or
– adequate accounting records have not been kept by the Company,
or returns adequate for our audit have not been received from
branches not visited by us; or
– the Company financial statements are not in agreement with the
accounting records and returns.
| We have nothing to report in this regard. | ||
13.2. Directors’ remuneration
Under the Companies Act 2006 we are also required to report if, in our
opinion, certain disclosures of directors’ remuneration have not been
made or the part of the directors’ remuneration report to be audited is
not in agreement with the accounting records and returns.
| We have nothing to report in this regard. | ||
14. Other matters which we are required to
address
14.1. Auditor tenure
Following the recommendation of the Audit & Risk Committee, we
were appointed by the members on 10 May 2018 to audit the
financial statements for the year ending 31 December 2018 and
subsequent financial periods. The period of total uninterrupted
engagement including previous renewals and reappointments of the
firm is eight years covering the years ended 31 December 2018 to 31
December 2025.
14.2. Consistency of the audit report with the additional
report to the Audit & Risk Committee
Our audit opinion is consistent with the additional report to the Audit
& Risk Committee we are required to provide in accordance with ISAs
(UK).
| 140 | BAE Systems plc Annual Report 2025 |
| Independent Auditor’s report to the members of BAE Systems plc continued |
15. Use of our report
This report is made solely to the Company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the
Company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company’s members as a
body, for our audit work, for this report, or for the opinions we have
formed.
As required by the Financial Conduct Authority (FCA) Disclosure
Guidance and Transparency Rule (DTR) 4.1.15R – DTR 4.1.18R, these
financial statements will form part of the Electronic Format Annual
Financial Report filed on the National Storage Mechanism of the FCA
in accordance with DTR 4.1.15R – DTR 4.1.18R. This auditor’s report
provides no assurance over whether the Electronic Format Annual
Financial Report has been prepared in compliance with DTR 4.1.15R –
DTR 4.1.18R. We have been engaged to provide assurance on
whether the Electronic Format Annual Financial Report has been
prepared in compliance with DTR 4.1.15R – DTR 4.1.18R and will
publicly report separately to the members on this.
Claire Faulkner
(Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London
17 February 2026
| Strategic report | Governance | Financial statements | Additional information | 141 | ||
| Consolidated income statement for the year ended 31 December |
| 2025 | 2024 | ||||||
| Note | Total | Total | |||||
| £m | £m | £m | £m | ||||
| Continuing operations | |||||||
| Revenue | 2 | 28,336 | 26,312 | ||||
| Operating costs | 3 | (25,838) | (24,106) | ||||
| Other income | 5 | 233 | 266 | ||||
| Share of results of equity accounted investments | 13 | 194 | 213 | ||||
| Operating profit | 2 | 2,925 | 2,685 | ||||
| Finance income | 135 | 135 | |||||
| Finance costs | (488) | (488) | |||||
| Net finance costs | 6 | (353) | (353) | ||||
| Profit before tax | 2,572 | 2,332 | |||||
| Tax expense | 7 | (421) | (291) | ||||
| Profit for the year | 2,151 | 2,041 | |||||
| Attributable to: | |||||||
| Equity shareholders | 2,062 | 1,956 | |||||
| Non-controlling interests | 89 | 85 | |||||
| 2,151 | 2,041 | ||||||
| Earnings per share | 8 | ||||||
| Basic earnings per share | 68.8p | 64.9p | |||||
| Diluted earnings per share | 68.0p | 64.1p |
| 142 | BAE Systems plc Annual Report 2025 |
| Consolidated statement of comprehensive income for the year ended 31 December |
| 2025 | 2024 | ||||||||
| Other reserves1 |
Retained earnings |
Total | Other reserves1 |
Retained earnings |
Total | ||||
| Note | £m | £m | £m | £m | £m | £m | |||
| Profit for the year | — | 2,151 | 2,151 | — | 2,041 | 2,041 | |||
| Other comprehensive income | |||||||||
| Items that will not be reclassified to the income statement: | |||||||||
| Consolidated: | |||||||||
| Remeasurements on post-employment benefit schemes | 23 | — | (7) | (7) | — | 414 | 414 | ||
| Remeasurements on other investments | — | 12 | 12 | — | — | — | |||
| Tax on items that will not be reclassified to the income statement |
7 | — | (28) | (28) | — | (25) | (25) | ||
| Share of the other comprehensive (expense)/income of associates and joint ventures accounted for using the equity method (net of tax) |
13 | — | (3) | (3) | — | 15 | 15 | ||
| Items that may be reclassified to the income statement: | |||||||||
| Consolidated: | |||||||||
| Currency translation on foreign currency net investments | (608) | — | (608) | 4 | — | 4 | |||
| Reclassification of cumulative currency translation reserve on divestment of interest in equity accounted investments and other business disposals |
21 | — | 21 | 3 | — | 3 | |||
| Fair value gain/(loss) arising on hedging instruments during the year |
16 | 44 | — | 44 | (36) | — | (36) | ||
| Cumulative fair value loss on hedging instruments reclassified to the income statement |
11 | — | 11 | 69 | — | 69 | |||
| Tax on items that may be reclassified to the income statement |
7 | (6) | — | (6) | (7) | — | (7) | ||
| Share of the other comprehensive (expense)/income of associates and joint ventures accounted for using the equity method (net of tax) |
13 | (6) | — | (6) | 4 | — | 4 | ||
| Total other comprehensive (expense)/income for the year (net of tax) |
(544) | (26) | (570) | 37 | 404 | 441 | |||
| Total comprehensive (expense)/income for the year | (544) | 2,125 | 1,581 | 37 | 2,445 | 2,482 | |||
| Attributable to: | |||||||||
| Equity shareholders | (536) | 2,038 | 1,502 | 38 | 2,357 | 2,395 | |||
| Non-controlling interests | (8) | 87 | 79 | (1) | 88 | 87 | |||
| (544) | 2,125 | 1,581 | 37 | 2,445 | 2,482 |
1. An analysis of other reserves is provided in note 25.
| Strategic report | Governance | Financial statements | Additional information | 143 | ||
| Consolidated statement of changes in equity for the year ended 31 December |
| Attributable to equity holders of BAE Systems plc | |||||||||
| Note | Issued share capital |
Share premium |
Other reserves1 |
Retained earnings |
Total | Non- controlling interests |
Total equity |
||
| £m | £m | £m | £m | £m | £m | £m | |||
| At 1 January 2024 | 81 | 1,253 | 6,403 | 2,822 | 10,559 | 164 | 10,723 | ||
| Profit for the year | — | — | — | 1,956 | 1,956 | 85 | 2,041 | ||
| Total other comprehensive income for the year | — | — | 38 | 401 | 439 | 2 | 441 | ||
| Total comprehensive income for the year | — | — | 38 | 2,357 | 2,395 | 87 | 2,482 | ||
| Share-based payments (inclusive of tax) | 28 | — | — | — | 145 | 145 | — | 145 | |
| Cumulative fair value loss on hedging instruments transferred to the balance sheet |
— | — | 5 | — | 5 | — | 5 | ||
| Ordinary share dividends | 25 | — | — | — | (937) | (937) | (90) | (1,027) | |
| Purchase of own shares | 25 | (1) | — | 1 | (551) | (551) | — | (551) | |
| At 31 December 2024 | 80 | 1,253 | 6,447 | 3,836 | 11,616 | 161 | 11,777 | ||
| Profit for the year | — | — | — | 2,062 | 2,062 | 89 | 2,151 | ||
| Total other comprehensive expense for the year | — | — | (536) | (24) | (560) | (10) | (570) | ||
| Total comprehensive (expense)/income for the year | — | — | (536) | 2,038 | 1,502 | 79 | 1,581 | ||
| Share-based payments (inclusive of tax) | 28 | — | — | — | 226 | 226 | — | 226 | |
| Cumulative fair value gain on hedging instruments transferred to the balance sheet |
— | — | (31) | — | (31) | — | (31) | ||
| Ordinary share dividends | 25 | — | — | — | (1,027) | (1,027) | (87) | (1,114) | |
| Purchase of own shares | 25 | (1) | — | 1 | (502) | (502) | — | (502) | |
| At 31 December 2025 | 79 | 1,253 | 5,881 | 4,571 | 11,784 | 153 | 11,937 |
- An analysis of other reserves is provided in note 25.
| 144 | BAE Systems plc Annual Report 2025 |
| Consolidated balance sheet as at 31 December |
| Note | 2025 | 2024 | ||
| £m | £m | |||
| Non-current assets | ||||
| Goodwill | 9 | 12,732 | 13,297 | |
| Other intangible assets | 10 | 2,513 | 2,965 | |
| Property, plant and equipment | 11 | 5,160 | 4,843 | |
| Right-of-use assets | 12 | 1,638 | 1,755 | |
| Investment property | 37 | 38 | ||
| Equity accounted investments | 13 | 698 | 823 | |
| Other investments | 124 | 83 | ||
| Contract receivables | 14 | 117 | 108 | |
| Other receivables | 15 | 859 | 626 | |
| Post-employment benefit surpluses | 23 | 1,250 | 1,271 | |
| Other financial assets | 16 | 232 | 265 | |
| Deferred tax assets | 17 | 172 | 315 | |
| 25,532 | 26,389 | |||
| Current assets | ||||
| Inventories | 18 | 1,384 | 1,324 | |
| Contract receivables | 14 | 3,834 | 3,749 | |
| Trade and other receivables | 15 | 3,125 | 2,914 | |
| Current tax | 19 | 183 | 176 | |
| Other financial assets | 16 | 183 | 212 | |
| Cash and cash equivalents | 20 | 3,438 | 3,378 | |
| 12,147 | 11,753 | |||
| Total assets | 37,679 | 38,142 | ||
| Non-current liabilities | ||||
| Loans | 21 | (7,190) | (7,713) | |
| Lease liabilities | 12 | (1,513) | (1,658) | |
| Contract liabilities | 14 | (1,746) | (1,720) | |
| Other payables | 22 | (1,921) | (1,859) | |
| Post-employment benefit obligations | 23 | (406) | (503) | |
| Other financial liabilities | 16 | (248) | (193) | |
| Deferred tax liabilities | 17 | (26) | (14) | |
| Provisions | 24 | (389) | (363) | |
| (13,439) | (14,023) | |||
| Current liabilities | ||||
| Loans | 21 | (95) | (699) | |
| Lease liabilities | 12 | (253) | (183) | |
| Contract liabilities | 14 | (4,820) | (4,504) | |
| Trade and other payables | 22 | (6,686) | (6,383) | |
| Other financial liabilities | 16 | (173) | (264) | |
| Current tax | 19 | (44) | (55) | |
| Provisions | 24 | (232) | (254) | |
| (12,303) | (12,342) | |||
| Total liabilities | (25,742) | (26,365) | ||
| Net assets | 11,937 | 11,777 | ||
| Capital and reserves | ||||
| Issued share capital | 25 | 79 | 80 | |
| Share premium | 1,253 | 1,253 | ||
| Other reserves | 25 | 5,881 | 6,447 | |
| Retained earnings | 4,571 | 3,836 | ||
| Total equity attributable to equity holders of BAE Systems plc | 11,784 | 11,616 | ||
| Non-controlling interests | 153 | 161 | ||
| Total equity | 11,937 | 11,777 |
Approved by the Board of directors of BAE Systems plc on 17 February 2026 and signed on its behalf by:
| C N Woodburn | B M Greve |
| Chief Executive | Chief Financial Officer |
| Strategic report | Governance | Financial statements | Additional information | 145 | ||
| Consolidated cash flow statement for the year ended 31 December |
| 2025 | 2024 | |||
| Note | £m | £m | ||
| Profit for the year | 2,151 | 2,041 | ||
| Tax expense | 7 | 421 | 291 | |
| Adjustment in respect of research and development expenditure credits | 5 | (59) | (45) | |
| Share of results of equity accounted investments | 13 | (194) | (213) | |
| Net finance costs | 6 | 353 | 353 | |
| Depreciation, amortisation and impairment | 3 | 1,173 | 1,097 | |
| Net loss on disposal of property, plant and equipment, and investment property | 3,5 | — | 6 | |
| Gain in respect of divestment of interests in equity accounted investments and other business disposals | 5,32 | (12) | (94) | |
| Cost of equity-settled employee share schemes | 4 | 174 | 144 | |
| Movement in provisions | 16 | 24 | ||
| Difference between pension funding contributions paid and the pension charge | (50) | (249) | ||
| (Increase)/decrease in working capital: | ||||
| Inventories | (110) | (144) | ||
| Trade, contract and other receivables | (723) | (121) | ||
| Trade and other payables, and contract liabilities | 488 | 1,010 | ||
| Tax paid net of research and development expenditure credits received | (196) | (175) | ||
| Net cash flow from operating activities | 3,432 | 3,925 | ||
| Dividends received from equity accounted investments | 13 | 299 | 158 | |
| Interest received | 79 | 130 | ||
| Principal element of finance lease receipts | 6 | 12 | ||
| Purchase of property, plant and equipment, and investment property | (920) | (990) | ||
| Purchase of intangible assets | (183) | (173) | ||
| Purchase of other investments | (2) | — | ||
| Proceeds from funding related to assets | 122 | 153 | ||
| Equity accounted investment funding | 13 | (1) | — | |
| Proceeds from sale of property, plant and equipment, investment property and intangible assets | 25 | 23 | ||
| Purchase of subsidiary undertakings, net of cash and cash equivalents acquired | 31 | (8) | (4,776) | |
| Cash flow in respect of divestment of interests in equity accounted investments and other business disposals | 32 | 42 | 194 | |
| Net cash flow from investing activities | (541) | (5,269) | ||
| Interest paid | (512) | (543) | ||
| Equity dividends paid | 25 | (1,027) | (937) | |
| Purchase of own shares | 25 | (502) | (555) | |
| Dividends paid to non-controlling interests | (86) | (89) | ||
| Principal element of lease payments | (187) | (190) | ||
| Cash inflow from derivative financial instruments (excluding cash flow hedges) | 419 | 136 | ||
| Cash outflow from derivative financial instruments (excluding cash flow hedges) | (317) | (266) | ||
| Cash inflow from bond finance | — | 3,753 | ||
| Cash outflow from repayment of bond finance | (562) | (626) | ||
| Cash inflow from draw-down of bridge loan facility | — | 3,180 | ||
| Cash outflow from repayment of bridge loan facility | — | (3,168) | ||
| Net cash flow from financing activities | 26 | (2,774) | 695 | |
| Net increase/(decrease) in cash and cash equivalents | 117 | (649) | ||
| Cash and cash equivalents at 1 January | 3,378 | 4,067 | ||
| Effect of foreign exchange rate changes on cash and cash equivalents | (57) | (40) | ||
| Cash and cash equivalents at 31 December | 20 | 3,438 | 3,378 |
| 146 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements |
1. Preparation of the Consolidated financial statements
Basis of preparation
BAE Systems plc (the ultimate parent company) is a public company limited by shares incorporated in the United Kingdom under the Companies
Act and is registered in England and Wales. The address of the parent company’s registered office is shown on page 235.
Following review, the directors have concluded that it is appropriate to adopt the going concern basis for these financial statements and have
not identified any material uncertainties concerning the Group’s ability to do so in the 12-month period from the date of approving them.
Accordingly, the Consolidated financial statements of BAE Systems plc have been prepared on a going concern basis, and in accordance with
UK-adopted International Accounting Standards and the Companies Act 2006.
The Consolidated financial statements are presented in pounds sterling and, unless stated otherwise, rounded to the nearest million. They have
been prepared under the historical cost convention, as modified by the revaluation of certain financial assets and financial liabilities (including
derivative financial instruments).
Transactions in foreign currencies are translated at the exchange rates ruling at the date of the transactions. Monetary assets and liabilities
denominated in foreign currencies are retranslated at the exchange rates ruling at the balance sheet date, with the resulting exchange
differences recognised in the Consolidated income statement.
Material accounting policies
The material accounting policies applied in the preparation of these Consolidated financial statements are set out in the relevant notes. These
policies have been applied consistently to all the years presented, unless otherwise stated. The directors believe that the Consolidated financial
statements reflect appropriate judgements and estimates, and provide a true and fair view of the Group’s financial performance and position.
Key sources of estimation uncertainty
The application of the Group’s accounting policies requires the use of estimates. In response to the potential impact of risks and uncertainties,
the Group undertakes risk assessments and scenario planning in order to be able to respond to potential rapid changes in circumstances. The
Group considers a range of estimates and assumptions in the application of its accounting policies and management’s assessment of the
carrying value of assets and liabilities. In the event that these estimates or assumptions prove to be inaccurate, there may be an adjustment to
the carrying values of assets and liabilities within the next year. Areas of the Group’s financial statements which could be materially impacted
may include, but are not limited to:
| Accounting policy | Description | Note |
| Revenue and profit recognition |
The Group accounts for revenue in accordance with IFRS 15 Revenue from Contracts with Customers. For most of the Group’s contracts, revenue and associated margin are recognised progressively over time as costs are incurred, and as risks have been mitigated or retired. The ultimate profitability of contracts is based on estimates of revenue and costs, including allowances for technical and other risks which are reliant on the knowledge and experience of the Group’s project managers, engineers, and finance and commercial professionals. Material changes in these estimates could affect the profitability of individual contracts. Revenue and cost estimates are reviewed and updated at least quarterly, or more frequently as determined by events or circumstances. The long-term nature of many of the Group’s contracts means that judgements are made in estimating future costs on a contract, as well as when risks will be mitigated or retired. The Group continues to work closely and collaboratively with its key customers to deliver effectively on its contracts and commitments. However, the volume, scale, complexity and long-term nature of its programmes mean that potential sensitivities would be wide-ranging and not practicable to calculate. Owing to the potential future impact of current uncertainties, the Group’s estimates and assumptions related to revenue recognition could be impacted by issues such as reduced productivity as a result of operational disruption, production delays and increased costs as a result of disruption to the supply chain, changing working practices to move towards our decarbonisation ambitions or, where there is uncertainty as to the recovery from customers, of programme costs incurred. As described in the Group’s accounting policy on page 149, revenue and profit is recognised only to the extent that it is highly probable that there will not be a reversal of revenue in the future. Therefore, in any given reporting year, the Group would expect to recognise an amount of revenue that did not meet the highly probable threshold at the end of the previous reporting year, but subsequently became highly probable in the current reporting year. Accordingly, the Group has recognised £0.2bn (2024 £0.2bn) of revenue in respect of performance obligations satisfied or partially satisfied in previous years. This continues to provide an approximation of the potential revenue sensitivity arising as a result of management’s estimates and assumptions for variable consideration, future costs, and technical and other risks; however, it may not reflect the full potential impact on the contract receivables and contract liabilities balances. |
2 |
| Strategic report | Governance | Financial statements | Additional information | 147 | ||
1. Preparation of the Consolidated financial statements continued
| Accounting policy | Description | Note |
| Post-employment benefit obligations |
A number of actuarial assumptions are made in assessing the value of post-employment benefit obligations, including the discount rate, inflation rate and mortality assumptions. For each of the actuarial assumptions used, there is a wide range of possible values and management estimates a point within that range that most appropriately reflects the Group’s circumstances. If estimates relating to these actuarial assumptions are no longer valid, or change due to changing economic and social conditions, then the potential obligations due under these schemes could change significantly. Discount and inflation rates could change significantly as a result of a prolonged economic downturn, monetary policy decisions and interventions or other macroeconomic issues. Estimates made with regard to mortality projections may also change based on medical and epidemiological developments. Similarly, the values of many assets are subject to estimates and assumptions, in particular those which are held in unquoted pooled investment vehicles. The associated fair value of these unquoted pooled investments is estimated with consideration of the most recently available valuations provided by the investment or fund managers. These valuations inherently incorporate a number of assumptions on the underlying investments. The overall level of estimation uncertainty in valuing these assets could therefore give rise to a material change in valuation within the next 12 months. Furthermore, estimates are required around the Group’s ability to access its defined benefit surpluses, and on what basis, which then determines the associated rate of tax to apply. Depending on the outcome, judgement is then required to determine the presentation of any tax payable in recovering a surplus. Note 23 provides information on the key assumptions and analysis of their sensitivities. |
23 |
Critical judgements made in applying accounting policies
In the course of preparing the Consolidated financial statements and when applying its accounting policies, the Group has been required to
make judgements with regard to the actions required to enable the business to continue to meet customers’ requirements in an operating
environment still dominated by global economic uncertainties. No critical judgements have been made in the process of applying the Group’s
accounting policies, other than those involving estimates, that have had a significant effect on the amounts recognised in the Consolidated
financial statements.
Impact of climate on the Consolidated financial statements
In preparing the Consolidated financial statements management has considered the potential impact of climate change, both in the context of
the disclosures included in the Strategic report, and the impact of climate-related risks and opportunities and the Group’s decarbonisation
ambitions and activities on the Group’s financial results.
As a responsible defence business, sustainability is embedded in our strategic framework, with one of the Group’s long-term objectives to
advance and integrate our ESG agenda. The products and services we provide are complex, diverse and developed over extended periods of
time. Sustainability and the impact of our operations is considered in the planning and ongoing production of our products and services,
including incorporation of the impact of the Group’s decarbonisation ambitions and activities. These are embedded in our financial reporting,
forecasting and governance processes.
Estimates and judgement are required in determining how the Group will pursue its decarbonisation ambitions. These, as well as mitigating
actions required from the detailed review of climate risks and opportunities identified within the TCFD disclosures on page 222, have been
factored into the current and future plans of the Group through the IBP. The IBP is the Group’s annual long-term strategy review and five-year
plan for each segment, including the investment case to decarbonise.
There are a number of core practices and processes that support the business to remain resilient and adapt to the impacts of climate change,
while controlling the financial impacts to the Group. These include:
– Maintenance and investment in our infrastructure – our products are designed and built to remain in service for decades to come, and
require development and construction over a significant period of time. In order to deliver complex engineering and technologically advanced
products, we continuously invest in the maintenance and upkeep of our global sites and facilities. The Group regularly invests in its facilities to
ensure they are maintained and adapted to enable our operations. Regular maintenance and investing in Group infrastructure is embedded in
our strategy, and the expected associated costs are reflected in our IBP. Insurance also provides underlying cover for more immediate and
unexpected impacts of climate change.
– Investment in renewable energy – during the year, the Group has continued to contract for PPAs to invest in renewable energy, providing
long-term security of energy and pricing.
– Proactive estate management – a large part of our business is based on sites that are leased to the Group, as reflected in our right-of-use
assets in the Consolidated financial statements. Although some facilities, such as shipyards, are required to be in certain locations, many of our
operations are not tied to a particular location. Given the long-term outlook of our business, future physical impacts of climate change could
be mitigated through movement of activities on these sites to facilities that will be less impacted by climate change. As and when sites are
identified that would benefit from relocation, the associated costs are reflected within the IBP. We have not currently identified any sites which
require relocation due to climate change. We also use opportunities to build new infrastructure and refurbish existing buildings to upgrade
energy efficiency.
The more immediate financial impacts of climate-related risks, and the actions being taken to address them, are reflected in the financial results of
the Group for the year. These are not considered to have had a material impact. Areas impacted by climate-related risks and opportunities include:
– Goodwill and other intangible assets – the annual impairment review uses cash flow projections from the IBP, which incorporates any
financial impact of climate-related risks and opportunities identified. This includes product repair and adaptation, as well as investment in
facilities to progress the Group’s decarbonisation ambitions. All Cash-Generating Units showed sufficient headroom after incorporation of
climate-related costs and opportunities.
| 148 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
1. Preparation of the Consolidated financial statements continued
– Property, plant and equipment – the useful economic life of existing capitalised assets across the Group has been reviewed in light of any
repairs, upgrades to existing infrastructure, or future investment in facilities that will be required as a result of the climate-related risks and
opportunities identified across our sites. No significant impairment of assets has been identified from this review.
– Right-of-use assets, lease liabilities, and financial assets and liabilities – the Group has continued to contract for PPAs during the year to
provide more sustainable energy from renewable sources. Once the projects are completed, and where the accounting for these agreements
falls within the scope of IFRS 16 Leases, the relevant right-of-use assets and corresponding liabilities will be recognised in the Consolidated
financial statements. The associated costs of the arrangement will be recognised in line with the term of the agreement. The Group has also
considered whether any embedded derivatives have arisen, within the scope of IFRS 9 Financial Instruments, as a result of the PPAs entered
into during the year. None are considered to exist at the balance sheet date; however, this will continue to be monitored as the associated
contractual arrangements are refined and the construction of the facilities approaches completion.
– Pension plans – in assessing the value of pension assets for the UK schemes, the Group has considered the impact of climate change in so far
as climate risk is considered by respective asset managers and reflected in the cash flow projections used in valuing infrastructure investment
assets and pooled investment vehicle assets upon which the Group bases its assessment. There is also alignment between the UK Main
Scheme and the Group’s climate change objectives with consistent long-term decarbonisation ambitions. This has not materially impacted the
Group’s net pension position during the year.
– Deferred tax assets – the recoverability of deferred tax assets is dependent on the future availability of profits, which in turn could be
impacted by climate-related matters. The recoverability of deferred tax assets has been reviewed against the Group’s future forecasts resulting
from the IBP process, which incorporate identified climate-related risks and opportunities. No material risk to the recoverability of deferred tax
assets has been identified.
– Share-based payments – the award of Performance Shares within the Director’s Long-Term Incentive framework has a 10% weighting based
on the reduction of Group GHG emissions (Scopes 1 and 2) aligned to a science-based pathway. The ability to meet this target will impact the
amount and timing of any share-based payments over the term of the policy. This condition has not materially impacted the financial results of
the Group for the current year.
Changes in accounting policies
The following amendments to existing standards became effective on 1 January 2025 and have not had a material impact on the Group:
– Amendments to IAS 21: Lack of Exchangeability, effective from 1 January 2025.
The following other standards, interpretations and amendments to existing standards have been issued but were not mandatory for accounting
periods beginning on 1 January 2025. These either have been, or are expected to be, endorsed by the UK Endorsement Board and are not
expected to have a material impact on the Group:
– Amendments to IFRS 9 and IFRS 7: Amendments to the Classification and Measurement of Financial Instruments, effective from 1 January
2026;
– Amendments to IFRS 9 and IFRS 7: Contracts Referencing Nature-dependent Electricity, effective from 1 January 2026;
– Annual Improvements to IFRS Accounting Standards – Volume 11, effective from 1 January 2026; and
– IFRS 19 Subsidiaries without Public Accountability: Disclosures, effective from 1 January 2027.
The following new standard has been endorsed by the UK Endorsement Board and is expected to have a material impact to the presentation of
the Consolidated financial statements:
– IFRS 18 Presentation and Disclosure in Financial Statements, effective from 1 January 2027. This is a presentational standard and the Group is
working through the impact, with the main changes to the Group expected to be the requirement to disaggregate information reported in
the Consolidated income statement and the reporting of Management-defined Performance Measures in the notes to the Consolidated
financial statements.
Consolidation
The financial statements of the Group consolidate the results of the Company and its subsidiary entities, and include its share of results of
investments accounted for under the equity method.
A subsidiary is an entity controlled by the Group. The Group controls a subsidiary when it is exposed, or has the rights, to variable returns from its
involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. The results of subsidiaries are
included in the Consolidated income statement from the date of acquisition, or up until the date of disposal.
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in
preparing the Consolidated financial statements.
Joint ventures and investments in associated undertakings are accounted for under the equity method and the Consolidated income statement
includes the Group’s share of their profits and losses, the Consolidated statement of comprehensive income includes its share of their other
comprehensive income and expense, and the Consolidated balance sheet includes its share of their net assets within equity accounted
investments.
The assets and liabilities of overseas subsidiaries and equity accounted investments are translated at the exchange rates ruling at the balance
sheet date. The income statements of such entities are translated at average rates of exchange during the year. All resulting exchange
differences are recognised directly in a separate component of equity. Translation differences that arose before the transition date
to IFRS (1 January 2004) are presented in equity, but not as a separate component. When a foreign operation is sold, the cumulative exchange
differences recognised in equity since 1 January 2004 are recognised in the Consolidated income statement as part of the profit or loss on sale.
| Strategic report | Governance | Financial statements | Additional information | 149 | ||
2. Segmental analysis and revenue recognition
| Revenue and profit recognition Revenue represents income derived from contracts for the provision of goods and services, over time or at a point in time, by the Group to customers in exchange for consideration in the ordinary course of the Group’s activities. The Group accounts for revenue in accordance with IFRS 15 Revenue from Contracts with Customers. For most of the Group’s contracts, revenue and associated margin are recognised progressively over time as costs are incurred, and as risks have been mitigated or retired. The ultimate profitability of contracts is based on estimates of revenue and costs, including allowances for technical and other risks which are reliant on the knowledge and experience of the Group’s project managers, engineers, and finance and commercial professionals. Revenue and cost estimates are reviewed and updated at least quarterly, or more frequently as determined by events and circumstances. The Group typically enters into the following types of contracts with customers: – to design, build or create assets uniquely available to the customer such as combat vehicles, ships, submarines, aircraft and spacecraft; – to service or maintain assets over a period of time; – to give access to software and licences; and – to offer bespoke services to customers, for example through training or the offering of cyber, intelligence and security capabilities. Revenue is recognised against each of these types of contracts in line with the following accounting policies. Performance obligations Upon approval by the parties to a contract, the contract is assessed to identify each promise to transfer either a distinct good or service or a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Goods and services are distinct and accounted for as separate performance obligations in the contract if the customer can benefit from them either on their own or together with other resources that are readily available to the customer and they are separately identifiable in the contract. In some cases, the Group provides warranties to its customers to give them assurance that its products and services will function in line with agreed-upon specifications. Warranties are not provided separately and, therefore, do not represent separate performance obligations. As they are not provided separately, they are not considered to be insurance contracts in scope of IFRS 17 Insurance Contracts. A provision for warranties is recognised when the underlying products and services are sold (see note 24 for further details). Transaction price At the start of the contract, the total transaction price is estimated as the amount of consideration to which the Group expects to be entitled in exchange for transferring the promised goods and services to the customer, excluding sales taxes. Variable consideration, such as variable price mechanisms, is included based on the expected value or most likely amount only to the extent that it is highly probable that there will not be a reversal in the amount of cumulative revenue recognised. The transaction price does not include estimates of consideration resulting from contract modifications, such as change orders, until they have been approved by the parties to the contract. The total transaction price is allocated to the performance obligations identified in the contract in proportion to their relative stand-alone selling prices. Given the bespoke nature of many of the Group’s products and services, which are designed and/or manufactured under contract to the customer’s individual specifications, there are typically no observable stand-alone selling prices. Instead, stand-alone selling prices are typically estimated based on expected costs plus contract margin consistent with the Group’s pricing principles. While payment terms vary from contract to contract, on many of the Group’s contracts, an element of the transaction price is received in advance of delivery. When cash is received in advance of goods or services being delivered a contract liability is recognised. The Group therefore has significant contract liabilities (note 14). The Group’s contracts are not considered to include significant financing components on the basis that there is no difference between the consideration and the cash selling price. UK Ministry of Defence contracting rules prohibit the inclusion of financing in the sales price. Negotiations on competitive international export contracts do not make allowance for the cash payment profile. Revenue and profit recognition Revenue is recognised as performance obligations are satisfied and control of the goods and services is transferred to the customer. For each performance obligation within a contract, the Group determines whether it is satisfied over time or at a point in time. Performance obligations are satisfied over time if one of the following criteria is satisfied: – the customer simultaneously receives and consumes the benefits provided by the Group’s performance as it performs; – the Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or – the Group’s performance does not create an asset with an alternative use to the Group and it has an enforceable right to payment for performance completed to date. The Group has determined that most of its contracts satisfy the over-time criteria, either because the customer simultaneously receives and consumes the benefits provided by the Group’s performance as it is performed (typically services or support contracts, for example in the case of ongoing maintenance and support of aircraft and flying capability), or the Group’s performance does not create an asset with an alternative use to the Group and it has an enforceable right to payment for performance completed to date (typically development or production contracts, such as in the production of ships or aircraft to customers’ unique specifications). |
||
| 150 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
2. Segmental analysis and revenue recognition continued
| For each performance obligation to be recognised over time the Group recognises revenue using an input method, based on costs incurred in the year. Revenue and attributable margin are calculated by reference to reliable estimates of the transaction price and total expected costs, after making suitable allowances for technical and other risks including the impact of global economic uncertainties and climate change. Revenue and associated margin are therefore recognised progressively as costs are incurred and as risks have been mitigated or retired. The Group has determined that this method appropriately depicts the Group’s performance in transferring control of the goods and services to the customer. If the over-time criteria for revenue recognition are not met, revenue is recognised at the point in time that control is transferred to the customer, which is usually when legal title passes to the customer and the business has the right to payment, for example, on delivery. When it is probable that total contract costs will exceed total contract revenue the expected loss is recognised immediately as an expense. Software licences The Group sells software licences either separately or together with other goods and services, including computer hardware and implementation, hosting and support. Revenue recognition in respect of software licences sold as part of a bundle of goods and services is considered separately when the licence is determined to be a separate performance obligation. Software licences either represent a right to access the Group’s intellectual property as it exists throughout the licence period or a right to use the Group’s intellectual property as it exists at the point in time at which the licence is granted. Revenue in respect of a right to access licence is recognised over the licence term or, in relation to perpetual licences, over the related customer relationship. Revenue in respect of a right to use licence is recognised on delivery of the software to the customer or, if the customer chooses not to access and take delivery of the software, on expiry of the licence arrangement. A software licence is considered to be a right to access the Group’s intellectual property as it exists throughout the licence period if all of the following criteria are satisfied: – the contract requires, or the customer reasonably expects, that the Group will undertake activities that significantly affect the intellectual property; – the licence directly exposes the customer to the effects of those activities; and – those activities do not result in the transfer of a good or service to the customer. Contract modifications The Group’s contracts are often amended for changes in customers’ requirements and specifications. A contract modification exists when the parties to the contract approve a modification that either changes existing, or creates newly enforceable, rights and obligations. The effect of a contract modification on the transaction price, and the Group’s measure of progress towards the satisfaction of the performance obligation to which it relates, is recognised in one of the following ways: 1. prospectively, as an additional, separate contract; 2. prospectively, as a termination of the existing contract and creation of a new contract; or 3. as part of the original contract using a cumulative catch-up. The majority of the Group’s contract modifications are treated under either 1 (for example, the requirement for additional distinct goods or services) or 3 (for example, a change in the specification of the distinct goods or services for a partially completed contract), although the facts and circumstances of any contract modification are considered individually as the types of modifications will vary and may result in different accounting outcomes. Costs to obtain a contract The Group expenses pre-contract bidding costs which are incurred regardless of whether a contract is awarded. The Group does not typically incur costs to obtain contracts that it would not have incurred had the contracts not been awarded, such as sales commission. Costs to fulfil a contract Contract fulfilment costs in respect of over-time contracts are expensed as incurred. Contract fulfilment costs in respect of point in time contracts are accounted for under IAS 2 Inventories. |
||
Reporting segments
The Group has five sectors which, together with HQ, make up its six reporting segments as defined by IFRS 8 Operating Segments.
– Electronic Systems comprises the US- and UK-based electronics solutions business and the US-based SMS business, which have been
aggregated together due to the similarities of the services offered. Together the teams deliver electronic warfare systems, navigation systems,
electro-optical sensors, military and commercial avionics, precision guided solutions and communications systems, as well as space electronics,
spacecraft, and ground and tactical systems.
– Platforms & Services , with operations in the US, Sweden and UK, manufactures and upgrades combat vehicles, weapons and munitions,
and delivers services and sustainment activities, including naval ship repair, and the management and operation of two government-owned
contractor-operated ammunition plants.
– Air comprises the Group’s UK‑based aircraft build and support activities for European and international markets, US programmes,
development of our Future Combat Air System and FalconWorks®, alongside our business in the Kingdom of Saudi Arabia and interests in our
joint ventures: Edgewing, Eurofighter and MBDA.
– Maritime comprises our UK‑based maritime and land activities, including ship build and support activities, major submarine build
programmes, as well as our Australian business and interest in our RBSL joint venture.
| Strategic report | Governance | Financial statements | Additional information | 151 | ||
2. Segmental analysis and revenue recognition continued
– Cyber & Intelligence comprises the US-based Intelligence & Security business and UK-headquartered Digital Intelligence business, which have
been aggregated together due to the similarities of the services offered. Together, they cover the Group’s cyber security activities for national
security, central government and government enterprises.
– HQ comprises the Group’s head office and UK-based shared services activities.
The Board (the chief operating decision maker as defined by IFRS 8 Operating Segments) monitors the results of these reporting segments to
assess performance and make decisions about the allocation of resources. Segmental performance is evaluated based on key performance
indicators – sales1 and underlying EBIT2. Net finance costs and tax expense are managed on a Group basis.
Revenue and sales1 by reporting segment
| Revenue | Deduct: Sales to equity accounted investments |
Add back: Share of sales by equity accounted investments |
Sales1 | ||||||||
| 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | ||||
| £m | £m | £m | £m | £m | £m | £m | £m | ||||
| Electronic Systems | 7,507 | 7,186 | (251) | (258) | 272 | 261 | 7,528 | 7,189 | |||
| Platforms & Services | 5,021 | 4,344 | — | — | 18 | 46 | 5,039 | 4,390 | |||
| Air | 7,372 | 6,880 | (1,574) | (1,413) | 3,501 | 3,052 | 9,299 | 8,519 | |||
| Maritime | 6,579 | 6,002 | (5) | (6) | 223 | 191 | 6,797 | 6,187 | |||
| Cyber & Intelligence | 2,397 | 2,411 | — | — | — | — | 2,397 | 2,411 | |||
| HQ | 52 | 24 | — | — | 180 | 179 | 232 | 203 | |||
| 28,928 | 26,847 | (1,830) | (1,677) | 4,194 | 3,729 | 31,292 | 28,899 | ||||
| Intra-group revenue/sales | (592) | (535) | (38) | (29) | — | — | (630) | (564) | |||
| 28,336 | 26,312 | (1,868) | (1,706) | 4,194 | 3,729 | 30,662 | 28,335 |
| Revenue from external customers |
Intra-group revenue | ||||
| 2025 | 2024 | 2025 | 2024 | ||
| £m | £m | £m | £m | ||
| Electronic Systems | 7,310 | 6,988 | 197 | 198 | |
| Platforms & Services | 4,948 | 4,288 | 73 | 56 | |
| Air | 7,318 | 6,840 | 54 | 40 | |
| Maritime | 6,507 | 5,915 | 72 | 87 | |
| Cyber & Intelligence | 2,245 | 2,271 | 152 | 140 | |
| HQ | 8 | 10 | 44 | 14 | |
| 28,336 | 26,312 | 592 | 535 |
Revenue and sales 1 by customer location
| Revenue | Sales1 | |||||
| 2025 | 2024 | 2025 | 2024 | |||
| £m | £m | £m | £m | |||
| UK | 7,876 | 7,039 | 8,349 | 7,439 | ||
| Europe (excluding UK) | 2,221 | 1,733 | 3,634 | 2,842 | ||
| US | 13,145 | 12,559 | 13,157 | 12,536 | ||
| Canada | 227 | 189 | 227 | 189 | ||
| Kingdom of Saudi Arabia | 2,838 | 2,892 | 2,843 | 2,962 | ||
| Qatar | 252 | 259 | 332 | 468 | ||
| Australia | 1,287 | 1,158 | 1,293 | 1,170 | ||
| Asia and Pacific (excluding Australia) | 358 | 354 | 499 | 455 | ||
| Other | 132 | 129 | 328 | 274 | ||
| 28,336 | 26,312 | 30,662 | 28,335 |
| 152 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
2. Segmental analysis and revenue recognition continued
Revenue by major customer
Revenue from the Group’s three principal customers, which individually represent over 10% of total revenue, is as follows:
| Restated2 | ||
| 2025 | 2024 | |
| £m | £m | |
| US Department of War | 9,614 | 8,831 |
| UK Ministry of Defence | 7,126 | 6,481 |
| Kingdom of Saudi Arabia Ministry of Defense | 2,795 | 2,817 |
Revenue from the UK Ministry of Defence and the US Department of War was generated by five reporting segments, excluding HQ. Revenue
from the Kingdom of Saudi Arabia Ministry of Defense was generated by the Air segment.
Operating profit/(loss) by reporting segment
| Operating profit/(loss) |
Finance and tax expense/ (income) of equity accounted investments |
Amortisation of programme, customer- related and other intangible assets, and impairment of equity accounted investments and intangible assets |
Adjusting items | Underlying EBIT3 | ||||||||||
| 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | |||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||
| Electronic Systems | 863 | 708 | — | — | 337 | 307 | (38) | 56 | 1,162 | 1,071 | ||||
| Platforms & Services | 576 | 456 | — | 9 | — | — | — | (17) | 576 | 448 | ||||
| Air | 1,078 | 1,009 | 14 | (14) | 16 | 10 | — | 2 | 1,108 | 1,007 | ||||
| Maritime | 431 | 465 | 4 | 4 | 22 | 5 | — | — | 457 | 474 | ||||
| Cyber & Intelligence | 182 | 182 | — | — | 39 | 22 | 2 | (5) | 223 | 199 | ||||
| HQ | (205) | (135) | 5 | 10 | — | — | (4) | (59) | (204) | (184) | ||||
| 2,925 | 2,685 | 23 | 9 | 414 | 344 | (40) | (23) | 3,322 | 3,015 | |||||
| Net finance costs | (353) | (353) | ||||||||||||
| Profit before tax | 2,572 | 2,332 | ||||||||||||
| Tax expense | (421) | (291) | ||||||||||||
| Profit for the year | 2,151 | 2,041 |
- Sales is an alternative performance measure defined in the Alternative performance measures section on page 216. Sales includes revenue from the
Group’s subsidiaries as well as the Group’s share of revenue of equity accounted investments, recognising the strategic importance in its industry of its
equity accounted investments. It is presented here as our internal measure of segmental performance and to provide additional information on
performance to the user.
- The 2024 revenue by major customer has been restated to reflect revenue from the ultimate customer where contracts are subcontracted through another
entity.
- Underlying EBIT is an alternative performance measure defined in the Alternative performance measures section on page 216. It provides a measure of
operating profitability, excluding one-off events or adjusting items that are not considered to be part of the ongoing operational transactions of the
business, to enable management to monitor the performance of recurring operations over time, and which is comparable across the Group. It is presented
here as our internal measure of segmental performance and to provide additional information on performance to the user.
| Strategic report | Governance | Financial statements | Additional information | 153 | ||
2. Segmental analysis and revenue recognition continued
Adjusting items
Adjusting items are items of financial performance which have been determined by management as being material by their size or incidence
and not relevant to an understanding of the Group’s underlying business performance. Adjusting items include profit or loss on business
transactions, the impact of substantively enacted tax rate changes, and costs incurred which are one-off in nature, for example non-routine costs
or income relating to post-retirement benefit schemes, and other items which management has determined as not being relevant to an
understanding of the Group’s underlying business performance.
2025
Adjusting items in 2025 totalled a net gain of £40m. This comprised a net profit of £51m for pension-related gains, largely in relation to a review
of US pension arrangements (£58m), and a £12m profit on the disposal of a portion of our remaining shareholding in Air Astana. This was
partially offset by £22m of integration-related costs, primarily in relation to SMS, and £1m of costs related to historic transactions.
2024
Adjusting items in 2024 totalled a net gain of £23m. This comprised a net profit on disposal of a number of non-core business of £94m, the most
significant being the partial disposal of the Group’s partial shareholding in Air Astana which generated a profit of £75m. In addition, we
recognised a settlement gain of £13m on a US pension buy-out offset by £72m of acquisition and integration-related costs, primarily in relation
to Ball Aerospace, and £12m of other charges related to historic transactions.
Performance obligations
The Group’s order book, which represents its unsatisfied performance obligations, as at 31 December 2025 was £63.1bn (2024 £60.4bn).
The Group expects that approximately 38% (2024 35%) of the order book will be recognised as revenue during the next year, with the
remainder largely recognised over the following four (2024 four) years.
For each performance obligation to be recognised over time, the Group recognises revenue using an input method, based on costs incurred
in the year. Revenue and attributable margin are calculated by reference to reliable estimates of transaction price and total expected costs,
after making suitable allowances for technical and other risks. Revenue and associated margin are therefore recognised progressively as costs
are incurred, and as risks have been mitigated or retired. The Group has determined that this method appropriately depicts the Group’s
performance in transferring control of the goods and services to the customer. Accordingly, revenue of £0.2bn (2024 £0.2bn) was recognised
during the year in respect of performance obligations satisfied or partially satisfied in previous years.
Geographical analysis of non-current assets
| Asset location | 2025 | 2024 | |
| Note | £m | £m | |
| UK | 6,295 | 5,902 | |
| Europe (excluding UK) | 2,356 | 2,326 | |
| US | 13,213 | 14,316 | |
| Kingdom of Saudi Arabia | 810 | 870 | |
| Australia | 513 | 467 | |
| Asia and Pacific (excluding Australia) | 8 | 8 | |
| 23,195 | 23,889 | ||
| Other investments | 124 | 83 | |
| Contract receivables | 14 | 117 | 108 |
| Other receivables (excluding prepayments) | 15 | 442 | 458 |
| Post-employment benefit surpluses | 23 | 1,250 | 1,271 |
| Other financial assets | 16 | 232 | 265 |
| Deferred tax assets | 17 | 172 | 315 |
| Non-current assets | 25,532 | 26,389 |
| 154 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
3. Operating costs
| Research and development The Group undertakes research and development activities either on its own behalf or on behalf of customers, including research and development expenditure in relation to the Group’s Sustainability Accelerator Fund. Group-funded expenditure on research, and on development activities not meeting the conditions for capitalisation, is written off as incurred and charged to the Consolidated income statement. |
||
| Note | 2025 | 2024 | |
| £m | £m | ||
| Inventories recognised as an expense | 9,862 | 9,085 | |
| Staff costs | 4 | 9,837 | 9,252 |
| Depreciation | 690 | 663 | |
| Amortisation | 10 | 470 | 422 |
| Impairment – intangible assets | 10 | 12 | 6 |
| Impairment – property, plant and equipment | 11 | 4 | 6 |
| Impairment reversal – investment property | (3) | — | |
| Acquisition and integration-related costs | 31 | 22 | 72 |
| Loss on disposal of property, plant and equipment, and intangible assets | 16 | 18 | |
| Other operating charges | 4,928 | 4,582 | |
| Operating costs | 25,838 | 24,106 |
Research and development expenditure
| 2025 | 2024 | ||
| £m | £m | ||
| Total research and development cost | 3,165 | 2,673 | |
| Deduct: Contract-funded research and development | (2,758) | (2,308) | |
| Company-funded research and development expenditure | 407 | 365 | |
| Deduct: Capitalised in the year | (14) | (8) | |
| Company-funded research and development expense | 393 | 357 | |
| Add back: Amortisation and impairment of capitalised cost | 3 | 2 | |
| Research and development included in operating costs | 396 | 359 |
Fees payable to the Company’s auditor and its associates included in operating costs
| 2025 | 2024 | ||||||
| UK | Overseas | Total | UK | Overseas | Total | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||
| Fees payable to the Company’s auditor for the audit of the Company’s annual accounts |
3,149 | — | 3,149 | 3,145 | — | 3,145 | |
| Fees payable to the Company’s auditor and its associates for the audit of the Company's subsidiaries |
5,632 | 7,177 | 12,809 | 5,579 | 8,578 | 14,157 | |
| Total audit fees | 8,781 | 7,177 | 15,958 | 8,724 | 8,578 | 17,302 | |
| Audit-related assurance services1 | 1,389 | 102 | 1,491 | 1,405 | 4 | 1,409 | |
| Other non-audit services | 1 | — | 1 | 1 | — | 1 | |
| Total non-audit fees2 | 1,390 | 102 | 1,492 | 1,406 | 4 | 1,410 | |
| Total fees payable to the Company’s auditor and its associates | 10,171 | 7,279 | 17,450 | 10,130 | 8,582 | 18,712 |
- Audit-related assurance services principally comprises fees in respect of the review of the Group’s Half-yearly report, along with European Single Electronic
Format controls, ESG assurance work and extended controls assessment.
- In addition to the amounts shown above, the auditor received fees of £497k (2024 £500k) for the audit of the BAE Systems UK pension schemes and
£345k (2024 £392k) for the audit of BAE Systems US pension schemes.
| Strategic report | Governance | Financial statements | Additional information | 155 | ||
4. Employees
The average and year-end numbers of Group employees, excluding employees of equity accounted investments, were as follows:
| Average | At year end | ||||
| 2025 | 2024 | 2025 | 2024 | ||
| Number '000 |
Number '000 |
Number '000 |
Number '000 |
||
| Electronic Systems | 22 | 22 | 23 | 22 | |
| Platforms & Services | 12 | 12 | 12 | 12 | |
| Air | 22 | 21 | 22 | 21 | |
| Maritime | 31 | 28 | 32 | 30 | |
| Cyber & Intelligence | 11 | 11 | 11 | 11 | |
| HQ | 4 | 3 | 4 | 4 | |
| 102 | 97 | 104 | 100 |
The aggregate staff costs of Group employees, excluding employees of equity accounted investments, were as follows:
| Note | 2025 | 2024 | |
| £m | £m | ||
| Wages and salaries | 8,439 | 7,999 | |
| Social security costs | 699 | 615 | |
| Share-based payments | 28 | 174 | 144 |
| Pension costs - defined contribution plans | 23 | 380 | 334 |
| Pension costs - defined benefit plans | 23 | 121 | 133 |
| Other post-employment benefit costs | 23 | 24 | 27 |
| 9,837 | 9,252 |
5. Other income
| Note | 2025 | 2024 | |
| £m | £m | ||
| Research and development expenditure credits | 59 | 45 | |
| Gain on divestment of interests in equity accounted investments and other business disposals | 32 | 12 | 94 |
| Profit on disposal of investment property | 16 | 12 | |
| Management recharges to equity accounted investments | 29 | 3 | 3 |
| Royalties | 27 | 31 | |
| Income related to plan amendments / settlements on pension schemes | 23 | 58 | 13 |
| Other | 58 | 68 | |
| Other Income | 233 | 266 |
| 156 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
6. Net finance costs
| Finance income and finance costs Finance income and finance costs are recognised in the Consolidated income statement in the year in which they are incurred. |
||
| Note | 2025 | 2024 | |
| £m | £m | ||
| Interest income on cash and other financial instruments | 80 | 116 | |
| Interest income on finance lease receivables | 12 | 1 | 1 |
| Net interest income on post-employment benefit obligations | 23 | 54 | 18 |
| Finance income | 135 | 135 | |
| Interest expense on loans and other financial instruments | (425) | (482) | |
| Facility fees | (4) | (4) | |
| Interest expense on lease liabilities | 12 | (79) | (73) |
| Net present value expenses on provisions and other payables | (15) | (13) | |
| Gain/(loss) on remeasurement of financial instruments at fair value through profit or loss1,2 | 45 | (6) | |
| Foreign exchange (losses)/gains2,3 | (10) | 90 | |
| Finance costs | (488) | (488) | |
| Net finance costs | (353) | (353) |
- Comprises gains and losses on derivative financial instruments, principally held to manage the Group’s exposure to interest rate fluctuations on current
and anticipated external borrowings and exchange rate fluctuations on balances with the Group’s subsidiaries and equity accounted investments.
- The net gain or loss on remeasurement of financial instruments at fair value through profit or loss and the net gain or loss on foreign exchange are
presented within finance costs as the gains and losses relate to the same underlying transactions.
- Foreign exchange (losses)/gains reflects exchange rate movements on US dollar-denominated borrowings and balances with the Group’s subsidiaries and
equity accounted investments.
7. Tax expense
| Income tax expense comprises current and deferred tax. Current and deferred tax is recognised in the Consolidated income statement, except to the extent that it relates to a business combination or items recognised directly in equity or other comprehensive income. Current tax Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Deferred tax is not recognised for temporary differences: – on the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, except for transactions giving rise to equal taxable and deductible temporary differences, or to temporary differences associated with right-of-use assets and lease liabilities; – related to investments in subsidiaries and equity accounted investments to the extent that it is probable that they will not reverse in the foreseeable future; and – arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. The Group’s underlying effective tax rate is sensitive to the geographic mix of profits and is impacted by the UK’s enactment of the Organisation for Economic Co-operation and Development’s Global Anti-Base Erosion Model Rules (Global Minimum Tax) effective from 1 January 2024. The Group has applied the temporary exception issued by the International Accounting Standards Board from the accounting requirements for deferred taxes in IAS 12. Accordingly, the Group neither recognises nor discloses information about deferred tax assets and liabilities related to Global Minimum Tax income taxes. |
||
| Strategic report | Governance | Financial statements | Additional information | 157 | ||
7. Tax expense continued
Tax expense
| 2025 | 2024 | |
| £m | £m | |
| Current tax | ||
| UK: | ||
| Current year | (188) | (157) |
| Adjustments in respect of prior years | 47 | 27 |
| (141) | (130) | |
| Overseas: | ||
| Current year | (191) | (230) |
| Adjustments in respect of prior years | 37 | 292 |
| (154) | 62 | |
| Total current tax | (295) | (68) |
| Deferred tax | ||
| UK: | ||
| Origination and reversal of temporary differences | (10) | (19) |
| Adjustments in respect of prior years | (16) | 8 |
| (26) | (11) | |
| Overseas: | ||
| Origination and reversal of temporary differences | (63) | 43 |
| Adjustments in respect of prior years | (37) | (255) |
| (100) | (212) | |
| Total deferred tax | (126) | (223) |
| Tax expense | (421) | (291) |
| UK | (167) | (141) |
| Overseas | (254) | (150) |
| Tax expense | (421) | (291) |
Reconciliation of tax expense
The following table reconciles the theoretical income tax expense, using the UK corporation tax rate, to the reported tax expense. The
reconciling items represent, besides the impact of tax rate differentials and changes, non-taxable benefits or non-deductible expenses arising
from differences between the local tax base and the reported financial statements.
| 2025 | 2024 | |
| £m | £m | |
| Profit before tax | 2,572 | 2,332 |
| UK corporation tax rate | 25.0% | 25.0% |
| Expected income tax expense | (643) | (583) |
| Effect of tax rates in foreign jurisdictions, including US state taxes | (1) | 3 |
| Expenses not tax effected | (16) | (12) |
| Income not subject to tax | 122 | 162 |
| Research and development tax credits | 29 | 38 |
| Adjustments in respect of prior years | 31 | 72 |
| Adjustments in respect of equity accounted investments | 52 | 55 |
| Other | 5 | (26) |
| Tax expense | (421) | (291) |
| 158 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
7. Tax expense continued
Tax recognised in other comprehensive income
| 2025 | 2024 | ||||||
| Before tax |
Tax expense |
Net of tax | Before tax |
Tax (expense)/ benefit |
Net of tax | ||
| £m | £m | £m | £m | £m | £m | ||
| Items that will not be reclassified to the income statement: | |||||||
| Consolidated: | |||||||
| Remeasurements on post-employment benefit schemes | (7) | (28) | (35) | 414 | (25) | 389 | |
| Remeasurement of other investments | 12 | — | 12 | — | — | — | |
| Share of the other comprehensive (expense)/income of associates and joint ventures accounted for using the equity method |
(2) | (1) | (3) | 16 | (1) | 15 | |
| Items that may be reclassified to the income statement: | |||||||
| Consolidated: | |||||||
| Currency translation on foreign currency net investments | (608) | — | (608) | 4 | — | 4 | |
| Reclassification of cumulative currency translation reserve on divestment of interest in equity accounted investments and other business disposals |
21 | — | 21 | 3 | — | 3 | |
| Fair value gain/(loss) arising on hedging instruments during the year |
44 | (5) | 39 | (36) | 8 | (28) | |
| Cumulative fair value loss on hedging instruments reclassified to the income statement |
11 | (1) | 10 | 69 | (15) | 54 | |
| Share of the other comprehensive (expense)/income of associates and joint ventures accounted for using the equity method |
(6) | — | (6) | 4 | — | 4 | |
| (535) | (35) | (570) | 474 | (33) | 441 |
| 2025 | 2024 | ||||||
| Other reserves |
Retained earnings |
Total | Other reserves |
Retained earnings |
Total | ||
| £m | £m | £m | £m | £m | £m | ||
| Current tax | |||||||
| Consolidated: | |||||||
| Remeasurements on post-employment benefit schemes and other investments |
— | — | — | — | 11 | 11 | |
| — | — | — | — | 11 | 11 | ||
| Deferred tax | |||||||
| Consolidated: | |||||||
| Remeasurements on post-employment benefit schemes and other investments |
— | (28) | (28) | — | (36) | (36) | |
| Fair value (gain)/loss arising on hedging instruments during the year |
(5) | — | (5) | 8 | — | 8 | |
| Cumulative fair value loss on hedging instruments reclassified to the income statement |
(1) | — | (1) | (15) | — | (15) | |
| Share of the other comprehensive income of associates and joint ventures accounted for using the equity method |
— | (1) | (1) | — | (1) | (1) | |
| (6) | (29) | (35) | (7) | (37) | (44) | ||
| Tax on other comprehensive expense/(income) | (6) | (29) | (35) | (7) | (26) | (33) |
| Strategic report | Governance | Financial statements | Additional information | 159 | ||
8. Earnings per share
| The number of ordinary shares outstanding at the start of the year is calculated by taking the total number of ordinary shares in issue, less treasury shares and shares held in trust which are contingently returnable (i.e. where the performance conditions attached to those shares have not been met, excluding the passage of time). The weighted average number of ordinary shares purchased, issued or released is calculated by reference to the day on which each transaction occurred. The weighted average number of ordinary shares used in calculating earnings per share is the number of ordinary shares outstanding at the start of the year, less the weighted average number of shares repurchased, plus the weighted average number of shares issued within the year (including those issued from treasury), and those shares held in trust that are no longer contingently returnable (i.e. all performance conditions attached to them are met, excluding the passage of time). The weighted average number of ordinary shares used in calculating diluted earnings per share is the weighted average number of ordinary shares outstanding, plus the number of ordinary shares which are considered potentially dilutive ordinary shares in respect of share incentive schemes, should the vesting conditions have been met as at the year end. |
||
| Movement in shares for the purpose of calculating earnings per share | Ordinary shares |
Treasury shares |
Contingently returnable shares held in trust |
Outstanding shares for purpose of earnings per share |
Weighted average share movement in the year |
|
| millions | millions | millions | millions | millions | ||
| At 1 January 2024 | 3,239 | (204) | (20) | 3,015 | ||
| Ordinary shares repurchased in the year | (44) | — | — | (44) | (20) | |
| Net shares issued in the year | — | 20 | 5 | 25 | 18 | |
| At 31 December 2024 | 3,195 | (184) | (15) | 2,996 | ||
| Ordinary shares repurchased in the year | (29) | — | — | (29) | (15) | |
| Net shares issued in the year | — | 19 | 2 | 21 | 16 | |
| At 31 December 2025 | 3,166 | (165) | (13) | 2,988 |
| 2025 Number of shares |
2024 Number of shares |
||
| millions | millions | ||
| Outstanding shares for purpose of earnings per share at 1 January | 2,996 | 3,015 | |
| Average ordinary shares repurchased in the year | (15) | (20) | |
| Average ordinary shares issued in the year (net) | 16 | 18 | |
| Weighted average shares for the purpose of calculating basic earnings per share at 31 December | 2,997 | 3,013 | |
| Incremental ordinary shares in respect of employee share schemes | 34 | 40 | |
| Weighted average shares for the purpose of calculating diluted earnings per share at 31 December | 3,031 | 3,053 |
| 2025 | 2024 | ||
| Profit for the year attributable to equity shareholders (£m) | 2,062 | 1,956 | |
| Basic earnings per share (pence) | 68.8 | 64.9 | |
| Diluted earnings per share (pence) | 68.0 | 64.1 |
| 160 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
9. Goodwill
| Under the acquisition method for business combinations, goodwill is the acquisition-date fair value of the consideration transferred, less the net of the acquisition-date fair values of the identifiable assets acquired and liabilities assumed. On acquisition of joint ventures and associates, goodwill is included in the carrying value of equity accounted investments. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is not amortised, but is tested annually for impairment, and carried at cost less accumulated impairment losses. Impairment Goodwill is tested annually for impairment as required by IAS 36 Impairment of Assets. For the purposes of impairment testing, goodwill is allocated to Cash-Generating Units (CGUs), or a group of CGUs on a consistent basis. The impairment calculations require the use of estimates of the future profitability and cash-generating ability of the CGU to determine its value in use based on the Group’s five-year IBP and the pre-tax discount rate used in discounting these projected cash flows. An impairment loss is recognised whenever the carrying amount of an asset or its CGU exceeds its recoverable amount, which is the greater of its value in use and its fair value less cost of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using an appropriate pre-tax discount rate. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the CGU to which the asset belongs. Impairment losses are recognised in the Consolidated income statement. An impairment loss in respect of goodwill is not reversed. |
||
| Goodwill | ||
| Note | £m | |
| Cost or valuation | ||
| At 1 January 2024 | 16,051 | |
| Business acquisitions | 1,812 | |
| Business disposals | (3) | |
| Foreign exchange adjustments | 128 | |
| At 31 December 2024 | 17,988 | |
| Business acquisitions | 31 | 22 |
| Foreign exchange adjustments | (740) | |
| At 31 December 2025 | 17,270 | |
| Impairment | ||
| At 1 January 2024 | 4,665 | |
| Foreign exchange adjustments | 26 | |
| At 31 December 2024 | 4,691 | |
| Foreign exchange adjustments | (153) | |
| At 31 December 2025 | 4,538 | |
| Net book value | ||
| At 31 December 2025 | 12,732 | |
| At 31 December 2024 | 13,297 | |
| At 1 January 2024 | 11,386 |
| Strategic report | Governance | Financial statements | Additional information | 161 | ||
9. Goodwill continued
Impairment testing
The recoverable amount of the Group’s goodwill is based on value in use, estimated using risk-adjusted future cash flow projections from the
five-year IBP and a terminal value based on the projections for the final year of that plan, with long-term growth rates applied across each
significant group of CGUs. The IBP process includes the use of historical experience, available government spending data and the Group’s order
backlog, as well as the impact of evolving issues such as global economic uncertainty and climate change. Pre-tax discount rates have been used
in discounting the projected risk-adjusted cash flows and are adjusted for other factors specific to each CGU, such as the territory and market in
which they operate.
Significant CGUs
A summary of the significant CGUs is presented below.
| Allocated goodwill | Pre-tax discount rate | Long-term growth rate | |||||||
| Cash-Generating Unit | Key assumptions | 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | ||
| £bn | £bn | % | % | % | % | ||||
| Electronic Systems (excluding Space & Mission Systems) |
Continued demand from the US Government for electronic warfare systems (where the business has a leadership position), other technology-based solutions and growth in the commercial avionics market. |
4.9 | 5.1 | 10 | 9 | 2.0 | 2.0 | ||
| Space & Mission Systems |
Continued demand from the US Government, US Intelligence Community and civilian space agencies for capabilities in the design, build and operation of satellites and satellite systems, space electronics and instrument payloads. |
1.4 | 1.5 | 9 | 8 | 3.8 | 3.8 | ||
| Platforms & Services | Continued demand in the Group’s principal markets for existing and successor military tracked vehicles, naval guns, missile launchers, artillery systems, munitions, upgrade programmes and support, and in the US for complex infrastructure and maritime services. |
3.4 | 3.6 | 9 | 9 | 1.0 | 1.0 | ||
| Maritime | Continued demand, primarily from the UK and Australian Governments, for existing and successor programmes for submarines, complex warships and munitions. This includes upgrade and sustainment programmes in these areas as well as in the field of air, electronic systems and wide-area surveillance. |
1.4 | 1.4 | 11 | 9 | 2.0 | 2.0 |
The Group has undertaken sensitivity analysis on the key assumptions used in the impairment testing against each group of CGUs to which
goodwill is allocated. Applying a reasonably possible change in any of these key assumptions did not cause the CGUs carrying amount to exceed
its recoverable amount.
Other CGUs
The remaining goodwill balance of £1.6bn (2024 £1.7bn) is allocated across multiple CGUs. No individual CGU exceeds 10% of the Group’s total
goodwill balance. The majority of the projected cash flows within these CGUs is primarily underpinned by expected levels of government
spending on defence, aerospace and security and the Group’s ability to capture a broadly consistent market share.
| 162 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
10. Other intangible assets
| Other intangible assets are carried at cost or valuation, less accumulated amortisation and impairment. The Group has no indefinite-life intangible assets other than goodwill. Cost or valuation Software Software includes: – Computer software licences acquired for use within the Group are capitalised as an intangible asset on the basis of the costs incurred to acquire and bring to use the specific software; and – Software development costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Group-funded expenditure associated with enhancing or maintaining computer software programmes for sale is recognised as an expense as incurred. Software as a service cloud computing arrangements Software as a Service (SaaS) solutions are service contracts which provide the Group with the right to access a cloud provider’s application software over a contractual period. Typically, such arrangements involve ongoing licence fees to obtain access to the cloud provider’s application software, as well as upfront costs incurred to implement the SaaS solution. Implementation services are only capitalised as intangible assets, in accordance with IAS 38, where: – The Group has both a contractual right to take possession of the software at any time without significant penalty, and the ability to run the software independently of the host vendor; or – The costs incurred meet the definition of and recognition criteria for an intangible asset. This includes the development of software code that enhances or creates additional capability to existing systems controlled by the Group. Where costs associated with the implementation do not meet the criteria above, but the implementation activities are performed by the SaaS vendor or an agent thereof, consideration is given as to whether these activities are distinct from the provision of the solution itself. This assessment considers the nature of the implementation activities and whether benefit can be obtained from any of these in isolation. Where the activity is not considered distinct, the costs are recognised as a prepayment and released over the expected useful life of the solution. Where the conditions above are not met, costs incurred in relation to implementation activities and the ongoing fees to obtain access to the SaaS solution are recognised as operating expenses when the services are received. Development costs Development costs funded by the Group on activities applied to a plan or design for the production of new or substantially improved products are capitalised as an internally generated intangible asset if certain conditions are met. The costs capitalised include materials, direct labour and related overheads. Programme and customer-related Intangible assets recognised by the Group include those relating to ongoing programmes within businesses acquired, mainly in respect of customer relationships and order backlog. These assets are initially recognised at their fair value at the acquisition date. Other Other intangible assets includes patents, trademarks and licences. Amortisation Amortisation on other intangible assets is charged to the Consolidated income statement on a straight-line basis over their estimated useful lives. For programme-related intangibles, amortisation is set on a programme-by-programme basis over the life of the individual programme. Amortisation for customer-related intangibles is also set on an individual basis. The estimated useful lives are as follows: |
||||||
| Software | up to 10 years | Programme and customer-related | up to 15 years | |||
| Development costs | up to 10 years | Other | up to 20 years | |||
| Impairment of intangible assets, property, plant and equipment, right-of-use assets, investment property and equity accounted investments The carrying amounts of the Group’s intangible assets (excluding goodwill), property, plant and equipment, right-of-use assets, investment property and equity accounted investments are reviewed at each balance sheet date to determine whether there is any indication of impairment, as required by IAS 36 Impairment of Assets. If any such indication exists, the asset’s recoverable amount is estimated. For intangible assets that are not yet available for use, impairment testing is performed annually. In estimating the asset’s recoverable amount, the Group takes into consideration the impact of the Group’s net zero ambitions. Impairment losses are recognised in the Consolidated income statement. An impairment loss in respect of other intangible assets, property, plant and equipment, investment property and equity accounted investments is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised or if there has been a change in the estimate used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. |
||||||
| Strategic report | Governance | Financial statements | Additional information | 163 | ||
10. Other intangible assets continued
| Software | Development costs |
Programme and customer-related |
Other | Total | ||
| Note | £m | £m | £m | £m | £m | |
| Cost or valuation | ||||||
| At 1 January 2024 | 1,021 | 141 | 646 | 133 | 1,941 | |
| Additions: | ||||||
| Acquired separately | 149 | — | — | — | 149 | |
| Internally developed | 16 | 8 | — | — | 24 | |
| Business acquisitions | 48 | — | 2,317 | 136 | 2,501 | |
| Disposals | (46) | (15) | (24) | (12) | (97) | |
| Foreign exchange adjustments | (2) | 2 | 17 | 1 | 18 | |
| At 31 December 2024 | 1,186 | 136 | 2,956 | 258 | 4,536 | |
| Additions: | ||||||
| Acquired separately | 160 | — | — | — | 160 | |
| Internally developed | 12 | 14 | — | — | 26 | |
| Disposals | (12) | — | (11) | (6) | (29) | |
| Transfer from property, plant and equipment | 11 | 3 | 7 | — | — | 10 |
| Foreign exchange adjustments | (11) | (7) | (194) | (8) | (220) | |
| At 31 December 2025 | 1,338 | 150 | 2,751 | 244 | 4,483 | |
| Amortisation and impairment | ||||||
| At 1 January 2024 | 702 | 88 | 362 | 76 | 1,228 | |
| Amortisation | 86 | 2 | 312 | 22 | 422 | |
| Impairment charge | 6 | — | — | — | 6 | |
| Disposals | (46) | (15) | (24) | (12) | (97) | |
| Foreign exchange adjustments | — | 2 | 9 | 1 | 12 | |
| At 31 December 2024 | 748 | 77 | 659 | 87 | 1,571 | |
| Amortisation | 88 | 3 | 347 | 32 | 470 | |
| Impairment charge | — | — | 7 | 5 | 12 | |
| Disposals | (1) | — | (11) | (6) | (18) | |
| Foreign exchange adjustments | (4) | (5) | (50) | (6) | (65) | |
| At 31 December 2025 | 831 | 75 | 952 | 112 | 1,970 | |
| Net book value | ||||||
| At 31 December 2025 | 507 | 75 | 1,799 | 132 | 2,513 | |
| At 31 December 2024 | 438 | 59 | 2,297 | 171 | 2,965 | |
| At 1 January 2024 | 319 | 53 | 284 | 57 | 713 |
Capital commitments
At 31 December 2025, capital expenditure of £49m (2024 £43m) in respect of intangible assets was contracted for but not provided for in the
Consolidated financial statements.
| 164 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
11. Property, plant and equipment
| Cost Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of self- constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. The cost of demonstration assets is written off as incurred. The reimbursement of the cost of an item of property, plant and equipment by way of a government grant is presented as deferred income and recognised in the Consolidated income statement on a basis consistent with the depreciation of the asset over its estimated useful life. Assets held for leasing out under operating leases are included in property, plant and equipment at cost less accumulated depreciation and impairment losses. |
|||
| Depreciation Depreciation is provided, normally on a straight-line basis, to write off the cost of items of property, plant and equipment over their estimated useful lives to any estimated residual value, using the following rates: |
|||
| Buildings | up to 50 years, or the lease term if shorter | ||
| Plant and machinery: | |||
| Computing equipment and motor vehicles | 4 to 5 years | ||
| Other equipment | 10 to 20 years, or the project life if shorter | ||
| No depreciation is provided on freehold land and assets in the course of construction. | |||
| The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each balance sheet date, taking into consideration the impact on the assets’ useful economic lives as a result of the Group’s sustainability ambitions. |
|||
| Impairment The carrying amounts of the Group’s property, plant and equipment are reviewed at each balance sheet date to determine whether there is any indication of impairment in accordance with the policy shown in note 10. |
|||
| Strategic report | Governance | Financial statements | Additional information | 165 | ||
11. Property, plant and equipment continued
| Land and buildings |
Plant and machinery |
Total | ||
| £m | £m | £m | ||
| Cost | ||||
| At 1 January 2024 | 3,430 | 4,339 | 7,769 | |
| Additions | 386 | 585 | 971 | |
| Business acquisitions | 464 | 230 | 694 | |
| Disposals | (32) | (99) | (131) | |
| Business disposals | (7) | (24) | (31) | |
| Foreign exchange adjustments | 8 | 25 | 33 | |
| At 31 December 2024 | 4,249 | 5,056 | 9,305 | |
| Additions | 370 | 558 | 928 | |
| Disposals | (77) | (114) | (191) | |
| Transfer to other intangibles | — | (10) | (10) | |
| Foreign exchange adjustments | (112) | (166) | (278) | |
| At 31 December 2025 | 4,430 | 5,324 | 9,754 | |
| Depreciation and impairment | ||||
| At 1 January 2024 | 1,374 | 2,760 | 4,134 | |
| Depreciation | 158 | 286 | 444 | |
| Impairment charge | 5 | 1 | 6 | |
| Disposals | (30) | (96) | (126) | |
| Business disposals | (3) | (16) | (19) | |
| Foreign exchange adjustments | 5 | 18 | 23 | |
| At 31 December 2024 | 1,509 | 2,953 | 4,462 | |
| Depreciation | 171 | 290 | 461 | |
| Disposals | (75) | (104) | (179) | |
| Impairment charge | — | 4 | 4 | |
| Foreign exchange adjustments | (55) | (99) | (154) | |
| At 31 December 2025 | 1,550 | 3,044 | 4,594 | |
| Net book value | ||||
| At 31 December 20251 | 2,880 | 2,280 | 5,160 | |
| At 31 December 20241 | 2,740 | 2,103 | 4,843 | |
| At 1 January 2024 | 2,056 | 1,579 | 3,635 |
- Includes £1,367m (2024 £1,262m) of assets at Barrow-in-Furness, UK funded by the UK Government.
Assets in the course of construction
Included in the above analysis, the following balances relate to those assets which are still in the course of construction:
| Land and buildings |
Plant and machinery |
Total | |
| £m | £m | £m | |
| At 31 December 2025 | 515 | 622 | 1,137 |
| At 31 December 2024 | 579 | 658 | 1,237 |
Capital commitments
At 31 December 2025, capital expenditure of £493m (2024 £539m) in respect of property, plant and equipment was contracted for but not
provided for in the Consolidated financial statements.
Assets pledged as security
Within the Land and buildings balance, there are assets with a carrying value of £162m (2024 £160m) which the Group cannot pledge as
security for borrowings or sell to another entity.
| 166 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
12. Leases
| The Group as lessee All leases in which the Group is lessee are recognised as a right-of-use asset and a corresponding lease liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between repayment of the lease liability and finance cost. The finance cost is charged to the Consolidated income statement over the lease term to produce a constant periodic rate of interest on the lease liability. The right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. The lease liability is initially measured as the present value of future lease payments, discounted using the Group’s incremental borrowing rate, where the interest rate implicit in the lease is not determinable. The Group’s incremental borrowing rate is the interest rate the Group would have to pay to borrow the amount necessary to obtain an asset of similar value, in a similar economic environment with similar terms and conditions. The right-of-use asset is initially measured at cost, comprising the initial value of the lease liability, any lease payments made (net of any incentives received from the lessor) before the commencement of the lease, any initial direct costs and any restoration costs. The carrying amounts of the Group’s right-of-use assets are reviewed at each balance sheet date to determine whether there is any indication of impairment in accordance with the policy shown in note 10. Payments in respect of short-term leases, low-value leases and leases of intangible assets are charged to the Consolidated income statement on a straight-line basis over the lease term. |
||
The Group leases land, buildings, vehicles and equipment under non-cancellable lease arrangements. The leases have varying terms, including
escalation clauses, renewal rights and purchase options. None of these terms represents unusual arrangements or creates material onerous or
beneficial rights or obligations.
Right-of-use assets
| 2025 | 2024 | |||||||
| Note | Land and buildings |
Plant and machinery |
Total | Land and buildings |
Plant and machinery |
Total | ||
| £m | £m | £m | £m | £m | £m | |||
| Net book value at 1 January | 1,720 | 35 | 1,755 | 1,280 | 31 | 1,311 | ||
| Additions | 113 | 24 | 137 | 494 | 21 | 515 | ||
| Business acquisitions | 31 | — | — | — | 77 | — | 77 | |
| Disposals | (14) | — | (14) | — | — | — | ||
| Lease modifications | 71 | 2 | 73 | 53 | 2 | 55 | ||
| Depreciation | (208) | (20) | (228) | (203) | (16) | (219) | ||
| Business disposals | — | — | — | (1) | — | (1) | ||
| Foreign exchange adjustments | (85) | — | (85) | 20 | (3) | 17 | ||
| Net book value at 31 December | 1,597 | 41 | 1,638 | 1,720 | 35 | 1,755 |
Lease liabilities
A maturity analysis of the future undiscounted lease payments in respect of the Group’s lease liabilities is presented in the table below:
| 2025 | 2024 | |
| £m | £m | |
| Payments due: | ||
| Within one year | 265 | 260 |
| Between one and five years | 868 | 891 |
| Later than five years | 1,324 | 1,342 |
| Total undiscounted gross payments | 2,457 | 2,493 |
| Deduct: Impact of discounting | (691) | (652) |
| Lease liabilities | 1,766 | 1,841 |
The Group is also committed to future undiscounted lease payments of £nilin respect of leases which had not yet commenced at 31 December
2025 (2024 £76m).
The total cash outflow for leases in the year ended 31 December 2025, including short-term leases and low-value leases, amounted to £304m
(2024 £295m).
| Strategic report | Governance | Financial statements | Additional information | 167 | ||
12. Leases continued
Amounts recognised in the Consolidated income statement
| 2025 | 2024 | |
| £m | £m | |
| Included in operating costs: | ||
| Depreciation on right-of-use assets | (228) | (219) |
| Short-term lease expense | (28) | (25) |
| Low-value lease expense | (7) | (8) |
| (263) | (252) | |
| Included in net finance costs: | ||
| Interest income on finance lease receivables | 1 | 1 |
| Interest expense on lease liabilities | (79) | (73) |
| (78) | (72) |
13. Equity accounted investments
| Equity accounted investments comprise joint ventures and associates. A joint venture is a joint arrangement whereby the parties that have joint control have rights to the net assets of the arrangement. An associate is an entity over which the Group has significant influence but not control or joint control. The Group recognises its share of the profit or loss and other comprehensive income of equity accounted investments as a separate line in the Consolidated income statement and Consolidated statement of comprehensive income, respectively. The carrying value of an equity accounted investment comprises the Group’s share of net assets and purchased goodwill, and is assessed for impairment as a single asset. The carrying amounts of the Group’s equity accounted investments are reviewed at each balance sheet date to determine whether there is any indication of impairment, in accordance with the policy shown in note 10. |
||
Group summary
The Group has two individually material joint ventures which are Eurofighter Jagdflugzeug and MBDA, the carrying values of which are included
below. The following table shows a reconciliation of the opening to closing carrying values for both the Group’s principal and other joint
ventures and associates.
| 168 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
13. Equity accounted investments continued
| Principal equity accounted investments |
Other joint ventures |
Other associates |
Total | |
| £m | £m | £m | £m | |
| At 1 January 2024 | 551 | 185 | 96 | 832 |
| Group’s share of profit for the year | 197 | 10 | 6 | 213 |
| Group’s share of remeasurements on post-employment benefit schemes | 16 | — | — | 16 |
| Tax on items that may be reclassified to the income statement | (1) | — | — | (1) |
| Foreign exchange adjustments | 4 | (1) | — | 3 |
| Amounts recognised in hedging reserve | (1) | 2 | — | 1 |
| Group’s share of total comprehensive income for the year | 215 | 11 | 6 | 232 |
| Divestment of interest in equity accounted investments | — | (56) | — | (56) |
| Dividends received from equity accounted investments | (135) | (22) | (1) | (158) |
| Foreign exchange adjustments | (28) | 1 | — | (27) |
| At 31 December 2024 | 603 | 119 | 101 | 823 |
| Group’s share of profit/(loss) for the year | 194 | 43 | (18) | 219 |
| Impairment of equity accounted investments | — | — | (25) | (25) |
| Group’s share of remeasurements on post-employment benefit schemes | (2) | — | — | (2) |
| Tax on items that will not be reclassified to the income statement | (1) | — | — | (1) |
| Foreign exchange adjustments | (4) | — | — | (4) |
| Amounts recognised in hedging reserve | — | (2) | — | (2) |
| Group’s share of total comprehensive income/(expense) for the year | 187 | 41 | (43) | 185 |
| Equity accounted investment funding | — | 1 | — | 1 |
| Divestment of interest in equity accounted investments | — | (39) | — | (39) |
| Dividends received from equity accounted investments | (275) | (29) | — | (304) |
| Foreign exchange adjustments | 31 | (1) | 2 | 32 |
| At 31 December 2025 | 546 | 92 | 60 | 698 |
Contingent liabilities
The Group is not aware of any material contingent liabilities in respect of its equity accounted investments.
Principal equity accounted investments
| Joint venture | Principal activities | Shareholding | Principally operates in |
| Eurofighter Jagdflugzeug | Management and control of the European Typhoon programme | 33.3% | Germany |
| MBDA | Development and manufacture of missiles and missile systems | 37.5% | Europe |
The following tables summarise the financial information of the Group’s principal equity accounted investments included in their own financial
statements, as adjusted for fair value adjustments at acquisition and differences in accounting policies, and reconcile this to the Group’s interest
in those equity accounted investments.
| Strategic report | Governance | Financial statements | Additional information | 169 | ||
13. Equity accounted investments continued
| 2025 | 2024 | ||||
| Eurofighter Jagdflugzeug |
MBDA | Eurofighter Jagdflugzeug |
MBDA | ||
| £m | £m | £m | £m | ||
| Revenue (100%) | 4,674 | 4,950 | 4,187 | 4,159 | |
| Underlying EBIT1 excluding depreciation and amortisation | 24 | 740 | 38 | 603 | |
| Depreciation and amortisation | (4) | (200) | (4) | (149) | |
| Finance income | 12 | 176 | 10 | 229 | |
| Finance costs | (2) | (6) | (2) | (30) | |
| Tax expense | (7) | (214) | (13) | (156) | |
| Profit for the year (100%) | 23 | 496 | 29 | 497 | |
| Remeasurements on post-employment benefit schemes, net of tax | — | (6) | — | 40 | |
| Amounts recognised in hedging reserve, net of tax | — | (2) | — | (2) | |
| Foreign exchange adjustments | — | (10) | — | 12 | |
| Total comprehensive income for the year (100%) | 23 | 478 | 29 | 547 | |
| Group’s share of total comprehensive income for the year | 8 | 179 | 10 | 205 | |
| Non-current assets2 | 32 | 3,824 | 29 | 3,100 | |
| Cash and cash equivalents | 49 | 6,444 | 27 | 5,065 | |
| Current assets excluding cash and cash equivalents | 11,763 | 6,569 | 9,892 | 5,486 | |
| Current assets | 11,812 | 13,013 | 9,919 | 10,551 | |
| Non-current financial liabilities excluding trade and other payables, and provisions |
— | (7) | — | (6) | |
| Other non-current liabilities | (47) | (573) | (47) | (66) | |
| Non-current liabilities | (47) | (580) | (47) | (72) | |
| Current financial liabilities excluding trade and other payables, and provisions | (8) | — | (13) | — | |
| Other current liabilities | (11,753) | (14,870) | (9,851) | (12,033) | |
| Current liabilities | (11,761) | (14,870) | (9,864) | (12,033) | |
| Net assets (100%) | 36 | 1,387 | 37 | 1,546 |
-
Underlying EBIT is an alternative performance measure defined in the Alternative performance measures section on page 216.
-
Includes MBDA’s share of the net IAS 19 surplus in the Group’s defined benefit schemes of £104m (2024 £100m).
| 2025 | 2024 | ||||||
| Eurofighter Jagdflugzeug |
MBDA | Total | Eurofighter Jagdflugzeug |
MBDA | Total | ||
| £m | £m | £m | £m | £m | £m | ||
| Group’s share of net assets | 12 | 520 | 532 | 12 | 580 | 592 | |
| Goodwill adjustment | — | 14 | 14 | — | 11 | 11 | |
| Carrying value | 12 | 534 | 546 | 12 | 591 | 603 |
| 2025 | 2024 | ||||||
| Eurofighter Jagdflugzeug |
MBDA | Total | Eurofighter Jagdflugzeug |
MBDA | Total | ||
| £m | £m | £m | £m | £m | £m | ||
| Dividends received | 9 | 266 | 275 | 6 | 129 | 135 |
| 170 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
14. Contract receivables and liabilities
| Contract receivables are measured at amortised cost under IFRS 9 Financial Instruments as they are held within a business model to collect contractual cash flows, and these cash flows consist solely of payments of principal and interest on the principal amount outstanding. Contract receivables represent amounts for which the Group has an unconditional right to consideration in respect of unbilled revenue recognised at the balance sheet date and comprise costs incurred plus attributable margin. Contract receivables include a provision for expected credit losses, which is measured at an amount equal to lifetime expected credit losses, estimated by reference to past experience and relevant forward-looking factors. The Group writes off a receivable when there is objective evidence that the debtor is in significant financial difficulty and there is no realistic prospect of recovery, for example, when a debtor enters bankruptcy or financial reorganisation. Contract liabilities represent the obligation to transfer goods or services to a customer for which consideration has been received, or consideration is due, from the customer. |
||
| 2025 | 2024 | |
| £m | £m | |
| Non-current | ||
| Contract receivables | 117 | 108 |
| Contract liabilities | (1,746) | (1,720) |
| Current | ||
| Contract receivables | 3,834 | 3,749 |
| Contract liabilities | (4,820) | (4,504) |
Contract receivables are stated net of a provision for expected credit losses. Disclosures relating to provision for expected credit losses are
provided in note 16.
Revenue recognised in the year includes £4,002m (2024 £4,105m) that was included in the opening contract liabilities balance.
Non-current and current contract liabilities as at 1 January 2024 were £1,955m and £3,865m, respectively.
| Strategic report | Governance | Financial statements | Additional information | 171 | ||
15. Trade and other receivables
| Trade receivables are measured at amortised cost under IFRS 9 Financial Instruments as they are held within a business model to collect contractual cash flows and these cash flows consist solely of payments of principal and interest on the principal amount outstanding. Trade receivables, amounts owed by equity accounted investments and finance lease receivables include a provision for expected credit losses. The Group measures the provision at an amount equal to lifetime expected credit losses, estimated by reference to past experience and relevant forward-looking factors. The Group writes off a receivable when there is objective evidence that the debtor is in significant financial difficulty and there is no realistic prospect of recovery, for example, when a debtor enters bankruptcy or financial reorganisation. US deferred compensation plan assets are measured at fair value in accordance with IAS 19 Employee Benefits. |
||
| Note | 2025 | 2024 | |
| £m | £m | ||
| Non-current | |||
| Prepayments | 417 | 168 | |
| US deferred compensation plan assets | 372 | 367 | |
| Finance lease receivables | 16 | 18 | |
| Other receivables | 54 | 73 | |
| 859 | 626 | ||
| Current | |||
| Trade receivables | 1,563 | 1,357 | |
| Amounts owed by equity accounted investments | 29 | 95 | 52 |
| Prepayments | 924 | 1,005 | |
| Accrued income | 42 | 27 | |
| US deferred compensation plan assets | 51 | 50 | |
| Finance lease receivables | 8 | 6 | |
| Other receivables | 442 | 417 | |
| 3,125 | 2,914 |
Trade receivables are stated net of a provision for expected credit losses. Disclosures relating to the ageing of trade receivables and movements
in the provision for expected credit losses are provided in note 16.
| 172 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
16. Other financial assets and liabilities and financial risk management
| Derivative financial instruments and hedging activities The international nature of the Group’s business means it is exposed to volatility in currency exchange rates. In order to protect itself against currency fluctuations, the Group’s policy is to hedge all material firm transactional exposures. The Group uses interest rate derivative instruments to manage the Group’s exposure to interest rate fluctuations on its borrowings and deposits by varying the proportion of fixed-rate debt relative to floating-rate debt over the forward time horizon. The Group uses foreign exchange derivative instruments to manage the Group’s exposure to currency fluctuations on its borrowings and deposits with the Group’s subsidiaries and equity accounted investments. In accordance with its Treasury policy, the Group does not hold derivative financial instruments for trading purposes. The Group aims to achieve hedge accounting treatment for all derivatives that hedge material foreign currency exposures. Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, such instruments are stated at fair value at the balance sheet date. The fair values are estimated by discounting expected future cash flows based on reputable third-party forecast data, and then adjusting for credit risk, including the Group’s own credit risk, and market risk. Fair value through profit or loss Gains and losses on derivative financial instruments that are not designated as cash flow hedges are recognised within net finance costs in the Consolidated income statement for the year. Cash flow hedges Where a derivative financial instrument is designated as a hedge of the exposure to variability in cash flows relating to a highly-probable forecast transaction (income or expense) or recognised asset or liability, the effective portion of any change in the fair value of the instrument is recognised in other comprehensive income and presented in the hedging reserve in equity. Amounts recognised in equity are removed from the hedging reserve and included in the cost of the underlying transaction or reclassified to the Consolidated income statement when the underlying transaction affects profit or loss. These amounts are presented within the same line item in the Consolidated income statement as the underlying transaction, typically revenue or operating costs. The ineffective portion of any change in the fair value of the instrument is recognised in the Consolidated income statement within net finance costs immediately. The Group treats the foreign currency basis element of the designated foreign exchange derivative hedging instruments as a cost of hedging, and as such it is excluded from the hedge designation. Any hedges entered into on behalf of equity accounted investments (note 29) are classified as cash flow hedges. |
||
| 2025 | 2024 | ||||
| Assets | Liabilities | Assets | Liabilities | ||
| £m | £m | £m | £m | ||
| Non-current | |||||
| Cash flow hedges – foreign exchange contracts | 125 | (170) | 152 | (169) | |
| Debt-related derivative financial instruments | 80 | (77) | 110 | (21) | |
| Other foreign exchange/interest rate contracts | 27 | (1) | 3 | (3) | |
| 232 | (248) | 265 | (193) | ||
| Current | |||||
| Cash flow hedges – foreign exchange contracts | 152 | (143) | 163 | (225) | |
| Other foreign exchange/interest rate contracts | 31 | (30) | 49 | (39) | |
| 183 | (173) | 212 | (264) |
Debt-related derivative financial instruments
The debt-related derivative financial instruments represent the fair value of cross-currency and foreign exchange derivatives relating to the
US$500m 7.5% bond, repayable 2027 and the US$1,300m 3.4% bond, repayable 2030 (see note 21).
| Strategic report | Governance | Financial statements | Additional information | 173 | ||
16. Other financial assets and liabilities and financial risk management continued
Interest rate risk
The Group’s objective is to manage its exposure to interest rate fluctuations on borrowings through varying the proportion of fixed-rate debt
relative to floating-rate debt with derivative instruments, including interest rate and cross-currency swaps.
The Group’s interest rate management policy is that a minimum of 50% (2024 50%) and a maximum of 90% (2024 90%) of borrowings are
maintained at fixed interest rates. At 31 December 2025, the Group had 85% (2024 86%) of fixed-rate debt and 15% (2024 14%) of floating-
rate debt based on a gross debt of £7.3bn (2024 £8.3bn), including debt-related derivative financial assets.
Based on contracted maturities and/or repricing dates, the following amounts are exposed to interest rate risk over the future as shown below:
| 2025 | 2024 | ||||||
| Within one year |
Between one and two years |
Later than two years |
Within one year |
Between one and two years |
Later than two years |
||
| £m | £m | £m | £m | £m | £m | ||
| Cash and cash equivalents | 3,438 | — | — | 3,378 | — | — | |
| Interest rate swaps | (1,115) | (1,119) | (1,121) | (1,197) | (1,197) | (1,197) |
The floating-rate debt has been predominantly achieved by entering into interest rate swaps which swap the fixed-rate US dollar interest
payable on debt into a floating rate. At the end of 2025, the Group had a total of $1.5bn (2024 $1.5bn) of this type of swap outstanding with
a weighted average duration of 2.2 years (2024 3.2 years). In December 2025, the Group transacted £600m of interest rate swaps to receive a
fixed rate of 3.6% and to pay the floating sterling benchmark rate, SONIA. These swaps have an effective date of March 2027 and a maturity
date of September 2030.
In respect of the Group’s fixed-rate debt, the weighted average period in respect of which interest is fixed was 11.4 years (2024 11.6 years).
Given the level of short-term interest rates during the year, the average cost of the floating-rate debt was 4.9% (2024 6.0%) on US dollars. The
cost of the fixed-rate debt was 4.4% (2024 4.3%).
Sensitivity analysis
A change of 100 basis points in short-term rates applied to the average fixed/floating mix, and level of borrowings would vary the interest cost
to the Group by approximately £11m (2024 £12m).
In respect of cash deposits, given the fluctuation in the Group’s working capital requirements, cash is generally invested for short-term periods
based at floating-interest rates. A change of 100 basis points in the average interest rates during the year applied to the average cash deposits
would vary the interest receivable by approximately £20m (2024 £23m). Should interest rates fluctuate by a different rate to those disclosed,
the impact can be linearly interpolated.
| 174 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
16. Other financial assets and liabilities and financial risk management continued
Liquidity risk
Contractual cash outflows on financial liabilities
The contracted cash outflows on loans, derivative financial instruments and other financial instruments at the reporting date are shown below,
classified by maturity. The cash outflows are shown on a gross basis, are not discounted, are translated at the spot rate and include estimated
interest payments where applicable. Contracted cash outflows reflect the gross cash outflow on derivative financial instruments and exclude
the broadly offsetting cash inflows for the receive leg of derivatives that are settled separately to the pay leg.
| 2025 | 2024 | ||||||||||
| Contracted cash outflow | Contracted cash outflow | ||||||||||
| Carrying amount |
Within one year |
Between one and five years |
Later than five years |
Total | Carrying amount |
Within one year |
Between one and five years |
Later than five years |
Total | ||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | ||
| Cash outflows without directly offsetting inflows |
|||||||||||
| Accruals1 | (1,786) | (1,761) | (25) | — | (1,786) | (1,713) | (1,684) | (29) | — | (1,713) | |
| Trade and other payables2 | (3,714) | (3,651) | (63) | — | (3,714) | (3,440) | (3,351) | (89) | — | (3,440) | |
| Lease liabilities | (1,766) | (265) | (868) | (1,324) | (2,457) | (1,841) | (260) | (891) | (1,342) | (2,493) | |
| Loans | (7,285) | (332) | (3,914) | (6,342) | (10,588) | (8,412) | (977) | (3,295) | (8,071) | (12,343) | |
| (14,551) | (15,406) | ||||||||||
| Cash outflows with largely offsetting inflows3 |
|||||||||||
| Cash flow hedges – financial assets | 277 | (7,119) | (4,776) | (1,226) | (13,121) | 315 | (5,199) | (4,932) | (1,465) | (11,596) | |
| Cash flow hedges – financial liabilities | (313) | (8,931) | (5,437) | (1,260) | (15,628) | (394) | (7,154) | (6,026) | (1,310) | (14,490) | |
| Debt-related derivatives – financial assets | 80 | (23) | (360) | — | (383) | 110 | (23) | (347) | (36) | (406) | |
| Debt-related derivatives – financial liabilities |
(77) | (35) | (1,123) | — | (1,158) | (21) | (35) | (141) | (1,018) | (1,194) | |
| Other foreign exchange/interest rate contracts – financial assets |
58 | (2,078) | (205) | (93) | (2,376) | 52 | (2,977) | — | — | (2,977) | |
| Other foreign exchange/interest rate contracts – financial liabilities |
(31) | (2,795) | (77) | — | (2,872) | (42) | (2,045) | (327) | — | (2,372) | |
| (6) | 20 | ||||||||||
| (14,557) | (15,386) |
-
Accruals presented in the table excludes £1,070m (2024 £1,082m) of accruals which are non-financial liabilities.
-
Trade and other payables excludes other taxes and social security costs, deferred income and US deferred compensation plan liabilities (see note 22) on
the basis that these are non-financial liabilities.
- Cash outflows in relation to derivatives presented in this table do not include the cash inflows which would be received when closing out the trades. These
cash inflows are expected to largely offset all outflows presented within this table.
Borrowing facilities
The Group’s objective is to maintain adequate undrawn committed borrowing facilities.
At 31 December 2025, the Group had a committed Revolving Credit Facility (RCF) of £2bn (2024 £2bn). In September 2025 the Group exercised
the remaining one-year extension option, taking the maturity of the facility to 2030. The RCF was undrawn throughout the year.
| Strategic report | Governance | Financial statements | Additional information | 175 | ||
16. Other financial assets and liabilities and financial risk management continued
Currency risk
The Group’s objective is to reduce its exposure to transactional volatility in earnings and cash flows from movements in foreign currency
exchange rates, mainly the US dollar, euro, Saudi riyal and Australian dollar.
The Group is exposed to movements in foreign currency exchange rates in respect of foreign currency-denominated transactions. All material
firm transactional exposures are hedged using foreign exchange forward contracts and the Group aims, where possible, to apply cash flow
hedge accounting to these transactions.
The currency and notional amount of the designated hedging instruments match the currency and principal amounts of the forecast
transactions being hedged; therefore, the hedging instruments and hedged items have values which will generally move in opposite directions
because of the same hedged risk. As the critical terms of the hedging instruments match those of the hedged items, an economic relationship
can be demonstrated on an ongoing basis.
The hedge ratio is 1:1 on the basis that the notional amount of the designated hedging instruments matches the principal amount of the
forecast foreign currency sales/purchases designated as the hedged items. The Group does not designate groups of items with offsetting risk
positions as hedged items.
The Group considers the potential sources of hedge ineffectiveness to be:
– valuation adjustments for credit risk made to derivative hedging instruments at each hedge effectiveness measurement date;
– changes to the timing and amount of forecast transactions; and
– non-occurrence of the designated hedged items.
Foreign currency basis is excluded from the currency hedge designation and was highly immaterial.
The Group enters into derivative contracts with varying maturities up to 2035. The following table presents the sterling nominal amounts of the
foreign currency contracts used to hedge foreign currency risk, split by maturity profile, along with the exchange rate:
| 2025 | 2024 | |||||||||||
| Currency purchased | Currency sold | Currency purchased | Currency sold | |||||||||
| (Purchase)/sale contracts | Maturity date | Weighted average hedged rate |
Notional value of currency purchased |
Weighted average hedged rate |
Notional value of currency sold |
Weighted average hedged rate |
Notional value of currency purchased |
Weighted average hedged rate |
Notional value of currency sold |
|||
| £m | £m | £m | £m | |||||||||
| Sterling/US dollar | Within one year | 1.31 | (2,187) | 1.30 | 2,426 | 1.27 | (2,015) | 1.28 | 2,627 | |||
| Between one and five years | 1.28 | (800) | 1.27 | 1,038 | 1.27 | (1,304) | 1.26 | 1,728 | ||||
| Later than five years | 1.28 | (25) | 1.28 | 28 | 1.30 | (10) | 1.30 | 10 | ||||
| Sterling/euro | Within one year | 1.13 | (3,930) | 1.13 | 3,512 | 1.15 | (2,944) | 1.15 | 2,550 | |||
| Between one and five years | 1.10 | (3,357) | 1.10 | 3,122 | 1.11 | (3,207) | 1.11 | 3,165 | ||||
| Later than five years | 1.06 | (1,224) | 1.06 | 1,282 | 1.06 | (1,455) | 1.06 | 1,449 | ||||
| Other | Within one year | n/a | (4,054) | n/a | 4,049 | n/a | (2,243) | n/a | 2,222 | |||
| Between one and five years | n/a | (2,072) | n/a | 2,018 | n/a | (1,814) | n/a | 1,815 | ||||
| Later than five years | n/a | (28) | n/a | 27 | n/a | (27) | n/a | 25 | ||||
| Cash flow hedges | (17,677) | 17,502 | (15,019) | 15,591 |
The effect of cash flow hedges on the Group’s financial position and performance for the year is as follows:
| 2025 | 2024 | ||||||||
| (Purchase)/sale contracts | Change in the value of hedging instruments since 1 January |
Change in the value of hedged items since 1 January |
Notional amount |
Carrying amount |
Change in the value of hedging instruments since 1 January |
Change in the value of hedged items since 1 January |
Notional amount |
Carrying amount |
|
| £m | £m | £m | £m | £m | £m | £m | £m | ||
| Sterling/US dollar | 62 | (62) | 480 | 32 | (24) | 24 | 1,036 | (28) | |
| Sterling/euro | 13 | (13) | (595) | (2) | (15) | 15 | (442) | (17) | |
| Other | (31) | 31 | (60) | (66) | 3 | (3) | (22) | (34) | |
| Cash flow hedges | 44 | (44) | (175) | (36) | (36) | 36 | 572 | (79) |
| 176 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
16. Other financial assets and liabilities and financial risk management continued
Currency risk continued
Sensitivity analysis
The Group is exposed to movements in foreign currency exchange rates in respect of the translation of net assets and income statements
of foreign subsidiaries and equity accounted investments. The Group does not hedge the translation effect of exchange rate movements on
the income statements or balance sheets of foreign subsidiaries and equity accounted investments it regards as long-term investments.
The estimated impact on foreign exchange gains and losses in net finance costs of a ten cent movement in the closing sterling to US dollar
exchange rate on the retranslation of US dollar-denominated bonds held by BAE Systems plc is approximately £473m (2024 £545m).
The Group enters into cash flow hedges in order to manage all material firm transactional exposures. The estimated impact on fair value gains
and losses in other reserves of a ten cent movement in the closing sterling to US dollar exchange rates on the transactional cash flow hedges
is approximately £33m (2024 £85m). The estimated impact of a ten cent movement in the closing sterling to euro exchange rate on the
transactional cash flow hedges is approximately £52m (2024 £35m).
Credit risk
For trade receivables, contract receivables, amounts due from equity accounted investments and finance lease receivables, the Group measures
a provision for expected credit losses at an amount equal to lifetime expected credit losses, estimated by reference to past experience and
relevant forward-looking factors.
The Group’s assessment is that credit risk in relation to defence-related sales to government customers or subcontractors to governments
is extremely low as the probability of default is insignificant; therefore, the provision for expected credit losses is immaterial in respect of
receivables from these customers. For all non-government commercial customers, the Group assesses expected credit losses, including risk
arising from global economic uncertainty; however, this is not considered material to the financial statements. The Group considers that default
has occurred when a receivable is past 180 days overdue, unless there is evidence of recoverability, because historical experience indicates that
these receivables are generally not recoverable. The Group recognises a provision of 100% against all receivables over 180 days past due unless
there is evidence that individual receivables in this category are recoverable.
The carrying amount of the Group’s financial assets represents the maximum exposure to credit risk.
Movements on the provision for expected credit losses for trade receivables are as follows:
| 2025 | 2024 | |
| £m | £m | |
| At 1 January | 19 | 20 |
| Business acquisitions | — | 1 |
| Net remeasurement of loss allowance | 1 | 3 |
| Amounts written off | (3) | (5) |
| At 31 December | 17 | 19 |
For contract receivables, amounts due from equity accounted investments and finance lease receivables the expected credit loss provision is
immaterial as the probability of default is considered insignificant.
The Group writes off a receivable when there is evidence that the debtor is in significant financial difficulty and there is no realistic prospect of
recovery, for example, when a debtor enters bankruptcy or financial reorganisation. The ageing of trade receivables is detailed below:
| 2025 | 2024 | ||||||
| Gross | Provision | Net | Gross | Provision | Net | ||
| £m | £m | £m | £m | £m | £m | ||
| Not past due | 1,033 | — | 1,033 | 895 | — | 895 | |
| Up to 180 days overdue | 499 | (3) | 496 | 438 | (3) | 435 | |
| Past 180 days overdue | 48 | (14) | 34 | 43 | (16) | 27 | |
| 1,580 | (17) | 1,563 | 1,376 | (19) | 1,357 |
Cash management
Cash flow forecasting is performed by the businesses on a monthly basis. The Group monitors a rolling forecast of its liquidity requirements to
ensure that there is sufficient cash to meet operational needs and maintain adequate headroom.
Surplus cash held by the businesses over and above balances required for working capital management is loaned to the Group’s centralised
treasury department. Surplus cash is invested in instant-access current accounts, short-term deposits and money market funds, choosing
instruments with appropriate maturities or sufficient liquidity to provide adequate headroom as determined by cash flow forecasts.
The Group’s objective is to monitor and control counterparty credit risk and credit limit utilisation. The Group adopts a conservative approach
to the investment of its surplus cash which is deposited for short periods with financial institutions with investment-grade (BBB- and above)
credit ratings. The cash and cash equivalents balance at 31 December 2025 of £3,438m (2024 £3,378m) was invested with 38 (2024 40)
financial institutions. A credit limit is allocated to each institution taking account of its market capitalisation, credit rating and credit default swap
price. The cash and cash equivalents of the Group are invested in non-speculative financial instruments which are usually highly liquid, such as
short‑term deposits. Therefore, the Group believes it has reduced its exposure to counterparty credit risk through this process.
| Strategic report | Governance | Financial statements | Additional information | 177 | ||
16. Other financial assets and liabilities and financial risk management continued
Credit risk continued
The cash and cash equivalents balance is subject to review for impairment under IFRS 9 and, due to the high credit ratings of the counterparties
set out below, no impairment has been recognised within the year:
| Counterparty credit rating at 31 December | 2025 | 2024 |
| AAA to AA- | 64% | 62% |
| A+ to A- | 35% | 37% |
| BBB+ to BBB- | 1% | 1% |
Offsetting financial assets and liabilities
Financial assets and liabilities are offset, and the net amount reported in the balance sheet, when there is a legally enforceable right to offset the
recognised amounts. The following table sets out the Group’s financial assets and financial liabilities which are subject to a master netting
agreement. The master netting agreements regulate settlement amounts in the event a party defaults on their obligations.
| 2025 | 2024 | ||||||
| Balance sheet |
Amounts not offset |
Net balance |
Balance sheet |
Amounts not offset |
Net balance | ||
| £m | £m | £m | £m | £m | £m | ||
| Assets | |||||||
| Other financial assets | 415 | (339) | 76 | 477 | (363) | 114 | |
| Liabilities | |||||||
| Other financial liabilities | (421) | 339 | (82) | (457) | 363 | (94) |
17. Deferred tax
| A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different taxable entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. |
||
Deferred tax assets/(liabilities)
| Deferred tax assets | Deferred tax liabilities | Net balance at 31 December |
||||||
| 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | |||
| £m | £m | £m | £m | £m | £m | |||
| Property, plant and equipment | 12 | 13 | (233) | (163) | (221) | (150) | ||
| Other intangible assets | 78 | 66 | (48) | (56) | 30 | 10 | ||
| Capitalised research and development | 286 | 350 | — | — | 286 | 350 | ||
| Provisions and accruals | 252 | 256 | — | — | 252 | 256 | ||
| Goodwill | — | — | (413) | (399) | (413) | (399) | ||
| Pension/post-employment schemes: | ||||||||
| Deficits | 28 | 39 | (11) | — | 17 | 39 | ||
| US deferred compensation plans | 103 | 115 | — | — | 103 | 115 | ||
| Share-based payments | 107 | 86 | — | — | 107 | 86 | ||
| Financial instruments | 7 | 16 | — | (3) | 7 | 13 | ||
| Other items, including tax losses carried forward | 14 | 30 | (36) | (49) | (22) | (19) | ||
| Deferred tax assets/(liabilities) | 887 | 971 | (741) | (670) | 146 | 301 | ||
| Set off of tax | (715) | (656) | 715 | 656 | — | — | ||
| Net deferred tax assets/(liabilities) | 172 | 315 | (26) | (14) | 146 | 301 |
| 178 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
17. Deferred tax continued
Movement in temporary differences during the year
| At 1 January 2025 |
Foreign exchange adjustments |
Acquisitions and disposals |
Recognised in income |
Recognised in equity |
At 31 December 2025 |
|
| £m | £m | £m | £m | £m | £m | |
| Property, plant and equipment | (150) | 9 | — | (80) | — | (221) |
| Other intangible assets | 10 | (5) | (2) | 27 | — | 30 |
| Capitalised research and development | 350 | (22) | — | (42) | — | 286 |
| Provisions and accruals | 256 | (15) | — | 11 | — | 252 |
| Goodwill | (399) | 28 | — | (42) | — | (413) |
| Pension/post-employment schemes: | ||||||
| Deficits | 39 | — | — | 6 | (28) | 17 |
| US deferred compensation plans | 115 | (8) | — | (4) | — | 103 |
| Share-based payments | 86 | — | — | — | 21 | 107 |
| Financial instruments | 13 | — | — | — | (6) | 7 |
| Other items, including tax losses carried forward | (19) | (1) | — | (2) | — | (22) |
| 301 | (14) | (2) | (126) | (13) | 146 |
| At 1 January 2024 |
Foreign exchange adjustments |
Acquisitions and disposals |
Recognised in income |
Recognised in equity |
At 31 December 2024 |
|
| £m | £m | £m | £m | £m | £m | |
| Property, plant and equipment | (101) | (3) | — | (46) | — | (150) |
| Other intangible assets | 39 | — | (57) | 28 | — | 10 |
| Capitalised research and development | 458 | 6 | — | (114) | — | 350 |
| Provisions and accruals | 229 | 3 | — | 24 | — | 256 |
| Goodwill | (352) | (7) | — | (40) | — | (399) |
| Pension/post-employment schemes: | ||||||
| Deficits | 80 | — | — | (5) | (36) | 39 |
| US deferred compensation plans | 106 | 2 | — | 7 | — | 115 |
| Share-based payments | 94 | — | — | 23 | (31) | 86 |
| Financial instruments | 20 | — | — | — | (7) | 13 |
| Other items, including tax losses carried forward | 26 | (3) | 58 | (100) | — | (19) |
| 599 | (2) | 1 | (223) | (74) | 301 |
Unrecognised deferred tax assets and liabilities
Deferred tax assets have not been recognised in respect of the following items:
| 2025 | 2024 | ||||
| Gross amount |
Unrecognised deferred tax asset |
Gross amount |
Unrecognised deferred tax asset |
||
| £m | £m | £m | £m | ||
| Deductible temporary differences, including tax credits | 3 | 3 | 2 | 2 | |
| Tax losses carried forward | 693 | 119 | 502 | 114 | |
| 696 | 122 | 504 | 116 |
These assets have not been recognised as the incidence of future profits in the relevant countries and legal entities cannot be accurately
predicted at this time.
The Group has not recognised any deferred tax liability on temporary differences totalling £56m (2024 £158m) relating to potentially taxable
unremitted earnings of overseas subsidiaries and equity accounted investments because the Group is in a position to control the timing of the
reversal of the temporary differences and none are expected to reverse in the foreseeable future.
Both the recognised and unrecognised UK deferred tax balances at 31 December 2025 have been calculated at 25% (2024 25%), which reflects
the rate at which they are expected to unwind.
| Strategic report | Governance | Financial statements | Additional information | 179 | ||
18. Inventories
| Inventories are stated at the lower of cost, including all relevant overhead expenditure, and net realisable value. Inventory cost is valued using the most appropriate method based on the business use of inventory. In the majority of cases this is moving average unit cost, with some businesses using standard cost or first in first out (FIFO) as methods more indicative of their use of inventory. |
||
| 2025 | 2024 | |
| £m | £m | |
| Raw materials and consumables | 748 | 746 |
| Work-in-progress | 554 | 471 |
| Finished goods and goods for resale | 82 | 107 |
| 1,384 | 1,324 |
The Group recognised £32m (2024 £23m) as a write down of inventories to net realisable value during the year.
19. Current tax
| Current tax for the current and prior years is recognised as a liability to the extent that it has not yet been settled and as an asset to the extent that the amounts already paid exceed the amount due or the benefit of a tax loss can be carried back to recover current tax of a prior year. Current tax assets and liabilities are measured at the amount expected to be paid to or recovered from tax authorities, using the rates that have been enacted or substantively enacted by the balance sheet date. |
||
| 2025 | 2024 | |
| £m | £m | |
| Tax provisions | (39) | (78) |
| Research and development expenditure credits receivable | 170 | 85 |
| Other tax receivables | 8 | 114 |
| 139 | 121 | |
| Represented by: | ||
| Current tax assets | 183 | 176 |
| Current tax liabilities | (44) | (55) |
| 139 | 121 |
20. Cash and cash equivalents
| Cash and cash equivalents includes cash in hand, call and term deposits, investments in money market funds and other short-term liquid investments with original maturities of three months or less and which are subject to an insignificant risk of change in value. |
||
| 2025 | 2024 | |
| £m | £m | |
| Cash | 410 | 604 |
| Money market funds | 1,169 | 1,227 |
| Short-term deposits | 1,859 | 1,547 |
| 3,438 | 3,378 |
Cash and cash equivalents includes £35m (2024 £53m), which is subject to regulatory restrictions and is therefore not available for general use
by other entities within the Group.
| 180 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
21. Loans
| Loans are recognised initially at fair value, less attributable transaction costs. Subsequent to initial recognition, loans are stated at amortised cost. Any difference between the amount initially recognised and the redemption value is recognised in the Consolidated income statement over the period of the borrowings. |
||
| 2025 | 2024 | |
| £m | £m | |
| Non-current | ||
| US$500m 7.5% bond, repayable 2027 | 372 | 399 |
| US$800m 5% bond, repayable 2027 | 593 | 636 |
| US$1,250m 5.125% bond, repayable 2029 | 926 | 993 |
| US$1,300m 3.4% bond, repayable 2030 | 962 | 1,032 |
| US$1,000m 1.9% bond, repayable 2031 | 740 | 793 |
| US$500m 5.25% bond, repayable 2031 | 370 | 397 |
| US$1,500m 5.3% bond, repayable 2034 | 1,107 | 1,187 |
| US$400m 5.8% bond, repayable 2041 | 295 | 317 |
| US$550m 4.75% bond, repayable 2044 | 401 | 430 |
| US$1,000m 3% bond, repayable 2050 | 731 | 784 |
| US$201m 6.05%, private placement, repayable 2053 | 147 | 160 |
| US$750m 5.5%, bond, repayable 2054 | 546 | 585 |
| 7,190 | 7,713 | |
| Current | ||
| US$750m 3.85% bond, repayable 2025 | — | 598 |
| US$201m 6.05%, private placement, repayable 2053 | 2 | 1 |
| Accrued interest | 93 | 100 |
| 95 | 699 |
The US$500m 7.5% bond, repayable 2027, was converted at issue to a sterling fixed-rate bond by utilising cross-currency swaps and had an
effective rate during 2025 of 7.7%.
The US$800m 5% bond, repayable 2027, has been converted to a dollar floating-rate bond by utilising interest rate swaps that mature in March
2027 and had an effective rate during 2025 of 5.0%.
US$700m of the US$1,250m 5.125% bond, repayable 2029, has been converted to a dollar floating-rate bond by utilising interest rate swaps
that mature in March 2029 and had an effective rate during 2025 of 5.5%.
US$1,237m of the US$1,300m 3.4% bond, repayable 2030, was converted at issue to a sterling fixed-rate bond by utilising cross-currency swaps
and had an effective rate during 2025 of 3.5%.
| Strategic report | Governance | Financial statements | Additional information | 181 | ||
22. Trade and other payables
| Trade and other payables are stated at amortised cost. US deferred compensation plan liabilities represent the present value of expected future payments required to settle the obligation to employees in accordance with IAS 19 Employee Benefits. |
||
| Note | 2025 | 2024 | |
| £m | £m | ||
| Non-current | |||
| Accruals | 84 | 85 | |
| Amounts owed to equity accounted investments | 29 | 8 | 8 |
| Deferred income1 | 1,379 | 1,287 | |
| US deferred compensation plan liabilities | 395 | 398 | |
| Other payables | 55 | 81 | |
| 1,921 | 1,859 | ||
| Current | |||
| Trade payables | 1,114 | 1,084 | |
| Amounts owed to equity accounted investments | 29 | 2,234 | 1,997 |
| Other taxes and social security costs | 141 | 198 | |
| Accruals | 2,772 | 2,710 | |
| Deferred income1 | 71 | 74 | |
| US deferred compensation plan liabilities | 51 | 50 | |
| Other payables | 303 | 270 | |
| 6,686 | 6,383 |
- Includes £1,417m (2024 £1,337m) of funding received from the UK Government for property, plant and equipment at Barrow-in-Furness, UK.
| 182 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
23. Post-employment benefits
| Pension schemes Defined contribution Obligations for contributions are recognised as an expense in the Consolidated income statement as incurred. Defined benefit The cost of providing benefits is determined periodically by independent actuaries and charged to the Consolidated income statement in the year in which those benefits are earned by the employees. Remeasurements, including actuarial gains and losses, are recognised in the Consolidated statement of comprehensive income in the year in which they occur. Past service costs resulting from a plan amendment or curtailment are recognised immediately in the Consolidated income statement. The post-employment benefit surpluses and obligations recognised in the Group’s balance sheet represent the fair value of scheme assets, less the present value of the defined benefit obligations calculated using a number of actuarial assumptions as set out on page 185. The bid values of scheme assets are not intended to be realised in the short term and may be subject to significant change before they are realised. The present values of scheme liabilities are derived from cash flow projections over long periods and are, therefore, inherently uncertain. IAS 19 Employee Benefits limits the measurement of a defined benefit surplus to the lower of the surplus in the defined benefit scheme and the asset ceiling. The asset ceiling is the present value of any economic benefits available in the form of refunds from the scheme or reductions in future contributions to the scheme. IFRIC 14 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, issued in 2007, provides an interpretation of the requirements of IAS 19, clarifying that a refund is available if the entity has an unconditional right to a refund in certain circumstances. The Group has applied IFRIC 14 and has determined that there is no limit on the recognition of the surpluses in its defined benefit pension schemes as at 31 December 2025. In the UK the surpluses have been recognised on the basis that the future economic benefits are unconditionally available to the Group, which is assumed to be via a refund. These have been recognised after deducting a 25% (2024 25%) withholding tax which would be levied prior to the future refunding of any surplus and have been presented on a net basis as this is not deemed to be an income tax. The Group operates a number of multi-employer schemes which their equity accounted investments and strategic partners participate in. Where the Group is a participating employer of a multi-employer scheme, the Group has recognised only its share of the IAS 19 pension surpluses and deficits based on liability agreements with those partners and on the relative shares of contributions paid into the schemes. While this methodology is intended to reflect a reasonable estimate of the share of the surplus or deficit, it may not accurately reflect the obligations of the participating employers. In the event that an employer who participates in the Group’s pension schemes fails or cannot be compelled to fulfil its obligations as a participating employer, the remaining participating employers are obliged to collectively take on its obligations. The Group considers the likelihood of this event arising as remote. The Group’s share of the IAS 19 pension surplus or deficit allocated to equity accounted investments is included in the balance sheet within equity accounted investments (see note 13). |
||
Background
Pension schemes
BAE Systems plc operates pension schemes for the Group’s qualifying employees in the UK, US and other countries. The UK and US operate a
number of funded defined benefit schemes, and the assets are held in separate trustee-administered funds. The largest funded defined benefit
scheme is the BAE Systems Pension Scheme – BAE Systems Section (Main Scheme) which represents 93% (2024 92%) of the UK IAS 19 defined
benefit obligation at 31 December 2025. The schemes in other countries are primarily defined contribution schemes.
At 31 December 2025, the weighted average durations of the UK and US defined benefit pension obligations were 11 years (2024 12 years)
and 10 years (2024 10 years), respectively.
Regulatory framework
The funded UK schemes are registered and subject to the statutory scheme-specific funding requirements outlined in UK legislation, including
the payment of levies to the Pension Protection Fund as set out in the Pension Act 2004. These schemes were established under trust and the
responsibility for their governance lies jointly with the Trustees and the Group.
The funded US schemes are tax-qualified pension schemes regulated by the Pension Protection Act 2006 and insured by the Pension Benefit
Guaranty Corporation up to certain limits. These schemes were established under, and are governed by, the US Employee Retirement Income
Security Act 1974 and the BAE Systems Administrative Committee is a named fiduciary with the authority to manage their operation. The
schemes’ assets are held in the BAE Systems Master Pension Investment Trust and the trustee is The Northern Trust Company. The US schemes
received a favourable determination letter from the Internal Revenue Service (IRS) dated 6 July 2017, stating that the US schemes and related
Master Trust are designed in accordance with applicable sections of the IRS Code and, therefore, are exempt from tax. Once qualified, the US
schemes are required to operate in conformity with the Code to maintain qualification.
Benefits
The UK defined benefit schemes provide benefits to members in the form of a set level of pension payable for life based on members’ final
salaries. The majority of benefits attract inflation-related increases both in deferment and payment. All UK defined benefit schemes are closed
to new entrants, with benefits for new employees being provided through a defined contribution scheme. The Normal Retirement Age for the
majority of active members of the Main Scheme is 65. Specific benefits applicable to members differ between schemes. Further details on the
benefits provided by each scheme are provided on the BAE Systems Pensions website: baesystems.com/en-pensions/home.
The US defined benefit schemes cover eligible employees of BAE Systems, Inc. and certain adopting affiliates providing benefits based on each
employee’s final salary and service. The majority of the US defined benefit schemes ceased to be final salary schemes in January 2013. Since then
an annual accrual of $1,000 is credited to participants’ accumulated plan benefits. Vested benefits are payable upon retirement, death,
disability, and in certain circumstances upon termination of employment. The Normal Retirement Age for the US pension schemes is 65.
| Strategic report | Governance | Financial statements | Additional information | 183 | ||
23. Post-employment benefits continued
Other post-employment benefits
The Group operates a number of non-pension retirement benefit schemes, under which certain employees are eligible to receive benefits after
retirement or on leaving the Group, the majority of which relate to the provision of medical benefits to retired employees of the Group’s
subsidiaries in the US.
Funding
Introduction
Disclosures in respect of pension funding are provided below. Disclosures in respect of pension accounting under IAS 19 are provided on pages
The majority of the UK and US defined benefit pension schemes are funded by the Group’s subsidiaries and equity accounted investments. The
individual pension schemes’ funding requirements are based on actuarial measurement frameworks set out in their funding policies.
The funding valuations are performed by professionally qualified independent actuaries and include assumptions which differ from the actuarial
assumptions used for IAS 19 accounting purposes shown on page 185. The purpose of the funding valuations is to design funding plans which
ensure that the schemes have sufficient funds available to meet future benefit payments.
UK valuations
Funding valuations of the Group’s UK defined benefit pension schemes are performed at least every three years. The most recent triennial
funding valuation for the Main Scheme was carried out as at 31 March 2024. This valuation was concluded and signed off on 6 February 2025.
The results of the most recent triennial valuation for the Main Scheme are shown below. This valuation was agreed with the Trustees and
certified by the Scheme Actuary after consultation with the Pensions Regulator in the UK.
| Main Scheme as at 31 March 2024 |
|
| £bn | |
| Market value of assets | 19.2 |
| Present value of liabilities | (18.4) |
| Funding surplus | 0.8 |
| Percentage of accrued benefits covered by the assets at the valuation date | 104% |
The other UK schemes were also in surplus at their most recent triennial valuations.
US valuations
The Group’s US pension schemes are valued annually, with the latest valuations performed as at 1 January 2025. The actuarial present value of
accumulated plan benefits is determined by an independent actuary and uses actuarial assumptions to adjust the accumulated plan benefits
earned by participants to reflect the time value of money and the probability of payment between the valuation date and the expected date
of payment.
Contributions
Under the terms of the trust deeds of the UK schemes, the Group is required to have a funding plan determined at the conclusion of the triennial
funding valuations.
Equity accounted investments make regular contributions to the schemes in which they participate in line with the schedule of contributions.
Contributions in 2026 to the Group’s pension schemes are expected to be approximately £90m, at a lower level than 2025, primarily reflecting
the impact of updated market conditions on the cost of benefit accrual.
| 184 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
23. Post-employment benefits continued
Funding continued
Risk management
The defined benefit pension schemes expose the Group to actuarial risks, including market (investment) risk, interest rate risk, inflation risk and
longevity risk.
| Risk | Mitigation | |
| Market (investment) risk Asset returns may not move in line with the liabilities and may be subject to volatility. |
The investment portfolios are highly diversified, investing in a wide range of assets, in order to reduce the exposure of the total portfolio to a materially adverse impact from a single security or type of security. To reduce volatility, certain assets are held in a matching portfolio, which largely consists of index-linked bonds, gilts and swaps, designed to mirror movements in corresponding liabilities. Environmental (including exposure to climate-related risks), social and governance factors are incorporated into the investment analysis and decision-making process carried out by the Trustees of the UK schemes. There is alignment between the UK Main Scheme and the Company’s climate change objectives with consistent long-term decarbonisation ambitions. |
|
| Interest rate risk Liabilities are sensitive to movements in interest rates, with lower interest rates leading to an increase in the valuation of liabilities. |
The Main Scheme has adopted a cash flow matching strategy, whereby contractual income from assets is designed to directly match benefits paid to members each year. A portfolio of assets with contractual income has been structured to match benefits already in payment, representing just over half of the liabilities. This inherently hedges the associated interest rate risk. As members retire and become pensioners, additional matching assets will be purchased to keep pace. Interest rate risk associated with the remaining purchase of matching assets is mitigated via a hedging strategy involving mainly physical assets and derivatives. The overall level of interest rate hedging on the funding basis has increased over the years. |
|
| Inflation risk Liabilities are sensitive to movements in inflation, with higher inflation leading to an increase in the valuation of liabilities. |
The Main Scheme’s cash flow matching strategy includes aligning asset income to the inflation- linked members’ benefit payments. Inflation risk is mitigated by the presence of caps on most inflation-linked benefits and via a hedging strategy, executed with several banks to reduce counterparty risk. The overall level of inflation hedging on the funding basis has increased over the years. The Group’s US scheme benefits are not indexed with inflation. In 2014, the Main Scheme implemented a pension increase exchange to allow retired members to elect for a higher current pension in exchange for foregoing certain rights to future pension increases. |
|
| Longevity risk Liabilities are sensitive to life expectancy, with increases in life expectancies leading to an increase in the valuation of liabilities. |
Longevity adjustment factors are used in the majority of the UK pension schemes which adjust the benefit calculations so as to share the cost of people living longer with employees. In 2013, with the agreement of the Company, the Trustees of the 2000 Plan, Royal Ordnance Pension Scheme and Shipbuilding Industries Pension Scheme (SIPS) entered into arrangements with Legal & General to insure against longevity risk for the current pensioner population, covering a total of £4.4bn of pension scheme liabilities at that time. These arrangements reduce the funding volatility relating to increasing life expectancy. This longevity risk cover with Legal & General remains in place following the 2019 merger of the 2000 Plan and SIPS into the Main Scheme. |
| Strategic report | Governance | Financial statements | Additional information | 185 | ||
23. Post-employment benefits continued
Curtailment gain
In August 2025, the SMS pension scheme was modified to align with industry and other US schemes. The amendment resulted in a one-off gain
of £58m which has been recognised in the Consolidated income statement.
Surplus recognition
A number of schemes are in an accounting surplus position. The surpluses have been recognised on the basis that the future economic benefits
are unconditionally available to the Group, which is assumed to be via a refund. The UK surplus has been recognised net of withholding tax of
25% (2024 25%) based on the enacted legislation at that date. This tax would be levied prior to the future refunding of any surplus, and
therefore the surplus has been presented on a net basis as this is not deemed to be an income tax of the Group.
IAS 19 accounting
The disclosures below relate to post-retirement benefit schemes in the UK, US and other countries which are accounted for as defined benefit
schemes in accordance with IAS 19.
Principal actuarial assumptions
The assumptions used are estimates chosen from a range of possible actuarial assumptions which, due to the long-term nature of the obligation
covered, may not necessarily occur in practice.
| UK | US | ||||||
| 2025 | 2024 | 2023 | 2025 | 2024 | 2023 | ||
| Financial assumptions | |||||||
| Discount rate – past service (%) | 5.5 | 5.5 | 4.5 | 5.2 | 5.5 | 4.8 | |
| Discount rate – future service (%) | 5.8 | 5.6 | 4.6 | 5.2 | 5.5 | 4.8 | |
| Discount rate – US Healthcare schemes (%) | n/a | n/a | n/a | 5.2 | 5.5 | 4.8 | |
| Retail Prices Index (RPI) inflation (%) | 2.5 | 2.9 | 2.8 | n/a | n/a | n/a | |
| Rate of increase in salaries (%) | 2.5 | 2.9 | 2.8 | 2.8 | 2.8 | n/a | |
| Rate of increase in deferred pensions (CPI/RPI) (%) | 2.0/2.5 | 2.3/2.9 | 2.1/2.8 | n/a | n/a | n/a | |
| Rate of increase in pensions in payment (%) | 1.6 – 3.5 | 1.7 – 3.6 | 1.6 – 3.6 | n/a | n/a | n/a | |
| Demographic assumptions | |||||||
| Life expectancy of a male currently aged 65 (years) | 86 – 89 | 85 – 88 | 85 – 89 | 88 | 88 | 88 | |
| Life expectancy of a female currently aged 65 (years) | 88 – 91 | 88 – 91 | 88 – 89 | 89 | 89 | 89 | |
| Life expectancy of a male currently aged 45 (years) | 87 – 90 | 86 – 89 | 86 – 89 | 87 | 87 | 87 | |
| Life expectancy of a female currently aged 45 (years) | 89 – 92 | 89 – 92 | 89 – 90 | 89 | 89 | 89 |
Life expectancy
For its UK pension schemes, the Group has used the Self-Administered Pension Schemes S3 mortality tables based on year of birth (as published
by the Institute and Faculty of Actuaries) for both pensioner and non-pensioner members, in conjunction with the results of an investigation into
the actual mortality experience of scheme members and information on the demographic profile of the scheme’s membership.
In addition, to allow for future improvements in longevity, the Continuous Mortality Investigation 2024 tables (published by the Institute and
Faculty of Actuaries) have been used (in 2024, the 2023 version of the tables were used), with an assumed long-term rate of improvement of
1.0% per annum (2024 1.0%), an initial rate adjustment parameter (‘A’) of 0.2% (2024 0.2%), with both the age-period and cohort convergence
periods equal to the core values, except increased to 20 years from ages 80 to 100, and then tapering down to nil by age 120.
For the majority of the US schemes, the mortality tables used at 31 December 2025 are a blend of the fully generational PRI-2012 White Collar
table and the PRI-2012 Blue Collar table, both projected using November 2025 Aon Endemic Projection Scale MP-2021.
US healthcare schemes
The latest valuations of the principal schemes, covering retiree medical and life insurance schemes in certain US subsidiaries, were performed by
independent actuaries as at 1 January 2025. These valuations were rolled forward to reflect the information at 31 December 2025. The method
of accounting for these is similar to that used for defined benefit pension schemes.
Long-term healthcare cost is assumed to increase at 5.0% per annum (2024 5.1%).
| 186 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
23. Post-employment benefits continued
IAS 19 accounting continued
Summary of movements in post-employment benefit obligations
| UK defined benefit pension schemes |
US and other pension schemes |
US healthcare schemes |
Kingdom of Saudi Arabia end of service benefit |
Total | |
| £m | £m | £m | £m | £m | |
| Surplus/(deficit) at 1 January 2025 | 1,105 | (230) | 71 | (178) | 768 |
| Actual return on assets excluding amounts included in net finance costs | (424) | 147 | 3 | — | (274) |
| Decrease/(increase) in liabilities due to changes in financial assumptions | 384 | (57) | (3) | (5) | 319 |
| Increase in liabilities due to changes in demographic assumptions | (118) | (1) | — | — | (119) |
| Experience gains/(losses) | 53 | (3) | 1 | (2) | 49 |
| Contributions in excess of/(below) service cost | 44 | (27) | (2) | (10) | 5 |
| Past service (cost)/credit – plan amendments | (7) | 58 | — | — | 51 |
| Transfer to employee benefit trust1 | — | — | (34) | — | (34) |
| Net interest income/(expense) | 92 | (10) | 3 | (9) | 76 |
| Foreign exchange adjustments | — | 4 | (6) | 9 | 7 |
| Movement in withholding tax on surpluses | (4) | — | — | — | (4) |
| Surplus/(deficit) at 31 December 2025 | 1,125 | (119) | 33 | (195) | 844 |
- Healthcare plan assets utilised to provide medical benefits for active members.
| Strategic report | Governance | Financial statements | Additional information | 187 | ||
23. Post-employment benefits continued
IAS 19 accounting continued
Amounts recognised on the balance sheet
The table below shows a reconciliation between the Group’s share of scheme assets and liabilities of the UK, US and other post-employment
benefit schemes and the amounts recognised on the Group’s balance sheet.
| 2025 | |||||
| UK defined benefit pension schemes |
US and other pension schemes |
US healthcare schemes |
Kingdom of Saudi Arabia end of service benefit |
Total | |
| £m | £m | £m | £m | £m | |
| Present value of unfunded obligations | (89) | (97) | — | (195) | (381) |
| Present value of funded obligations | (15,738) | (2,761) | (103) | — | (18,602) |
| Fair value of scheme assets | 17,356 | 2,739 | 136 | — | 20,231 |
| Total gross surplus/(deficit) | 1,529 | (119) | 33 | (195) | 1,248 |
| Withholding tax on surpluses | (404) | — | — | — | (404) |
| Surplus/(deficit) | 1,125 | (119) | 33 | (195) | 844 |
| Represented by: | |||||
| Post-employment benefit surpluses | 1,214 | 3 | 33 | — | 1,250 |
| Post-employment benefit obligations | (89) | (122) | — | (195) | (406) |
| 1,125 | (119) | 33 | (195) | 844 |
The US unfunded pension obligations have associated assets held in deferred compensation schemes with a fair value of £58m (2024 £62m),
which are shown in other investments. The funds held in these trusts can be used solely for the satisfaction of the unfunded obligations.
| 2024 | |||||
| UK defined benefit pension schemes |
US and other pension schemes |
US healthcare schemes |
Kingdom of Saudi Arabia end of service benefit |
Total | |
| £m | £m | £m | £m | £m | |
| Present value of unfunded obligations | (92) | (97) | — | (178) | (367) |
| Present value of funded obligations | (16,128) | (2,974) | (108) | — | (19,210) |
| Fair value of scheme assets | 17,725 | 2,841 | 179 | — | 20,745 |
| Total gross surplus/(deficit) | 1,505 | (230) | 71 | (178) | 1,168 |
| Withholding tax on surpluses | (400) | — | — | — | (400) |
| Surplus/(deficit) | 1,105 | (230) | 71 | (178) | 768 |
| Represented by: | |||||
| Post-employment benefit surpluses | 1,197 | 3 | 71 | — | 1,271 |
| Post-employment benefit obligations | (92) | (233) | — | (178) | (503) |
| 1,105 | (230) | 71 | (178) | 768 |
| 188 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
23. Post-employment benefits continued
IAS 19 accounting continued
Changes in the fair value of scheme assets
| UK defined benefit pension schemes |
US and other pension schemes |
US healthcare schemes |
Kingdom of Saudi Arabia end of service benefit |
Total | |
| £m | £m | £m | £m | £m | |
| Value of scheme assets at 1 January 2024 | 19,254 | 2,629 | 180 | — | 22,063 |
| Interest income | 853 | 135 | 9 | — | 997 |
| Actual return on assets excluding amounts included in interest income | (1,628) | (94) | (4) | — | (1,726) |
| Actual return on assets | (775) | 41 | 5 | — | (729) |
| Contributions by employer | 229 | 156 | 1 | 13 | 399 |
| Contributions by employer in respect of employee salary sacrifice arrangements | 61 | — | — | — | 61 |
| Total contributions by employer | 290 | 156 | 1 | 13 | 460 |
| Members’ contributions | 4 | — | — | — | 4 |
| Settlements | — | (100) | — | — | (100) |
| Administrative expenses | (15) | (10) | (1) | — | (26) |
| Business acquisitions | — | 253 | — | — | 253 |
| Foreign exchange translation | — | 45 | 3 | — | 48 |
| Benefits paid | (1,033) | (173) | (9) | (13) | (1,228) |
| Value of scheme assets at 31 December 2024 | 17,725 | 2,841 | 179 | — | 20,745 |
| Interest income | 942 | 144 | 9 | — | 1,095 |
| Actual return on assets excluding amounts included in interest income | (424) | 147 | 3 | — | (274) |
| Actual return on assets | 518 | 291 | 12 | — | 821 |
| Contributions by employer | 120 | 11 | — | 12 | 143 |
| Contributions by employer in respect of employee salary sacrifice arrangements | 53 | — | — | — | 53 |
| Total contributions by employer | 173 | 11 | — | 12 | 196 |
| Members’ contributions | 3 | — | — | — | 3 |
| Administrative expenses | (16) | (6) | (1) | — | (23) |
| Transfer to employee benefit trust | — | — | (34) | — | (34) |
| Foreign exchange translation | — | (196) | (12) | — | (208) |
| Benefits paid | (1,047) | (202) | (8) | (12) | (1,269) |
| Value of scheme assets at 31 December 2025 | 17,356 | 2,739 | 136 | — | 20,231 |
| Strategic report | Governance | Financial statements | Additional information | 189 | ||
23. Post-employment benefits continued
IAS 19 accounting continued
Assets of defined benefit pension schemes
| 2025 | |||||||||||
| UK | US and other | Total | |||||||||
| Quoted | Unquoted | Total | Quoted | Unquoted | Total | Quoted | Unquoted | Total | |||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | |||
| Equities: | |||||||||||
| UK1 | 1 | — | 1 | — | — | — | 1 | — | 1 | ||
| Overseas | 31 | — | 31 | — | — | — | 31 | — | 31 | ||
| Pooled investment vehicles2 | 366 | 6,016 | 6,382 | 751 | — | 751 | 1,117 | 6,016 | 7,133 | ||
| Fixed-interest securities: | |||||||||||
| UK gilts | 2,205 | — | 2,205 | — | — | — | 2,205 | — | 2,205 | ||
| UK corporates | 2,055 | 1,480 | 3,535 | — | — | — | 2,055 | 1,480 | 3,535 | ||
| Overseas government | 23 | — | 23 | 205 | — | 205 | 228 | — | 228 | ||
| Overseas corporates | 1,797 | — | 1,797 | 1,584 | — | 1,584 | 3,381 | — | 3,381 | ||
| Index-linked securities: | |||||||||||
| UK gilts | 2,855 | — | 2,855 | — | — | — | 2,855 | — | 2,855 | ||
| UK corporates | 283 | — | 283 | — | — | — | 283 | — | 283 | ||
| Overseas corporates | 8 | — | 8 | — | — | — | 8 | — | 8 | ||
| Property3 | — | 1,135 | 1,135 | — | 64 | 64 | — | 1,199 | 1,199 | ||
| Derivatives4 | — | (1,523) | (1,523) | — | 11 | 11 | — | (1,512) | (1,512) | ||
| Cash: | |||||||||||
| Sterling | 401 | 36 | 437 | — | — | — | 401 | 36 | 437 | ||
| Foreign currency | 158 | 1 | 159 | 124 | — | 124 | 282 | 1 | 283 | ||
| Other | — | 28 | 28 | — | — | — | — | 28 | 28 | ||
| Total | 10,183 | 7,173 | 17,356 | 2,664 | 75 | 2,739 | 12,847 | 7,248 | 20,095 |
| 190 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
23. Post-employment benefits continued
IAS 19 accounting continued
| 2024 | |||||||||||
| UK | US and other | Total | |||||||||
| Quoted | Unquoted | Total | Quoted | Unquoted | Total | Quoted | Unquoted | Total | |||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | |||
| Equities: | |||||||||||
| UK1 | 1 | — | 1 | — | — | — | 1 | — | 1 | ||
| Overseas | 97 | — | 97 | — | — | — | 97 | — | 97 | ||
| Pooled investment vehicles2 | — | 6,559 | 6,559 | 815 | — | 815 | 815 | 6,559 | 7,374 | ||
| Fixed-interest securities: | |||||||||||
| UK gilts | 2,400 | — | 2,400 | — | — | — | 2,400 | — | 2,400 | ||
| UK corporates | 1,951 | 1,480 | 3,431 | — | — | — | 1,951 | 1,480 | 3,431 | ||
| Overseas government | 61 | — | 61 | 477 | — | 477 | 538 | — | 538 | ||
| Overseas corporates | 1,891 | — | 1,891 | 1,329 | — | 1,329 | 3,220 | — | 3,220 | ||
| Index-linked securities: | |||||||||||
| UK gilts | 1,959 | — | 1,959 | — | — | — | 1,959 | — | 1,959 | ||
| UK corporates | 580 | — | 580 | — | — | — | 580 | — | 580 | ||
| Overseas corporates | 8 | — | 8 | — | — | — | 8 | — | 8 | ||
| Property3 | — | 1,182 | 1,182 | — | 70 | 70 | — | 1,252 | 1,252 | ||
| Derivatives4 | — | (1,497) | (1,497) | — | 11 | 11 | — | (1,486) | (1,486) | ||
| Cash: | |||||||||||
| Sterling | 904 | 40 | 944 | — | — | — | 904 | 40 | 944 | ||
| Foreign currency | 75 | — | 75 | 139 | — | 139 | 214 | — | 214 | ||
| Other | — | 34 | 34 | — | — | — | — | 34 | 34 | ||
| Total | 9,927 | 7,798 | 17,725 | 2,760 | 81 | 2,841 | 12,687 | 7,879 | 20,566 |
-
Includes £nil (2024 £nil) of the Company’s own ordinary shares.
-
Primarily invested in private markets and exchange traded funds. The amounts classified as unquoted primarily comprise investments in private markets,
with the majority held in infrastructure, alternatives and direct funds, valued in accordance with International Private Equity and Venture Capital Valuation
Guidelines.
- Valued on the basis of open market value at the end of the year determined in accordance with the Royal Institution of Chartered Surveyors’ Appraisal and
Valuation Standards and the Practice Note contained therein. Includes £202m (2024 £203m) of property occupied by Group companies.
- Includes forward foreign exchange contracts, futures, and interest rate, inflation and longevity swaps. In addition, the total derivative figures shown are
net of £920m (2024 £512m) of repurchase agreements. The valuations are based on valuation techniques using underlying market data and discounted
cash flows.
| Strategic report | Governance | Financial statements | Additional information | 191 | ||
23. Post-employment benefits continued
IAS 19 accounting continued
Longevity swap
The Group holds longevity insurance contracts for some of its UK defined benefit pension schemes. These provide long-term protection and
income to the underlying pension scheme in the event that insured members live longer than expected.
The value of the longevity insurance contracts held by the Group are calculated by an actuary. They are measured by discounting the difference
between the projected fixed and floating cash flows payable under the contracts, excluding the value of future projected fees. The significant
assumptions used for this valuation are the discount rate and mortality assumptions; fair values for these assumptions are advised by an actuary
based on external data and characteristics of the insured member population.
At 31 December 2025, the longevity swap valuation leads to a negative adjustment to the assets which reflects that experience to date on the
contracts has been higher than expected deaths.
Changes in the present value of the defined benefit obligations
| UK defined benefit pension schemes |
US and other pension schemes |
US healthcare schemes |
Kingdom of Saudi Arabia end of service benefit |
Total | |
| £m | £m | £m | £m | £m | |
| Defined benefit obligations at 1 January 2024 | (18,203) | (2,936) | (125) | (168) | (21,432) |
| Current service cost | (76) | (32) | (2) | (24) | (134) |
| Contributions by employer in respect of employee salary sacrifice arrangements | (61) | — | — | — | (61) |
| Total current service cost | (137) | (32) | (2) | (24) | (195) |
| Members’ contributions | (4) | — | — | — | (4) |
| Settlements | — | 113 | — | — | 113 |
| Actuarial gain due to changes in financial assumptions | 1,745 | 179 | 4 | 14 | 1,942 |
| Actuarial gain/(loss) due to changes in demographic assumptions | 46 | (19) | 12 | 1 | 40 |
| Experience gains/(losses) | 95 | 46 | 2 | (5) | 138 |
| Interest expense | (795) | (153) | (5) | (8) | (961) |
| Business acquisitions | — | (400) | — | — | (400) |
| Foreign exchange translation | — | (42) | (3) | (1) | (46) |
| Benefits paid | 1,033 | 173 | 9 | 13 | 1,228 |
| Defined benefit obligations at 31 December 2024 | (16,220) | (3,071) | (108) | (178) | (19,577) |
| Current service cost | (60) | (32) | (1) | (22) | (115) |
| Contributions by employer in respect of employee salary sacrifice arrangements | (53) | — | — | — | (53) |
| Total current service cost | (113) | (32) | (1) | (22) | (168) |
| Members’ contributions | (3) | — | — | — | (3) |
| Past service (cost)/credit – plan amendments | (7) | 58 | — | — | 51 |
| Actuarial gain/(loss) due to changes in financial assumptions | 384 | (57) | (3) | (5) | 319 |
| Actuarial loss due to changes in demographic assumptions | (118) | (1) | — | — | (119) |
| Experience gains/(losses) | 53 | (3) | 1 | (2) | 49 |
| Interest expense | (850) | (154) | (6) | (9) | (1,019) |
| Foreign exchange translation | — | 200 | 6 | 9 | 215 |
| Benefits paid | 1,047 | 202 | 8 | 12 | 1,269 |
| Defined benefit obligations at 31 December 2025 | (15,827) | (2,858) | (103) | (195) | (18,983) |
| 192 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
23. Post-employment benefits continued
IAS 19 accounting continued
Amounts recognised in the Consolidated income statement
| 2025 | |||||
| UK defined benefit pension schemes |
US and other pension schemes |
US healthcare schemes |
Kingdom of Saudi Arabia end of service benefit |
Total | |
| £m | £m | £m | £m | £m | |
| Included in operating costs: | |||||
| Current service cost | (60) | (32) | (1) | (22) | (115) |
| Past service cost – plan amendments | (7) | — | — | — | (7) |
| Administrative expenses | (16) | (6) | (1) | — | (23) |
| (83) | (38) | (2) | (22) | (145) | |
| Included in other income: | |||||
| Past service credit – plan amendments | — | 58 | — | — | 58 |
| Included in net finance costs: | |||||
| Gross interest income/(expense) on post-employment benefit obligations | 92 | (10) | 3 | (9) | 76 |
| Impact of withholding tax | (22) | — | — | — | (22) |
| Net interest income/(expense) on post-employment benefit obligations | 70 | (10) | 3 | (9) | 54 |
| Included within statement of comprehensive income: | |||||
| Gross actuarial (loss)/gain on post-employment benefit schemes | (105) | 86 | 1 | (7) | (25) |
| Impact of withholding tax | 18 | — | — | — | 18 |
| Net actuarial (loss)/gain on post-employment benefit obligations | (87) | 86 | 1 | (7) | (7) |
| 2024 | |||||
| UK defined benefit pension schemes |
US and other pension schemes |
US healthcare schemes |
Kingdom of Saudi Arabia end of service benefit |
Total | |
| £m | £m | £m | £m | £m | |
| Included in operating costs: | |||||
| Current service cost | (76) | (32) | (2) | (24) | (134) |
| Administrative expenses | (15) | (10) | (1) | — | (26) |
| (91) | (42) | (3) | (24) | (160) | |
| Included in other income: | |||||
| Pensions settlement gain | — | 13 | — | — | 13 |
| Included in net finance costs: | |||||
| Gross interest income/(expense) on post-employment benefit obligations | 58 | (18) | 4 | (8) | 36 |
| Impact of withholding tax | (18) | — | — | — | (18) |
| Net interest income/(expense) on post-employment benefit obligations | 40 | (18) | 4 | (8) | 18 |
| Included within statement of comprehensive income: | |||||
| Gross actuarial gain on post-employment benefit schemes | 258 | 112 | 14 | 10 | 394 |
| Impact of withholding tax | 20 | — | — | — | 20 |
| Net actuarial gain on post-employment benefit obligations | 278 | 112 | 14 | 10 | 414 |
Defined contribution schemes
The Group incurred a charge of £380m (2024 £334m) in relation to defined contribution schemes for employees.
| Strategic report | Governance | Financial statements | Additional information | 193 | ||
23. Post-employment benefits continued
IAS 19 accounting continued
Sensitivity analysis
The sensitivity information has been derived using scenario analysis from the actuarial assumptions as at 31 December 2025 and keeping all
other assumptions as set out on page 185.
The pension schemes hold a number of unquoted pooled investment vehicles, which are investments in private markets. These are valued based
on latest available valuation reports, and as noted on page 147, these valuations are subject to estimation uncertainty as their valuation
techniques incorporate a number of assumptions, including those associated with the impact of climate change. Should these funds’ actual
valuations at 31 December 2025 be on average 2% different to those assumed, this would result in a £0.1bn (2024 £0.1bn) change in the
valuation of the assets.
Financial assumptions
The estimated impact of changes in the discount rate and inflation assumptions on the defined benefit pension obligation, together with the
estimated impact on scheme assets, is shown in the table below. The sensitivity analysis on the defined benefit obligation is measured on an IAS
19 accounting basis.
| Decrease/(increase) in pension obligation1 |
(Decrease)/increase in scheme assets1 |
|
| £bn | £bn | |
| Discount rate: | ||
| 0.5 percentage point increase/decrease | 1.0/(1.0) | (1.0)/1.1 |
| 1.0 percentage point increase/decrease | 1.8/(2.2) | (1.9)/2.3 |
| (Increase)/decrease in pension obligation1 |
Increase/(decrease) in scheme assets1 |
|
| £bn | £bn | |
| Inflation: | ||
| 0.1 percentage point increase/decrease | (0.1)/0.1 | 0.1/(0.1) |
| 0.5 percentage point increase/decrease | (0.5)/0.5 | 0.7/(0.6) |
Demographic assumptions
Changes in the life expectancy assumption, including the benefit of longevity swap arrangements (see longevity risk on page 184), would have
the following effect on the total net IAS 19 surplus:
| (Decrease)/increase in net surplus1 |
|
| £bn | |
| Life expectancy: | |
| One-year increase/decrease | (0.6)/0.6 |
- Before deduction of withholding tax.
| 194 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
24. Provisions
| A provision is recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and the amount has been reliably estimated. If the effect is material, provisions are determined by discounting the expected future cash flows at an appropriate pre-tax risk-free discount rate. Legal, contractual and environmental The Group holds provisions for expected legal, contractual and environmental costs that it expects to incur over an extended period. Management exercises judgement to determine the amount of these provisions. Provision is made for known issues based on past experience of similar items and other known factors. Each provision is considered separately and the amount provided reflects the best estimate of the most likely amount, being the single most likely amount in a range of possible outcomes. Warranties and after-sales services Where warranties and after-sales services are provided in the normal course of business, provisions for associated costs are made based on an assessment of future claims with reference to past experience. A provision for warranties is recognised when the underlying products and services are sold. The provision is based on historical warranty data and a weighting of possible outcomes against their associated probabilities. Reorganisations A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced to those affected. The costs associated with the reorganisation programmes are supported by detailed plans and based on previous experience as well as other known factors. Future operating costs are not provided for. |
||
| Legal, contractual and environmental |
Warranties and after-sales services |
Reorganisations | Other | Total | |
| £m | £m | £m | £m | £m | |
| Non-current | 260 | 67 | 4 | 32 | 363 |
| Current | 150 | 45 | 10 | 49 | 254 |
| At 1 January 2025 | 410 | 112 | 14 | 81 | 617 |
| Created | 116 | 64 | 11 | 15 | 206 |
| Utilised | (76) | (32) | (7) | (11) | (126) |
| Released | (38) | (13) | (1) | (14) | (66) |
| Net present value adjustments | 8 | — | — | 1 | 9 |
| Foreign exchange adjustments | (14) | (1) | (1) | (3) | (19) |
| At 31 December 2025 | 406 | 130 | 16 | 69 | 621 |
| Represented by: | |||||
| Non-current | 271 | 87 | 3 | 28 | 389 |
| Current | 135 | 43 | 13 | 41 | 232 |
| 406 | 130 | 16 | 69 | 621 |
Legal, contractual and environmental
Reflecting the inherent uncertainty within many legal proceedings, the amount of the outflows could differ significantly from the amount
provided. While the timing of the outflows is also uncertain, the Group expects these provisions to be utilised over a period of approximately
25 years.
Warranties and after-sales services
Warranty and after-sales services provisions are generally utilised within three years post-delivery. While actual events could result in potentially
significant differences to the value, but not the timing, of the outflows in relation to the provisions, management has reflected current
knowledge in assessing the provision levels.
Reorganisations
Reorganisation provisions are generally utilised within one to three years. There is limited volatility around the timing and amount of the
ultimate outflows related to these provisions.
Other
There are no individually significant provisions included within other provisions.
| Strategic report | Governance | Financial statements | Additional information | 195 | ||
25. Share capital and other reserves
Share capital
| Equity | Non-equity | Total | |||||
| Ordinary shares of 2.5p each | Special Share of £1 | ||||||
| Number of Shares |
Nominal value |
Number of Shares |
Nominal value |
Nominal value |
|||
| m | £m | £ | £m | ||||
| Issued and fully paid | |||||||
| At 1 January 2024 | 3,239 | 81 | 1 | 1 | 81 | ||
| Shares cancelled | (44) | (1) | — | — | (1) | ||
| At 31 December 2024 | 3,195 | 80 | 1 | 1 | 80 | ||
| Shares cancelled | (29) | (1) | — | — | (1) | ||
| At 31 December 2025 | 3,166 | 79 | 1 | 1 | 79 |
Special Share
One Special Share of £1 in the Company is held on behalf of the Secretary of State for Business and Trade (the Special Shareholder). Certain
provisions of the Company’s Articles of Association cannot be amended without the consent of the Special Shareholder. These provisions
include the requirement that no foreign person, or foreign persons acting in concert, can have more than a 15% voting interest in the Company,
the requirement that the majority of the directors are British, and the requirement that the Chief Executive or any executive Chair are British.
The effect of these requirements can also be amended by regulations made by the directors and approved by the Special Shareholder.
The Special Shareholder may require the Company at any time to redeem the Special Share at par or to convert the Special Share into one
ordinary voting share. The Special Shareholder is entitled to attend a general meeting, but has no right to vote or any other rights at such
meeting, other than to speak in relation to any business in respect of the Special Share.
Treasury shares
As at 31 December 2025, 164,506,971 (2024 183,673,739) ordinary shares of 2.5p each with an aggregate nominal value of £4,112,674 (2024
£4,591,843) and a market value of £2,820m (2024 £2,109m) were held in treasury. During 2025, 19,178,971 (2024 20,367,966) treasury shares
were used to satisfy awards and options under the Share Incentive Plan, International Share Incentive Plan, Performance Share Plan, the
Performance Shares and Restricted Shares elements of the Long-Term Incentive Plan, the Executive Share Option Plan, the Group Free Shares
Plan and the International Profit Sharing Scheme.
Shares held in trusts
The Group has an Employee Share Option Plan (ESOP) discretionary trust to administer the share plans and to acquire Company shares, using
funds loaned by the Group, to meet commitments to Group employees. At 31 December 2025, the ESOP Trust held 7,512,216 (2024 8,172,124)
ordinary shares of 2.5p each, with an aggregate nominal value of £187,805 (2024 £204,303) and a market value of £129m (2024 £94m).
The Group also has a Share Incentive Plan (SIP) trust. Participating employees are able to purchase Partnership shares, funded via salary sacrifice,
and also benefit from Free Shares and Matching Partnership Shares. At 31 December 2025, the SIP trust held 66,202,916 (2024 74,600,040)
ordinary shares of 2.5p each with an aggregate nominal value of £1,655,073 (2024 £1,865,001) and a market value of £1,135m (2024 £857m).
A dividend waiver was also in operation for the dividends paid in the year over shares within the trusts, other than those shares owned
beneficially by the participants or where the dividend payment is used to purchase dividend shares.
Shares which are unconditionally available to employees, but are retained within these trusts, are considered outstanding shares for the
purposes of the basic earnings per share calculation. Contingently issuable shares are included within the calculation of diluted earnings
per share (see note 8).
Own shares held
Own shares held, including treasury shares and shares held by BAE Systems ESOP and SIP Trusts, are recognised as a deduction from retained
earnings.
Equity dividends
| Equity dividends on ordinary share capital are recognised as a liability on the date that the shareholder’s right to receive payment is established. |
||
| 2025 | 2024 | |
| £m | £m | |
| Final 20.6p dividend per ordinary share paid in the year (2024 18.5p) | 622 | 562 |
| Interim 13.5p dividend per ordinary share paid in the year (2024 12.4p) | 405 | 375 |
| 1,027 | 937 |
After the balance sheet date, the directors proposed a final dividend of 22.8p per ordinary share. The dividend proposed amounts to
approximately £684m, although the final payment is likely to be lower as a result of the impact of share repurchases. Subject to shareholder
approval, the dividend will be paid on 4 June 2026 to shareholders registered on 24 April 2026. The provisional ex-dividend date is 23 April
2026. The payment of this dividend will not have any tax expense consequences for the Group.
| 196 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
25. Share capital and other reserves continued
Other reserves
| Merger reserve |
Statutory reserve |
Revaluation reserve |
Capital redemption reserve |
Hedging reserve |
Translation reserve |
Total | |
| £m | £m | £m | £m | £m | £m | £m | |
| At 1 January 2024 | 4,589 | 202 | 10 | 9 | (64) | 1,657 | 6,403 |
| Subsidiaries: | |||||||
| Currency translation on foreign currency net investments | — | — | — | — | — | 5 | 5 |
| Reclassification of cumulative currency translation reserve on divestment of interest in equity accounted investments and other business disposals |
— | — | — | — | — | 3 | 3 |
| Net amounts recognised in hedging reserve | — | — | — | — | 31 | — | 31 |
| Equity accounted investments (net of tax) | — | — | — | — | 1 | 3 | 4 |
| Purchase of own shares | — | — | — | 1 | — | — | 1 |
| At 31 December 2024 | 4,589 | 202 | 10 | 10 | (32) | 1,668 | 6,447 |
| Subsidiaries: | |||||||
| Currency translation on foreign currency net investments | — | — | — | — | — | (600) | (600) |
| Reclassification of cumulative currency translation reserve on divestment of interest in equity accounted investments |
— | — | — | — | — | 21 | 21 |
| Net amounts recognised in hedging reserve | — | — | — | — | 18 | — | 18 |
| Equity accounted investments (net of tax) | — | — | — | — | (2) | (4) | (6) |
| Purchase of own shares | — | — | — | 1 | — | — | 1 |
| At 31 December 2025 | 4,589 | 202 | 10 | 11 | (16) | 1,085 | 5,881 |
Merger reserve
The merger reserve arose on the acquisition of the Marconi Electronic Systems (MES) business by British Aerospace in 1999 to form BAE Systems,
and represents the amount by which the fair value of the shares issued by British Aerospace as consideration exceeded their nominal value.
Statutory reserve
Under Section 4 of the British Aerospace Act 1980, this reserve may only be applied in paying up unissued shares of the Company to be allotted
to members of the Company as fully paid bonus shares.
Revaluation reserve
The revaluation reserve relates to the revaluation at fair value of the net assets of the BVT joint venture previously held as an equity accounted
investment on the acquisition of the remaining 45% interest in 2009.
Capital redemption reserve
The capital redemption reserve represents the cumulative nominal value of the Company’s ordinary shares repurchased and subsequently
cancelled.
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to
hedged transactions that have not yet occurred.
Translation reserve
The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations.
Capital
The Group funds its operations through a mixture of equity funding and debt financing, including bank and capital market borrowings.
At 31 December 2025, the Group’s capital was £11,953m (2024 £11,809m), which comprised total equity of £11,937m (2024 £11,777m),
excluding amounts accumulated in equity relating to cash flow hedges of £(16)m (2024 £(32)m). Net debt (excluding lease liabilities) was
£3,844m (2024 £4,945m).
The capital structure of the Group reflects the judgement of the directors of an appropriate balance of funding required. The Group’s policy
is to maintain an investment grade credit rating and ensure operating flexibility, while:
– meeting its pension obligations;
– investing in research and technology and pursuing other organic investment opportunities;
– paying dividends in line with the Group’s policy of long-term sustainable cover of around two times underlying earnings (see page 217);
– making accelerated returns of capital to shareholders when the balance sheet allows and when the return from doing so is in excess of
the Group’s Weighted Average Cost of Capital; and
– investing in value-enhancing acquisitions, where market conditions are right and where they deliver on the Group’s strategy.
| Strategic report | Governance | Financial statements | Additional information | 197 | ||
25. Share capital and other reserves continued
Purchase of own shares
In July 2022, the directors approved a share buyback programme of up to £1.5bn (the 2022 share buyback programme). The 2022 share
buyback programme was completed on 24 July 2024. In total, 163,907,003 ordinary shares were repurchased under the 2022 share buyback
programme for a total cost (including transaction costs) of £1,508m.
In August 2023, the directors approved a further share buyback programme of up to £1.5bn (the 2023 share buyback programme). The 2023
share buyback programme commenced on 25 July 2024. The 2023 share buyback programme is expected to complete within three years of
its commencement.
In the year ended 31 December 2024, 22,220,182 ordinary shares were repurchased under the 2022 share buyback programme for a total
cost (including transaction costs) of £287m. A further 20,901,154 ordinary shares were repurchased under the 2023 share buyback programme
at a total cost (including transaction costs) of £264m.
In the year ended 31 December 2025, 29,595,214 ordinary shares were repurchased under the 2023 share buyback programme at a total cost
(including transaction costs) of £502m.
All ordinary shares acquired have been subsequently cancelled, with the nominal value of ordinary shares cancelled deducted from share capital
against the capital redemption reserve.
As part of the 2022 and 2023 buyback programmes, it was agreed that should a better alternative use for the Company’s cash reserves be
identified, the share buyback programmes would be ceased and the money instead used for the alternative purpose. Therefore, when the
Company issued a mandate to the brokers to purchase shares on its behalf, the mandate was structured such that it could be revoked at any
point. As such, no financial liability has been recognised for shares not yet purchased under the programmes at 31 December.
| 198 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
26. Movement in assets and liabilities arising from financing activities
| Non-cash movements | ||||||||||
| As at 1 January 2025 |
Cash flow1 | Foreign exchange movements |
Leases | Fair value adjustments |
Net finance costs |
Business acquisitions |
As at 31 December 2025 |
|||
| £m | £m | £m | £m | £m | £m | £m | £m | |||
| Assets | ||||||||||
| Other financial assets2 | 162 | (425) | — | — | 395 | 6 | — | 138 | ||
| 162 | (425) | — | — | 395 | 6 | — | 138 | |||
| Liabilities | ||||||||||
| Loans | (8,412) | 919 | 567 | — | — | (359) | — | (7,285) | ||
| Lease liabilities | (1,841) | 266 | 82 | (194) | — | (79) | — | (1,766) | ||
| Other financial liabilities2 | (63) | 321 | — | — | (362) | (4) | — | (108) | ||
| (10,316) | 1,506 | 649 | (194) | (362) | (442) | — | (9,159) | |||
| 1,081 | ||||||||||
| Other interest paid | 78 | |||||||||
| Purchase of own shares | 502 | |||||||||
| Equity dividends paid | 1,027 | |||||||||
| Dividends paid to non-controlling interests | 86 | |||||||||
| Net cash flow from financing activities | 2,774 |
| Non-cash movements | ||||||||||
| As at 1 January 2024 |
Cash flow1 | Foreign exchange movements |
Leases | Fair value adjustments |
Net finance costs |
Business acquisitions |
As at 31 December 2024 |
|||
| £m | £m | £m | £m | £m | £m | £m | £m | |||
| Assets | ||||||||||
| Other financial assets2 | 143 | (143) | — | — | 155 | 7 | — | 162 | ||
| 143 | (143) | — | — | 155 | 7 | — | 162 | |||
| Liabilities | ||||||||||
| Loans | (5,111) | (2,828) | (106) | — | — | (367) | — | (8,412) | ||
| Lease liabilities | (1,420) | 262 | (17) | (532) | — | (73) | (61) | (1,841) | ||
| Other financial liabilities2 | (168) | 292 | — | — | (161) | (26) | — | (63) | ||
| (6,699) | (2,274) | (123) | (532) | (161) | (466) | (61) | (10,316) | |||
| (2,417) | ||||||||||
| Other interest paid | 141 | |||||||||
| Purchase of own shares | 555 | |||||||||
| Equity dividends paid | 937 | |||||||||
| Dividends paid to non‑controlling interests | 89 | |||||||||
| Net cash flow from financing activities | (695) |
- Cash flow movements represent both payments or receipts of principal and payments of interest, which are presented separately in the Consolidated cash
flow statement.
- Excluding cash flow hedges, for which the cash flow is reported in line with the underlying transaction. See note 16 for an analysis of other financial assets
and liabilities.
| Strategic report | Governance | Financial statements | Additional information | 199 | ||
27. Fair value measurement
Fair value of financial instruments
Certain of the Group’s financial instruments are held at fair value.
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the balance sheet date.
The fair values of financial instruments held at fair value have been determined based on available market information at the balance sheet
date, and the valuation methodologies listed below:
– the fair values of forward foreign exchange contracts are calculated by discounting the contracted forward values and translating at the
appropriate balance sheet rates;
– the fair values of both interest rate and cross-currency swaps are calculated by discounting expected future principal and interest cash flows
and translating at the appropriate balance sheet rates; and
– the fair values of money market funds are calculated by multiplying the net asset value per share by the investment held at the balance sheet
date.
The derivative fair values are based on reputable third-party forecast data, and then adjusted for credit risk, including the Group’s own credit
risk, and market risk.
Due to the variability of the valuation factors, the fair values presented at 31 December may not be indicative of the amounts the Group will
realise in the future.
Fair value hierarchy
The fair value measurement hierarchy is as follows:
– Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities;
– Level 2 – Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices)
or indirectly (i.e. derived from prices); and
– Level 3 – Inputs for the asset or liability that are not based on observable market data (i.e. unobservable inputs).
All of the financial assets and liabilities measured at fair value are classified as level 2 using the fair value hierarchy, except for money market
funds, which are classified as level 1; other investments, which are at a combination of level 1 and level 3; and the contingent consideration
liability, which is measured at level 3. The fair value of the contingent consideration has been valued based on the discounted expected cash
flows. The total value of investments classified as level 3 is immaterial. There were no transfers between levels during the period. Alternative
valuation techniques would not materially change the valuations presented.
Financial assets and liabilities in the Group’s Consolidated balance sheet are either held at fair value or at amortised cost. With the exception of
loans, the carrying value of financial instruments measured at amortised cost approximates their fair value. For the bonds included within loans,
the fair value of loans presented in the table above is derived from market prices as of 31 December, classified as level 1 using the fair value
hierarchy. The fair value of the private placement included within loans has been valued based on the interest yield on an equivalent observable
bond, applied to the private placement cash flows, and has been classified as level 2 using the fair value hierarchy.
Carrying amounts and fair values of certain financial instruments
| 2025 | 2024 | |||||
| Carrying amount |
Fair value |
Carrying amount |
Fair value |
|||
| Note | £m | £m | £m | £m | ||
| Financial instruments measured at fair value: | ||||||
| Non-current | ||||||
| Other investments at fair value through other comprehensive income | 124 | 124 | 83 | 83 | ||
| Other financial assets | 16 | 232 | 232 | 265 | 265 | |
| Contingent consideration arising from business combinations | (40) | (40) | (65) | (65) | ||
| Other financial liabilities | 16 | (248) | (248) | (193) | (193) | |
| Current | ||||||
| Other financial assets | 16 | 183 | 183 | 212 | 212 | |
| Money market funds | 20 | 1,169 | 1,169 | 1,227 | 1,227 | |
| Contingent consideration arising from business combinations | (18) | (18) | (6) | (6) | ||
| Other financial liabilities | 16 | (173) | (173) | (264) | (264) | |
| Financial instruments not measured at fair value: | ||||||
| Non-current | ||||||
| Loans | 21 | (7,190) | (6,991) | (7,713) | (7,261) | |
| Current | ||||||
| Loans | 21 | (95) | (95) | (699) | (695) |
| 200 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
28. Share-based payments
| The Group has granted equity-settled share options and Long-Term Incentive Plan arrangements which are measured at fair value at the date of grant using an option pricing model. The fair value is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the number of shares that will actually vest. |
||
Details of the terms and conditions of each share-based payment plan are given in the Annual remuneration report on pages 111 to 126.
Expense in year
| 2025 | 2024 | |
| £m | £m | |
| Executive Share Option Plan | 1 | 4 |
| Performance Share Plan | 100 | 75 |
| Restricted Share Plan | 15 | 14 |
| 116 | 93 |
The Group also incurred a charge of £58m ( 2024 £51m) in respect of the equity-settled all-employee Free Shares and Matching Partnership
Shares elements of the Share Incentive Plan.
Executive Share Option Plan
| 2025 | 2024 | ||||
| Number of shares |
Weighted average exercise price |
Number of shares |
Weighted average exercise price |
||
| ’000 | £ | ’000 | £ | ||
| Outstanding at 1 January | 13,438 | 6.27 | 24,422 | 5.78 | |
| Exercised during the year | (9,699) | 6.35 | (10,262) | 5.07 | |
| Expired during the year | (84) | 6.98 | (722) | 6.81 | |
| Outstanding at 31 December | 3,655 | 6.06 | 13,438 | 6.27 | |
| Exercisable at 31 December | 3,655 | 6.06 | 6,767 | 5.18 |
| 2025 | 2024 | |
| Range of exercise price of outstanding options (£) | 4.85 – 7.83 | 4.38 – 7.83 |
| Weighted average remaining contracted life (years) | 5 | 6 |
Performance Share Plan and Restricted Share Plan
| Performance Share Plan | Restricted Share Plan | ||||
| 2025 | 2024 | 2025 | 2024 | ||
| Number of shares |
Number of shares |
Number of shares |
Number of shares |
||
| ’000 | ’000 | ’000 | ’000 | ||
| Outstanding at 1 January | 32,383 | 33,005 | 4,775 | 5,581 | |
| Granted during the year | 7,540 | 8,475 | 1,017 | 1,214 | |
| Exercised during the year | (6,882) | (7,132) | (1,892) | (1,789) | |
| Expired during the year | (1,502) | (1,965) | (222) | (231) | |
| Outstanding at 31 December | 31,539 | 32,383 | 3,678 | 4,775 | |
| Exercisable at 31 December | 439 | 953 | 211 | 271 |
| 2025 | 2024 | 2025 | 2024 | ||
| Weighted average remaining contracted life (years) | 5 | 5 | 5 | 5 | |
| Weighted average fair value of awards granted (£) | 16.71 | 13.27 | 16.74 | 13.31 |
The exercise price for the Performance Share Plan and Restricted Share Plan is £nil (2024 £nil).
| Strategic report | Governance | Financial statements | Additional information | 201 | ||
28. Share-based payments continued
Details of options/awards granted in the year
The fair value of equity-settled options/awards granted in the year has been measured using the weighted average inputs below and the
following valuation models:
– Executive Share Option Plan – Binomial
– Performance Share Plan – Monte Carlo
– Restricted Share Plan – Dividend valuation
| 2025 | 2024 | ||
| Range of share price at date of grant (£) | 16.73 – 17.78 | 9.75 – 13.36 | |
| Expected option/award life (years) | 3 – 7 | 3 – 7 | |
| Volatility (%) | 25 | 22 | |
| Risk-free interest rate (%) | 4 | 4 |
Volatility was calculated with reference to the Group’s weekly share price volatility, after allowing for dividends, for the greater of 30 weeks or
for the period until vest date.
The average share price in the year was £16.99 (2024 £12.85).
29. Related party transactions
The Group has a related party relationship with its directors and key management personnel (see below), equity accounted investments
(note 13) and pension schemes (note 23).
Transactions with related parties occur in the normal course of business, are priced on an arm’s-length basis and settled on normal trade terms.
The more significant transactions are disclosed below:
| Sales to related parties |
Purchases from related parties |
Amounts owed by related parties |
Amounts owed to related parties 1 |
Management recharges 1 |
||||||||||
| Related party | 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | ||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||
| Eurofighter Jagdflugzeug GmbH | 1,545 | 1,383 | 122 | 291 | 33 | 22 | 250 | 163 | — | — | ||||
| FADEC International LLC | 142 | 131 | — | — | 29 | 19 | — | — | — | — | ||||
| MBDA SAS | 30 | 23 | 191 | 127 | 7 | 2 | 1,938 | 1,807 | 3 | 3 | ||||
| Panavia Aircraft GmbH | 36 | 34 | 4 | 35 | 1 | 3 | 2 | — | — | — | ||||
| BAE Systems Pension Schemes | — | — | 79 | 18 | — | — | 172 | 187 | — | — | ||||
| Other | 115 | 135 | 43 | 41 | 26 | 8 | 52 | 35 | — | — | ||||
| 1,868 | 1,706 | 439 | 512 | 96 | 54 | 2,414 | 2,192 | 3 | 3 |
- Also relates to disclosures under IAS 24 Related Party Disclosures, for the parent company, BAE Systems plc. At 31 December 2025, £2,193m (2024
£1,975m) was owed by BAE Systems plc and £221m (2024 £217m) by other Group subsidiaries.
The Group also manages certain treasury functions on behalf of some of their equity accounted investments. This includes entering into foreign
exchange derivatives on their behalf. In 2025, we entered into forward contracts to purchase €604m, purchase $131m and purchase £14m
worth of other currencies (2024 purchase €551m, purchase $123m and purchase £29m worth of other currencies) on their behalf. No service
fee is charged for these arrangements. In addition, £7m (2024 £8m) of finance lease receivables in note 15 relates to amounts owed from
MBDA SAS, and the Group recharged costs of £1m (2024 £1m) to MBDA SAS and £2m (2024 £2m) to other equity accounted investments, in
respect of property and other administrative costs.
The Group considers key management personnel, as defined under IAS 24 Related Party Disclosures, to be the members of the Group’s
Executive Committee and the Company’s non-executive directors. Fuller disclosures on directors’ remuneration are set out in the Annual
remuneration report on pages 111 to 126. Total emoluments for directors and key management personnel charged to the Consolidated income
statement were:
| 2025 | 2024 | ||
| £'000 | £'000 | ||
| Short-term employee benefits | 21,931 | 21,155 | |
| Post-employment benefits | 1,227 | 1,279 | |
| Share-based payments | 20,000 | 15,724 | |
| Termination benefits | — | 596 | |
| 43,158 | 38,754 |
| 202 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
30. Contingent liabilities
| Contingent liabilities are potential future cash outflows which are either not probable or cannot be measured reliably. The Group has entered into a number of guarantee and performance bond arrangements in the normal course of business. Various Group undertakings are parties to legal actions and claims which arise in the normal course of business. Provision is made for any amounts that the directors consider may become payable (see note 24). |
||
The Group believes that the likelihood of any significant liability arising in respect of its guarantees and performance bond arrangements, and
legal actions and claims not already provided for, is remote.
Subsidiary audit exemptions
The Group has taken the exemption provided by the Companies Act 2006 (the Act) Section 479A relating to the audit of individual accounts for
certain UK subsidiary companies, as outlined below:
| Company | Registered company number |
Company | Registered company number |
||
| Alvis Limited | 00731159 | BAE Systems (Overseas Holdings) Limited | 02775320 | ||
| BAE Systems (Corporate Air Travel) Limited | 03666197 | BAE Systems Enterprises Limited | 00782930 | ||
| BAE Systems (Dynamics) Limited | 02606542 | BAE Systems Land Systems (Finance) Limited | 02639638 | ||
| BAE Systems (Funding Two) Limited | 04333003 | BAE Systems Surface Ships International Limited | 04380304 | ||
| BAE Systems (Kazakhstan) Limited | 03550759 | International Military Sales Limited | 02536529 |
BAE Systems plc will issue guarantees for all outstanding liabilities that these subsidiaries are subject to as at the financial year ended
31 December 2025 in accordance with section 479C of the Act.
31. Acquisition of businesses
| The results and financial position of the acquired business are consolidated from the date of acquisition under the requirements of IFRS 3 Business Combinations. The Group recognises and measures the acquiree’s identifiable assets acquired and liabilities assumed at their acquisition-date fair values. Where the consideration paid exceeds the fair value of the assets purchased then goodwill arises and will be disclosed in the Consolidated balance sheet. |
||
Businesses acquired during 2025
There were no material acquisitions during the year.
Businesses acquired during 2024
Ball Aerospace
On 16 February 2024, the Group acquired 100% of the share capital of Ball Aerospace (now Space & Mission Systems) for consideration of
$5.5bn (£4.4bn). The net assets acquired, including intangible assets identified, were valued at £2,845m resulting in goodwill of £1,507m.
Kirintec
On 3 September 2024, the Group acquired 100% of the share capital of Kirintec Ltd for total consideration of £282m, including £30m of
contingent consideration. The net assets acquired, including intangible assets identified, were provisionally valued at £161m resulting in
provisional goodwill of £121m. The purchase price allocation for the acquisition was finalised within the current year with no significant
changes. The final goodwill arising on acquisition was valued at £122m.
Other acquisitions
On 31 January 2024, the Group acquired 100% of the share capital of Malloy Aeronautics Ltd and, on 2 May 2024, the Group acquired 100%
of the share capital of Callen-Lenz Associates Ltd. Total consideration was £292m including £61m of contingent consideration. The net assets
acquired, including intangible assets identified, were valued at £108m resulting in goodwill of £184m at 31 December 2024. Since the 31
December 2024, the Group has adjusted the net assets acquired with Callen-Lenz Associates Ltd by £16m, which has resulted in an increase to
goodwill. Total goodwill of £200m has been recognised in respect of these acquisitions.
| Strategic report | Governance | Financial statements | Additional information | 203 | ||
32. Business disposals
Business disposals during 2025
There were no business disposals in 2025.
Disposal of interests in equity accounted investments during 2025
Air Astana
On 17 December 2025, the Group disposed of a portion of its 17% interest in Air Astana leaving the group with a 7% shareholding at 31
December 2025. The Group received cash proceeds of £38m and realised a profit on disposal of £12m, after accounting for the carrying value of
the investment, disposal costs and currency reserve reclassifications. Following the reduction in the shareholding, the Group is no longer equity
accounting for the remaining investment in Air Astana which is held within other investments, at fair value through other comprehensive
income, at 31 December 2025.
Innovaero
On 11 December 2025, the Group disposed of its 51% shareholding in Innovaero Pty Ltd, previously reported in the Maritime segment.
The Group received cash proceeds of £4m, there was no profit or loss on the disposal.
Business disposals during 2024
On 31 October 2024, the Group completed the sale of BAE Systems Imaging Solutions Inc., previously reported within the Electronic Systems
segment and, on 31 December 2024, the Group completed the sale of its forge facilities and related services which formed the Anniston
business within the Platforms & Services segment. Total net cash proceeds from the disposals were £8m and, after accounting for disposal costs
and cumulative currency translation, the loss on the disposals before tax totalled £4m.
Disposal of interests in equity accounted investments during 2024
Air Astana
On 9 February 2024, Air Astana launched a joint initial public offering (IPO). As a result of the IPO, the total shareholding held by BAE Systems
in Air Astana reduced from 49% to 17%. The Group received cash proceeds of £166m and realised a profit on the disposal of £75m, after
accounting for the carrying value of the investment and currency reserve reclassifications.
FNSS
On 10 December 2024, the Group sold its 49% shareholding in FNSS Savunma Sistemleri A.S,. FNSS was included in the Platforms & Services
segment. The Group received cash proceeds of £20m and realised a profit on the disposal of £23m, after accounting for currency reserve
reclassifications.
33. Events after the reporting period
There were no events after the reporting period which would materially impact the balances reported in this Report.
| 204 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
34. Information about related undertakings
In accordance with Section 409 of the Companies Act 2006, a full list of subsidiaries, joint ventures, associated undertakings, and significant
holdings in undertakings other than subsidiary undertakings of the Group at 31 December 2025 is disclosed below. All subsidiary undertakings
are subsidiary undertakings of their immediate parent undertaking(s) pursuant to section 1162 (2) (a) of the Companies Act 2006 unless
otherwise indicated. Unless otherwise stated, the aggregate percentage of capital held by the Group is 100%, the Group’s shareholding
represents ordinary shares of equal value and voting rights held indirectly by BAE Systems plc, the year end is 31 December, the country of
incorporation is the United Kingdom and the address of the registered office is Victory Point, Lyon Way, Frimley, Camberley, Surrey GU16 7EX,
United Kingdom. For companies incorporated outside of the United Kingdom, the country of incorporation is shown in the address. No
subsidiary undertakings have been excluded from the consolidation.
Subsidiary undertakings –
wholly-owned
Aircraft Research Association Limited1
Manton Lane, Bedford MK41 7PF, United Kingdom
Alvis Limited2
Alvis Pension Scheme Trustees Limited3
Alvis Vickers Limited
Armstrong Whitworth Aircraft Limited3
ASC Shipbuilding Pty Limited
Bldg 01, Level 2, 640 Mersey Road North, Osborne SA 5017,
Australia
Australian Marine Engineering Corporation (Finance)
Pty Limited4
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
Avro International Aerospace Limited3
BAE Systems (Al Diriyah C4i) Limited3
BAE Systems (Canada) Inc.
220 Laurier Avenue West, Suite 1200, Ottawa ON K1P 5Z9,
Canada
BAE Systems (Corporate Air Travel) Limited2
BAE Systems (Defence Systems) Limited
BAE Systems (Dynamics) Limited2
BAE Systems (Farnborough 3) Limited
BAE Systems (Finance) Limited
BAE Systems (Funding Four) Unlimited Company4 5
Riverside One, Sir John Rogerson’s Quay, Dublin D02 X576,
Ireland
BAE Systems (Funding Three) Limited4
C/O Interpath Ltd, 10 Fleet Place, London, EC4M 7RB,
United Kingdom
BAE Systems (Funding Two) Limited2
BAE Systems (Gripen Overseas) Limited
BAE Systems (Holdings) Limited3
BAE Systems (International) Limited
BAE Systems (Kazakhstan) Limited2
BAE Systems (Land and Sea Systems) Limited6
BAE Systems (Malaysia) Sdn Bhd
Level 25 Menara Hong Leong, No. 6 Jalan Damanlela, Bukit
Damansara, 50490 Kuala Lumpur, Malaysia
BAE Systems (MEH) Limited
BAE Systems (Military Air) Overseas Limited
BAE Systems (Nominees) Limited3
BAE Systems (Oman) Limited
BAE Systems (Operations) Limited7
BAE Systems (Operations) Singapore Pte Limited
1 Marina Boulevard, #28-00, One Marina Boulevard, Singapore,
018989
BAE Systems (Overseas Holdings) Limited2
BAE Systems (Poland) Sp. z o.o.
ul. Abp. A. Baraniaka 88, 61-131 Poznan, Poland
BAE Systems (Projects) Limited
BAE Systems (Property Investments) Limited
BAE Systems 2000 Pension Plan Trustees Limited3
BAE Systems AB8
Box 5676, SE-114 86 Stockholm, Sweden
BAE Systems Air Japan KK
1-1 Katamachi, Shinjuku-ku, Tokyo, Japan
BAE Systems Applied Intelligence (Asia Pacific)
Pte Limited
101 Thomson Road, # 07–03/07, United Square, Singapore,
307591
BAE Systems Applied Intelligence (Connect) A/S4
c/o Intertrust, (Denmark) Aps, Sundkrogsgade 21, 2100
Kobenhavn O., Denmark
BAE Systems Applied Intelligence (International)
Limited
Priestley Road, Surrey Research Park, Guildford, Surrey GU2 7RQ,
United Kingdom
BAE Systems Applied Intelligence A/S
c/o Intertrust, (Denmark) Aps, Sundkrogsgade 21, 2100
Kobenhavn O., Denmark
BAE Systems Applied Intelligence GCS Inc.
800 Towers Crescent Drive, 13th Floor #1382, Vienna, VA 22182,
United States
BAE Systems Applied Intelligence Integrated Computer
Solutions (Kuwait) (S.P.C.)4
Al Hamra Tower, Office Number 3503, 35th Floor, East Maqwa,
Kuwait City, Kuwait
BAE Systems Applied Intelligence Limited
Surrey Research Park, Guildford, Surrey GU2 7RQ,
United Kingdom
BAE Systems Applied Intelligence LLC
600 Mamaroneck Avenue #400, Harrison, Westchester County,
NY 10528, United States
BAE Systems Applied Intelligence Malaysia Sdn Bhd
Level 25, Menara Hong Leong, No. 6 Jalan Damanlela, Bukit
Damansara, 50490 Kuala Lumpur, Malaysia
BAE Systems Australia (Electronic Systems) Pty Limited4
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
BAE Systems Australia (NSW) Holdings Pty Limited4
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
BAE Systems Australia (NSW) Pty Limited4
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
BAE Systems Australia Datagate Pty Limited4
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
BAE Systems Australia Defence Holdings Pty Limited
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
BAE Systems Australia Defence Pty Limited9
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
BAE Systems Australia Holdings Limited3
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
BAE Systems Australia Limited
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
BAE Systems Australia Logistics Pty Limited4
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
BAE Systems Australia Sea Sentinel Project Pty Limited4
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
BAE Systems Australia Submarines Pty Limited
Level 2, 80 Flinders Street, Adelaide, SA 5000, Australia
BAE Systems Avionics Singapore Pte Limited
1 Marina Boulevard, #28-00, One Marina Boulevard, Singapore,
018989
BAE Systems Bofors AB
SE-691 80 Karlskoga, Sweden
BAE Systems Bofors Holdings Sdn Bhd
Level 21, Suite 21.01, The Gardens South Tower, Mid Valley City,
Lingkaran Syed Putra, 59200 Kuala Lumpur, Malaysia
BAE Systems C-ITS AB
Repslagaregatan 25, Linkoping SE-58222, Sweden
BAE Systems Communications Solutions LLC
Knowledge Oasis, Building 4, Second Floor, 0402-Z427,
Knowledge Oasis Muscat, PO Box 16, Postal Code 135, Muscat,
Oman
BAE Systems Controls Inc.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Corporate Secretary Limited
BAE Systems Creole Inc.10
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Deployed Systems Limited11
BAE Systems Digital Intelligence (Spain) S.A.
Paseo de la Castellana, 141, Cuzco IV, 28046 Madrid, Spain
BAE Systems Digital Intelligence Pty Limited12
Level 2, 14 Childers Street, Canberra, ACT 2601, Australia
BAE Systems do Brasil Ltda
SCN Quadra 5 Bloco A, Ed. Brasilia Shopping, Torre Norte, Sala
426, Brasilia, DF CEP:70715-900, Brazil
BAE Systems Electronic Systems (Overseas) Limited
BAE Systems Electronics Limited
BAE Systems Enterprises Limited2
BAE Systems Executive Pension Scheme Trustees
Limited3
BAE Systems Finance Inc.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Flight Training (Australia) Pty Limited4,13
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
BAE Systems GCS International Limited
BAE Systems Global Combat Systems Munitions Limited
BAE Systems Global LLC
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Hägglunds AB
Bjornavagen 2, Ornskoldsvik SE-89182, Sweden
BAE Systems Hawaii Shipyards Inc.
United Agent Group Inc., 900 Fort Street Mall #1680, Honolulu,
HI 96819, United States
BAE Systems Holding GmbH
Hauptstrasse 48, 82433 Bad Kohlgrub, Germany
BAE Systems Holdings (South Africa) (Pty) Limited4
Central Office Park No. 5, 257 Jean Avenue, Centurion, Gauteng,
0157, South Africa
BAE Systems Holdings B.V.4
c/o IQ-EQ, Hoogoorddreef 15, 1101 BA Amsterdam, Netherlands
BAE Systems Holdings Inc.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Holdings International LLC
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems India (Homeland Security) Private
Limited14
201, 2nd Floor, World Mark 2, Asset No. 8, Aerocity, NH-8, New
Delhi – 110037, India
BAE Systems India (Services) Private Limited14
201, 2nd Floor, World Mark 2, Asset No. 8, Aerocity, NH-8, New
Delhi – 110037, India
BAE Systems India (Technology) Private Limited14
201, 2nd Floor, World Mark 2, Asset No. 8, Aerocity, NH-8, New
Delhi – 110037, India
BAE Systems India (Ventures) Private Limited14
201, 2nd Floor, World Mark 2, Asset No. 8, Aerocity, NH-8, New
Delhi – 110037, India
BAE Systems Information and Electronic Systems
Integration Inc.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Insurance (Isle of Man) Limited
Tower House, Loch Promenade, Douglas, IM1 2LZ, Isle of Man
BAE Systems Integrated System Technologies (KSA)
Limited
BAE Systems Integrated System Technologies
(Overseas) Limited
BAE Systems Integrated System Technologies Limited
BAE Systems International Inc.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Japan GK
Ark Mori Building, 1-12-32 Akasaka, Minato-Ku, Tokyo, Japan
BAE Systems Land & Armaments Holdings LLC
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Land & Armaments Inc.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Land & Armaments L.P.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
| Strategic report | Governance | Financial statements | Additional information | 205 | ||
34. Information about related undertakings continued
Subsidiary undertakings –
wholly-owned continued
BAE Systems Land Systems (Finance) Limited2
BAE Systems Land Systems ATF Limited
BAE Systems Land Systems FMTV International Inc.10
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Land Systems Pinzgauer (Holdings)
Limited
BAE Systems Land Systems Pinzgauer Limited
BAE Systems MAI Turkey Hava Sistemleri A.Ş.
Beştepe Mahallesi, Dumlupınar Bulvarı, No:6 Armada İs Merkezi,
A Blok, Kat:11 Ofis No: 1115-1122, Yenimahalle, Ankara, Türkiye
BAE Systems Marine (Holdings) Limited
BAE Systems Marine (YSL) Limited
BAE Systems Marine Limited
BAE Systems Maritime Solutions Inc.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Maritime Solutions Jacksonville LLC
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Maritime Solutions Norfolk Inc.
United Agent Group Inc., 425 West Washington Street #4,
Suffolk, VA 23434, United States
BAE Systems Maritime Solutions San Diego Inc.
United Agent Group Inc., 7801 Folsom Boulevard, #202
Sacramento, CA 95826, United States
BAE Systems Netherlands B.V.
c/o IQ-EQ, Hoogoorddreef 15, 1101 BA Amsterdam, Netherlands
BAE Systems Norway AS
C. J. Hambros plass 2C, 0164 Oslo, Norway
BAE Systems Oman LLC
PO Box 74, Postal Code 111, Seeb, Oman
BAE Systems OneArc Australia Pty Ltd15
Unit 2, Building A, 2 Technology Place, Williamtown NSW 2318,
Australia
BAE Systems OneArc Czechia k.s.
Karolinská, 654/2, Karin, 186 00 Prague 8, Czech Republic
BAE Systems OneArc Germany GmbH
c/o Bird & Bird LLP, Maximiliansplatz 22, 80333 Munchen,
Germany
BAE Systems OneArc UK Limited
31 Hercules Way, Farnborough Aerospace Centre, Farnborough,
Hampshire GU14 6UU, United Kingdom
BAE SystemsOneArc USA, Inc.
United Agent Group Inc., 801 US Highway 1, North Palm Beach,
FL 33408, United States
BAE Systems Ordnance Systems Inc.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Pension Funds CIF Trustees Limited3
BAE Systems Pension Funds Investment Management
Limited3
BAE Systems Pension Funds Trustees Limited3
BAE Systems Project Services Limited
BAE Systems Projects (Canada) Limited
BAE Systems Properties Limited
BAE Systems Regional Aircraft Colombia SAS4
c/o Brigard & Urrutia, Calle 70 A No. 4-41, Bogotá, Colombia
BAE Systems Resolution Inc.
United Agent Group Inc., 2595 N Dallas Pkwy Suite 350, Frisco,
TX 75034, United States
BAE Systems S&S Operations Inc.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Saudi America Limited
Riyadh Kingdom Centre 28th Floor (REGUS), PO Box 23088,
Riyadh 11321, Central Province, Riyadh, Kingdom of Saudi Arabia
BAE Systems Saudi Arabia (Maintenance and
Equipment Services) Limited
PO Box 1732, Riyadh 11441, Kingdom of Saudi Arabia
BAE Systems Saudi Arabia (Vehicles and Equipment
Holdings) Limited3
BAE Systems Saudi Arabia (Vehicles and Equipment
Nominees) Limited3
BAE Systems Saudi Limited
PO Box 1732, Riyadh 11441, Kingdom of Saudi Arabia
BAE Systems Serviços de Aviônicos Ltda.
Rua Ambrósio Molina, No. 1090. Bloco F, Eugênio de Melo, São
José dos Campos, São Paulo 12.247-000, Brazil
BAE Systems Services Limited
BAE Systems Shared Services Inc.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Southeast Shipyards AMHC Inc.
United Agent Group Inc., 801 US Highway 1, North Palm Beach,
FL 33408, United States
BAE Systems Space & Mission Systems Holdings Inc.
United Agent Group Inc., 201 E 4th St, Loveland, CO 80537,
United States
BAE Systems Space & Mission Systems Inc.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Surface Ships (Holdings) Limited
BAE Systems Surface Ships (Overseas) Limited
BAE Systems Surface Ships (Projects) Limited
BAE Systems Surface Ships Integrated Support Limited
BAE Systems Surface Ships International Limited2
BAE Systems Surface Ships Limited
BAE Systems Surface Ships Projects (Malaysia) Sdn Bhd
Level 29 Menara Binjai, No 2 Jalan Binjai, Off Jalan Ampang,
50450 Kuala Lumpur, Malaysia
BAE Systems Surface Ships Support Limited4,7
BAE Systems SWS Defence AB
SE-691 80 Karlskoga, Sweden
BAE Systems Tactical Vehicle Systems LP
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Technology LLC
Office No. 458, Building No. 47, 90th North Street, Section 1,
New Cairo, 5th Settlement, Cairo, Egypt
BAE Systems Technology Solutions & Services Inc.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems TVS Holdings LLC
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Ukraine LLC
23-A Building, Yaroslaviv Val Street, Kyiv City, 01054, Ukraine
BAE Systems Zephyr Corporation
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Zephyr Fifth Corporation
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Zephyr Fourth Corporation
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Zephyr Second Corporation
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems Zephyr Third Corporation
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BAE Systems, Inc.
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
BIS Invest S.à.r.l.
2, Place de Strasbourg, L-2562, Luxembourg, Grand Duchy of
Luxembourg
Bohemia Interactive Simulations GK
c/o ARK OUTSOURCING KK, 4-3-5-704 Ebisu, Shibuya-ku, Tokyo,
150-0013, Japan
Bohemia Interactive Simulations Korea Ltd
c/o ARK OUTSOURCING KK, 4-3-5-704 Ebisu, Shibuya-ku, Tokyo,
150-0013, Japan
Bohemia Interactive Simulations sp z.o.o.4
Ul. Ostrobramska 101, 04-041, Warsaw, Poland
Bohemia Invest One Ltd
Bohemia Invest Two Ltd
British Aerospace (Far East) Limited12
Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong
British Aerospace (Malaysia) Sdn Bhd12
Unit 30-01, Level 30, Tower A, Vertical Business Suite, Avenue 3,
Bangsar South, No.8, Jalan Kerinchi, 59200 Kuala Lumpur,
Malaysia
British Aircraft Corporation (Pension Fund Trustees)
Limited3
British Aircraft Corporation Limited3
Callen-Lenz Associates Limited16
3 The Old Barns Manor Farm, Chilmark, Salisbury, Wiltshire SP3
5AF, United Kingdom
Corporate Secretary Subco Limited17
Corporate Secretary Subco 1 Limited
Corporate Secretary Subco 2 Limited
CPS International, Inc.10
Benedetti & Benedetti, Comosa Building, 21st Floor, PO Box
850120, Panama 5, Panama
Detica Group Limited
Detica Mexico S. de R.L. de C.V.
Torre Esmeralda II, Blvd Manuel Avila Camacho No. 36 Piso 18,
Lomas de Chapultepec, 11000 D.F., Mexico
Detica Services, Inc.
The Corporation Trust Company, 1209 Orange Street,
Wilmington, DE 19801, United States
Dividend Training Limited
Elliott Brothers (London) Limited
ETI Engineering, Inc.
1676 International Drive, 10th Floor, Suite 1000, McLean, VA
22102, United States
Eurostep AB
Gustavslundsvägen 137, SE-167 51 Bromma, Sweden
Eurostep Limited
Unit 16 Ffordd Richard Davies, St. Asaph Business Park, St. Asaph,
Denbighshire LL17 0LJ, United Kingdom
Eurostep Oy
Metsänneidonkuja 12 02130 Espoo, Finland
Eurostep S.à.r.l.
8 rue Germain Soufflot 78180 Montigny-le-Bretonneux, France
EVU Czech, S.R.O.
Pernerova 691/42, Karlin, 186 00 Prague 8, Czech Republic
Gloster Aircraft Limited3
H-B Utveckling, H-B Development AB
Ostermalmsgatan 87D, Stockholm SE 11486, 114 86, Sweden
Hadrian Holdings, Inc.
521 Fifth Avenue, New York, NY 101075, United States
Hadrian Trustees Limited1
Hägglunds Vehicle GmbH
Hoher Holzweg 12, Hemmingen, 30966 Hemmingen, Germany
Hawker Siddeley Aviation Limited3
Hawker Siddeley Dynamics Limited3
High Aerospace Ltd
Suite 204 Warner House, 123 Castle Street, Salisbury, Wiltshire
SP1 3TB, United Kingdom
HSA/HSD Pension Fund Trustees Limited3
Hunter Aerospace Corporation Pty Limited4
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
In-Space Missions Limited
8 Oriel Court, Omega Park, Alton GU34 2YT, United Kingdom
International Military Sales Limited2
Jetstream Aircraft Limited3
Prestwick International Airport, Prestwick, Ayrshire KA9 2RW,
United Kingdom
Kirintec B.V.
Prins Hendrikkade 21 E, 1012 TL, Amsterdam, Netherlands
Kirintec International DMCC
Unit 2707, Indigo Icon Tower, Plot No JLT-PH1-F3A, Jumeirah
Lakes Towers, Dubai, United Arab Emirates
Kirintec Limited
Walter Scott House, 10, Old Gloucester Road, Ross-On-Wye,
Herefordshire HR9 5PB, United Kingdom
Kirintec Sp.Zo.o4
210, 86, Hoza, Warsaw, 00-682, Poland
Malloy Aeronautics Defense LLC
10th Floor, 100 Light Street, Baltimore, MD 21202, United States
Malloy Aeronautics Limited
MES Holdco Limited
Charter Place, 23/27 Seaton Place, St. Helier, Jersey JE1 1JY
MES Interco4, 5
C/O Interpath Limited, 10 Fleet Place, London, EC4M 7RB, United
Kingdom
Meslink Limited4
Newcombe Properties Limited
Nexus Defence Limited
Walter Scott House, 10, Old Gloucester Road, Ross-On-Wye,
Herefordshire, HR9 5PB, United Kingdom
Pitch Technologies AB
Repslagaregatan 25, SE-582 22 Linköping, Sweden
Pitch Technologies Ltd
Sweden House, 5 Upper Montagu Street, London W1H 2AG,
United Kingdom
| 206 | BAE Systems plc Annual Report 2025 |
| Notes to the Consolidated financial statements continued |
34. Information about related undertakings continued
Subsidiary undertakings –
wholly-owned continued
Prismatic Ltd7
2 Omega Park, Alton GU34 2QE, United Kingdom
PT. BAE Systems Services
Wisma 46, Kota BNI, 34th Floor, Suite 34.01.A,
Jl. Jenderal Sudirman Kavling 71, Jakarta 10220, Indonesia
Pulse Power and Measurement Inc.
1717 Pennsylvania Avenue, NW Suite, 1025, Washington, DC
20006, United States
Pulse Power and Measurement Limited18
65 Shrivenham Hundred Business Park, Watchfield, Swindon,
Wiltshire SN6 8TY, United Kingdom
Representaciones SSTS, CA10
Ave Francisco de Miranda, Centro Lido El Rosal Oficina 71B,
Caracas, Venezuela
Royal Ordnance (Crown Service) Pension Scheme
Trustees Limited
Scottish Aviation Limited3
Prestwick International Airport, Prestwick, Ayrshire KA9 2RW,
United Kingdom
Shipbuilding (MSF) Pty Limited4
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
Shipbuilding (VIC) Pty Limited4
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
Simulation Technologies S.A.S.
8 rue de La Michodière, Paris, 75002, France
SkyCircuits Ltd
9 The Old Barns Manor Farm, Chilmark, Salisbury, Wiltshire SP3
5AF, United Kingdom
Spectacular AI Oy
Tekniikantie 14 02150, ESPOO, Uusimaa, Finland
Stewart & Stevenson TVS UK Limited
Stratsec.net Sdn Bhd
Unit F-3-1, Blok F, Third Floor, CBD Perdana 3, Jalan Perdana,
Cyber 12, 63000 Cyberjaya, Selangor Darul Ehsan, Malaysia
Support Solutions General Services and Contracting
Company/Limited Liability Company4
House No. 145, Street No. 1, Qtr. 611, Al Andulous Area, Al
Mansour, Baghdad, Iraq
TDS International Holdings Pty Limited4,15
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
TDS International Pty Limited4
Level 2, 80 Flinders Street, Adelaide SA 5000, Australia
Techmodal Limited
The Blackburn Aeroplane & Motor Co Limited3
The Bristol Aviation Company Limited3
The British & Colonial Aeroplane Co. Limited3
The Supermarine Aviation Works Limited3, 6
Thomas Sopwith Aviation Company Limited3
VSEL Birkenhead Limited
Westover Controls Incorporated
1098 Clark Street, Endicott, NY 13760, United States
Subsidiary undertakings –
not wholly-owned
Advanced National Company for Aircraft Maintenance
Limited (51%)
PO Box 1732, Riyadh 11441, Kingdom of Saudi Arabia
BAE Systems Arabian Industries (Capability & Training –
UK) Ltd (51%)
BAE Systems Arabian Industries (Supply Chain – UK) Ltd
(51%)
BAE Systems Arabian Industries Limited (51%)
PO Box 67775, RIYADH, 11517, Kingdom of Saudi Arabia
Granada Enterprises Limited (51%)
Al Arid Business Center, 7611 King Abdulaziz Road, Al Arid
District, Riyadh, 13342, Kingdom of Saudi Arabia
Hadrian Properties, Inc. (95%)
521 Fifth Avenue, New York, NY 101075, United States
International Systems Engineering Company Limited
(46.2%)19
Al Arid Business Center, 7611 King Abdulaziz Road, Al Arid
District, Riyadh, 13342, Kingdom of Saudi Arabia
Overhaul and Maintenance Company Holding (51%)
Al Arid Business Center, 7611 King Abdulaziz Road, Al Arid
District, Riyadh, 13342, Kingdom of Saudi Arabia
Saudi Technology & Logistics Services Limited (65%)3
PO Box 1732, Riyadh 11441, Kingdom of Saudi Arabia
TMB International Logistics Limited (51%)
Equity accounted investments
Abercromby Property International (20.42%)
521 Fifth Avenue, New York, NY 101075, United States
AMSH B.V. (50%)20
De Lairessestraat 145 E, Amsterdam, 1075 HJ, Netherlands
BAE Systems Strategic Aerospace Services Limited
(49%)
C/O TMF Group, 8th Floor, 20 Farringdon Street, London, EC2R
7HJ, United Kingdom
BAE Systems Strategic Aerospace Services SPC (49%)
Al Koudh, A’Seeb, Muscate Governate, PO Box 4245, Post Code
111, Oman
BAE Systems Strategic Aerospace Services WLL (49%)
Floor 3, Building 2, Street 984, Area 3, Doha, Qatar
BAeHAL Software Limited (40%)3,14
Airport Lane, HAL Estate, Bangalore 560010, India
BHIC Bofors Defense Asia Sdn Bhd (49%)
Level 21, Suite 21.01, The Gardens South Tower, Mid Valley City,
Lingkaran Syed Putra, 59200 Kuala Lumpur, Malaysia
BSL LLC (49%)
Office No. 38, Floor 4, The Gate Tower 4, No. 8, Doha, Qatar
BSL Teknoloji Ve Danişmanlik Hizmetleri Anonim Şirketi
(49%)
Beştepe Mah. Nergiz SK. No:7/2 ĺÇ Kapi No: 96 Yenimahalle /
Ankara, Türkiye
Canadian Naval Support Limited (50%)21
1741 Lower Water Street, Halifax, Nova Scotia, B3J 0J2, Canada
CTA International SAS (50%)
13 Route De La Miniere, 78034 Versailles Cedex, France
Data Link Solutions L.L.C. (50%)12
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
Edgewing Systems Italy S.P.A. (33.33%)
Torino (TO) Corso Francia, 426 CAP, 10146, Italy
Edgewing Systems Japan KK (33.33%)
20-15, Nishiki 2-chome, Naka Ward, Nagoya City, Japan
Edgewing Systems Limited (33.33%)22
350 Brook Drive, Green Park, Reading, Berkshire, RG2 6UH,
United Kingdom
Edgewing Systems UK Limited (33.33%)
350 Brook Drive, Green Park, Reading, Berkshire, RG2 6UH,
United Kingdom
Eurofighter Jagdflugzeug GmbH (33.33%)3
Am Soldnermoos 17, 85399 Hallbergmoos, Germany
FADEC Alliance LLC (25%)
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
FADEC International LLC (50%)
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
FAST Holdings Limited (50%)14,15
FAST Training Services Limited (50%)14
KBS Maritime Limited (50%)23
Victory Building (Pp 72), Rm. 233, The Parade, HM Naval Base,
Portsmouth PO1 3LS, United Kingdom
MBDA B.V. (37.5%)
De Lairessestraat 145 E, Amsterdam, 1075 HJ, Netherlands
MBDA Holdings S.A.S. (25%)
1 Avenue Réaumur, 92350 Le Plessis-Robinson, France
MBDA S.A.S. (37.5%)
4 Rue de Presbourg, 75116, Paris, France
Nobeli Business Support AB (34%)
SE-691 80 Karlskoga, Sweden
Panavia Aircraft GmbH (42.5%)3
Am Soldnermoos 17, 85399 Hallbergmoos, Germany
Promoveo Solutions JV LLC (49%)
United Agent Group Inc.,1521 Concord Pike Suite 201,
Wilmington, DE 19803, United States
Reaction Engines Limited (15.3%)24
8th Floor, 29 Wellington Street, Central Square, Leeds, LS1 4DL,
United Kingdom
Rheinmetall BAE Systems Land Limited (45%)
RBSL, Hadley Castle Works, Telford, Shropshire, TF1 9AY, United
Kingdom
Saab Bofors Test Center AB (30%)
Box 418, SE-691 27 Karlskoga, Sweden
Winner Developments Limited (33.3%)
Notes
-
Company limited by guarantee.
-
Company exempt from audit by virtue of the
Companies Act 2006 Section 479A for the year
ended 31 December 2025. Also see note 30.
-
Directly owned by BAE Systems plc.
-
In liquidation.
-
Unlimited company.
-
Ownership held in class of A shares, B shares
and preference shares.
- Ownership held in class of A shares and B
shares.
- Ownership held in ordinary shares and
preference shares.
- Ownership held in ordinary shares and
redeemable preference shares.
-
Ownership held in authorized shares.
-
40% directly owned by BAE Systems plc.
-
Year end 30 September.
-
Ownership held in ordinary shares, ordinary A
and ordinary B shares.
-
Year end 31 March.
-
Ownership held in ordinary A shares.
-
Ownership held in ordinary, ordinary A,
ordinary B, ordinary C, preference A and
preference B shares.
-
In strike-off.
-
Ownership held in class of A, B, C, D, E, F and G
ordinary shares.
-
Subsidiary due to unilateral controlling rights.
-
Ownership held in class of B shares.
-
Ownership held in common shares (50%) and
B Preferred shares (100%).
- Ownership held in 100% Class A Economic
shares and 33.33% Class D voting shares.
- Ownership held in ordinary shares (50%) and
preference shares (75%).
- In administration.
| Strategic report | Governance | Financial statements | Additional information | 207 | ||
| Company statement of changes in equity for the year ended 31 December |
| Note | Issued share capital |
Share premium |
Other reserves |
Retained earnings1 |
Total equity |
||
| £m | £m | £m | £m | £m | |||
| At 1 January 2024 | 81 | 1,253 | 214 | 3,030 | 4,578 | ||
| Profit for the year | — | — | — | 1,560 | 1,560 | ||
| Total other comprehensive income for the year | — | — | 1 | 32 | 33 | ||
| Total comprehensive income for the year | — | — | 1 | 1,592 | 1,593 | ||
| Share-based payments | 10 | — | — | — | 144 | 144 | |
| Purchase of own shares | 9 | (1) | — | 1 | (551) | (551) | |
| Ordinary share dividends2 | — | — | — | (937) | (937) | ||
| At 31 December 2024 | 80 | 1,253 | 216 | 3,278 | 4,827 | ||
| Profit for the year | — | — | — | 1,847 | 1,847 | ||
| Total other comprehensive expense for the year | — | — | (4) | (32) | (36) | ||
| Total comprehensive (expense)/income for the year | — | — | (4) | 1,815 | 1,811 | ||
| Share-based payments | 10 | — | — | — | 174 | 174 | |
| Purchase of own shares | 9 | (1) | — | 1 | (502) | (502) | |
| Ordinary share dividends2 | — | — | — | (1,027) | (1,027) | ||
| At 31 December 2025 | 79 | 1,253 | 213 | 3,738 | 5,283 |
-
The non-distributable portion of retained earnings is £1,284m (2024 £1,148m).
-
Details of ordinary share dividends are provided in note 25 to the Consolidated financial statements.
| 208 | BAE Systems plc Annual Report 2025 |
| Company balance sheet as at 31 December |
| Note | 2025 | 2024 | |
| £m | £m | ||
| Non-current assets | |||
| Intangible assets | 12 | 9 | |
| Right-of-use assets | 10 | 13 | |
| Investments in subsidiary undertakings and participating interests | 2 | 10,395 | 10,258 |
| Amounts owed by subsidiary undertakings | 3 | 8,132 | 9,440 |
| Other receivables | 3 | 33 | 39 |
| Post-employment benefit surpluses | 8 | 155 | 150 |
| Other financial assets | 4 | 360 | 383 |
| 19,097 | 20,292 | ||
| Current assets | |||
| Trade and other receivables | 3 | 48 | 167 |
| Current tax | — | 13 | |
| Other financial assets | 4 | 289 | 380 |
| Cash and cash equivalents | 2,768 | 2,584 | |
| 3,105 | 3,144 | ||
| Total assets | 22,202 | 23,436 | |
| Non-current liabilities | |||
| Loans | 5 | (6,270) | (6,724) |
| Lease liabilities | (9) | (12) | |
| Other payables | 6 | (4) | (4) |
| Post-employment benefit obligations | 8 | (89) | (74) |
| Other financial liabilities | 4 | (331) | (293) |
| Provisions | 7 | (137) | (132) |
| (6,840) | (7,239) | ||
| Current liabilities | |||
| Loans | 5 | (72) | (77) |
| Lease liabilities | (4) | (4) | |
| Trade and other payables | 6 | (9,703) | (10,920) |
| Current tax | (11) | — | |
| Other financial liabilities | 4 | (287) | (368) |
| Provisions | 7 | (2) | (1) |
| (10,079) | (11,370) | ||
| Total liabilities | (16,919) | (18,609) | |
| Net assets | 5,283 | 4,827 | |
| Capital and reserves | |||
| Issued share capital | 9 | 79 | 80 |
| Share premium | 1,253 | 1,253 | |
| Other reserves | 9 | 213 | 216 |
| Retained earnings1 | 3,738 | 3,278 | |
| Total equity | 5,283 | 4,827 |
- The Company’s profit for the year was £1,847m (2024 £1,560m).
Approved by the Board of directors of BAE Systems plc on 17 February 2026 and signed on its behalf by:
| C N Woodburn | B M Greve |
| Chief Executive | Chief Financial Officer |
Registered number: 01470151
| Strategic report | Governance | Financial statements | Additional information | 209 | ||
| Notes to the Company financial statements |
1. Preparation of the Company financial statements
Basis of preparation
The directors have a reasonable expectation that the Company has adequate resources to continue its operational existence for at least 12
months from the signing of the accounts, notwithstanding the net current liabilities of £6,974m. Therefore, the financial statements of BAE
Systems plc have been prepared on a going concern basis, as disclosed in the Strategic report on page 73, and in accordance with Financial
Reporting Standard (FRS) 101, Reduced Disclosure Framework.
In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of UK-adopted
International Financial Reporting Standards (IFRS), but makes amendments where necessary in order to comply with the Companies Act 2006
and has set out below where advantage of the FRS 101 disclosure exemptions have been taken:
– the requirements of paragraphs 45(b) and 46 to 52 of IFRS 2 Share‑based Payment;
– the requirements of paragraphs 62, B64(d), B64(e), B64(g), B64(h), B64(j) to B64(m), B64(n)(ii), B64(o)(ii), B64(p), B64(q)(ii), B66 and B67 of IFRS
3 Business Combinations;
– the requirements of paragraph 33(c) of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;
– the requirements of IFRS 7 Financial Instruments: Disclosures;
– the requirements of paragraphs 91 to 99 of IFRS 13 Fair Value Measurement;
– the requirements of the second sentence of paragraph 110 and paragraphs 113(a), 114, 115, 118, 119(a) to (c), 120 to 127 and 129 of IFRS 15
Revenue from Contracts with Customers;
– the requirements of paragraph 52, the second sentence of paragraph 89, and paragraphs 90, 91 and 93 of IFRS 16 Leases and the
requirements of paragraph 58 of IFRS 16 Leases;
– the requirement in paragraph 38 of IAS 1 Presentation of Financial Statements, to present comparative information in respect of: paragraph
53(a), (h) and (j) of IFRS 16 Leases; paragraph 79(a)(iv) of IAS 1; paragraph 73(e) of IAS 16 Property, Plant and Equipment; paragraph 118(e) of
IAS 38 Intangible Assets; and paragraphs 76 and 79(d) of IAS 40 Investment Property;
– the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 38D, 40A, 40B, 40C, 40D, 111 and 134 to 136 of IAS 1 Presentation of Financial
Statements;
– the requirements of paragraphs 1 to 44E, 44H(b)(ii) and 45 to 63 of IAS 7 Statement of Cash Flows;
– the requirements of paragraphs 30 and 31 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors;
– the requirements of paragraphs 17 and 18A of IAS 24 Related Party Disclosures;
– the requirements in IAS 24 Related Party Disclosures, to disclose related party transactions entered into between two or more members of a
group, provided that any subsidiary which is a party to the transaction is wholly-owned by such a member;
– the requirements of paragraph 74A(b) of IAS 16 Property, Plant and Equipment;
– the requirements of paragraphs 130(f)(ii), 130(f)(iii), 134(d) to 134(f) and 135(c) to 135(e) of IAS 36 Impairment of Assets; and
– the requirements of paragraphs 88C and 88D of IAS 12 Income Taxes.
The Company intends to continue to prepare its financial statements in accordance with FRS 101.
In accordance with Section 408(3) of the Companies Act 2006, the Company is exempt from the requirement to present its own income
statement. The amount of profit for the year of the Company is disclosed in the Company balance sheet.
The Company financial statements are presented in pounds sterling and, unless stated otherwise, rounded to the nearest million. The financial
statements have been prepared under the historical cost convention, as modified by the revaluation of relevant financial assets and financial
liabilities (including derivative instruments).
Material accounting policies
The material accounting policies applied in the preparation of these individual financial statements are set out below. These policies have been
applied consistently to all the years presented, unless otherwise stated.
Investments in subsidiary undertakings and participating interests
Fixed asset investments in shares in subsidiary undertakings and participating interests are stated at cost less provision for impairment.
The Company recognises an increase in its investments in subsidiary undertakings in respect of the cost of share-based payment awards issued
by the Company to employees of the Company’s operating subsidiaries, with a corresponding entry to equity.
Amounts owed by subsidiary undertakings
Amounts owed by subsidiary undertakings are stated at amortised cost including a provision for expected credit losses. For the purposes of
impairment assessment, amounts to subsidiary undertakings are considered low credit risk and, therefore, the Company measures the provision
at an amount equal to 12-month expected credit losses.
Other material accounting policies
Other material accounting policies are consistent with the Consolidated financial statements.
Judgements and sources of estimation uncertainty
In the course of preparing the financial statements, no judgements have been made in the process of applying the Company’s accounting
policies, other than those involving estimates, that have had a significant effect on the amounts recognised in the Company financial
statements.
| 210 | BAE Systems plc Annual Report 2025 |
| Notes to the Company financial statements continued |
1. Preparation of the Company financial statements continued
Key sources of estimation uncertainty
Post-employment benefits
A number of actuarial assumptions are made in assessing the value of post-employment benefit obligations, including discount rate, inflation
rate and mortality assumptions. For each of the actuarial assumptions used there is a wide range of possible values and management estimates
a point within that range that most appropriately reflects the Group’s circumstances.
If estimates relating to these actuarial assumptions are no longer valid or change due to changing economic and social conditions, then the
potential obligations due under these schemes could change significantly.
Discount and inflation rates could change significantly as a result of a prolonged economic downturn, monetary policy decisions and
interventions or other macroeconomic issues. Estimates made with regard to mortality projections may also change based on medical and
epidemiological developments.
Similarly, the values of many assets are subject to estimates and assumptions, in particular those which are held in unquoted pooled investment
vehicles. The associated fair value of these unquoted pooled investments is estimated with consideration of the most recently available
valuations provided by the investment or fund managers. These valuations inherently incorporate a number of assumptions on the underlying
investments. The overall level of estimation uncertainty in valuing these assets could therefore give rise to a material change in valuation within
the next 12 months.
Furthermore, estimates are required around the Group’s ability to access its defined benefit surpluses, and on what basis, which then determines
the associated rate of tax to apply. Depending on the outcome, judgement is then required to determine the presentation of any tax payable in
recovering a surplus.
Note 23 of the Consolidated financial statements provides information on the key assumptions and analysis of their sensitivities.
Changes in accounting policies
In the current year, the Company has applied the amendments to IAS 21 Lack of Exchangeability, effective from 1 January 2025. This has not had
a material impact on the Company.
2. Investments in subsidiary undertakings and participating interests
| £m | |
| Cost | |
| At 1 January 2025 | 10,264 |
| Additions | 137 |
| At 31 December 2025 | 10,401 |
| Impairment provisions | |
| At 1 January 2025 and 31 December 2025 | 6 |
| Net carrying value | |
| At 31 December 2025 | 10,395 |
| At 31 December 2024 | 10,258 |
3. Trade and other receivables
| 2025 | 2024 | |
| £m | £m | |
| Non-current | ||
| Amounts owed by subsidiary undertakings1 | 8,132 | 9,440 |
| Other receivables | 33 | 39 |
| 8,165 | 9,479 | |
| Current | ||
| Prepayments | 23 | 12 |
| Accrued income | 17 | 14 |
| Other receivables | 8 | 141 |
| 48 | 167 |
- Amounts owed by subsidiary undertakings are repayable on demand. While the majority of these receivables are interest free, certain balances bear
interest priced on an arm’s-length basis. Provision for expected credit losses is immaterial.
| Strategic report | Governance | Financial statements | Additional information | 211 | ||
4. Other financial assets and liabilities
| 2025 | 2024 | ||||
| Assets | Liabilities | Assets | Liabilities | ||
| £m | £m | £m | £m | ||
| Non-current | |||||
| Cash flow hedges – foreign exchange contracts | — | — | 2 | — | |
| Other foreign exchange/interest rate contracts | 280 | (254) | 271 | (272) | |
| Debt-related derivative financial instruments | 80 | (77) | 110 | (21) | |
| 360 | (331) | 383 | (293) | ||
| Current | |||||
| Cash flow hedges – foreign exchange contracts | — | — | 2 | — | |
| Other foreign exchange/interest rate contracts | 289 | (287) | 378 | (368) | |
| 289 | (287) | 380 | (368) |
Included within other foreign exchange contracts are derivatives entered into on behalf of subsidiaries. These derivatives were passed down to
the hedging subsidiary using an internal derivative with equal but opposite terms to the external derivatives, and valued using the same
methodology as the external derivatives. The majority of such derivatives were designated in cash flow hedges in the Consolidated financial
statements. Disclosures in respect of the maturity profile and fair value of other financial assets and liabilities are provided in notes 16 and 27 to
the Consolidated financial statements.
5. Loans
| 2025 | 2024 | |
| £m | £m | |
| Non-current | ||
| US$800m 5% bond, repayable 2027 | 593 | 636 |
| US$1,250m 5.125% bond, repayable 2029 | 926 | 993 |
| US$1,300m 3.4% bond, repayable 2030 | 962 | 1,032 |
| US$1,000m 1.9% bond, repayable 2031 | 740 | 793 |
| US$500m 5.25% bond, repayable 2031 | 370 | 397 |
| US$1,500m 5.3% bond, repayable 2034 | 1,107 | 1,187 |
| US$400m 5.8% bond, repayable 2041 | 295 | 317 |
| US$1,000m 3% bond, repayable 2050 | 731 | 784 |
| US$750m 5.5% bond, repayable 2054 | 546 | 585 |
| 6,270 | 6,724 | |
| Current | ||
| Accrued interest | 72 | 77 |
6. Trade and other payables
| 2025 | 2024 | |
| £m | £m | |
| Non-current | ||
| Other payables | 4 | 4 |
| Current | ||
| Amounts owed to subsidiary undertakings1 | 7,360 | 8,843 |
| Amounts owed to equity accounted investments | 2,193 | 1,975 |
| Accruals | 71 | 64 |
| Deferred income | 17 | 12 |
| Other payables | 62 | 26 |
| 9,703 | 10,920 |
- Amounts owed to subsidiary undertakings are repayable on demand. While the majority of these payables are interest free, certain balances incur interest
priced on an arm’s-length basis.
| 212 | BAE Systems plc Annual Report 2025 |
| Notes to the Company financial statements continued |
7. Provisions
| Contractual and other |
|
| £m | |
| Non-current | 132 |
| Current | 1 |
| At 1 January 2025 | 133 |
| Created | 1 |
| Net present value adjustments | 5 |
| At 31 December 2025 | 139 |
| Represented by: | |
| Non-current | 137 |
| Current | 2 |
| 139 |
The Company holds provisions for contractual costs that it expects to incur over an extended period. These costs are based on past experience of
similar items and represent management’s best estimate of the likely outcome, but the timing and amount of the outflows could differ
significantly from management’s estimates.
8. Post-employment benefits
The Company participates in all of the Group’s UK pension schemes. Regular contributions to the schemes are made in line with the schedule of
contributions and a share of deficit funding is allocated to participating employers. In the event of deficits arising, the costs of the deficit repair
would be allocated to participating employers. Full disclosures relating to these schemes are given in note 23 to the Consolidated financial
statements.
Amounts recognised on the balance sheet
The table below shows the Company’s share of the Group’s UK pension schemes after allocation to other participating employers.
| 2025 | 2024 | |
| £m | £m | |
| Present value of unfunded obligations | (89) | (74) |
| Present value of funded obligations | (1,498) | (1,554) |
| Fair value of scheme assets | 1,705 | 1,754 |
| Total gross surplus | 118 | 126 |
| Withholding tax on surpluses | (52) | (50) |
| Surplus | 66 | 76 |
| Represented by: | ||
| Post-employment benefit surpluses | 155 | 150 |
| Post-employment benefit obligations | (89) | (74) |
| 66 | 76 |
Surplus recognition
A number of schemes are in an accounting surplus position. The surpluses have been recognised on the basis that the future economic benefits
are unconditionally available to the Group, which is assumed to be via a refund. The surplus has been recognised net of withholding tax of 25%
as at 31 December 2025 (2024 25%). This tax would be levied prior to the future refunding of any surplus, and therefore the surplus has been
presented on a net basis as this is not deemed to be an income tax of the Group.
| Strategic report | Governance | Financial statements | Additional information | 213 | ||
9. Share capital and other reserves
Share capital and equity dividends
Disclosures in respect of the Company’s share capital and on equity dividends are provided in note 25 to the Consolidated financial statements.
Other reserves
| Statutory reserve |
Capital redemption reserve |
Hedging reserve |
Total | |
| £m | £m | £m | £m | |
| At 1 January 2024 | 202 | 9 | 3 | 214 |
| Amounts recognised in hedging reserve | — | — | 1 | 1 |
| Shares cancelled | — | 1 | — | 1 |
| At 31 December 2024 | 202 | 10 | 4 | 216 |
| Amounts recognised in hedging reserve | — | — | (4) | (4) |
| Shares cancelled | — | 1 | — | 1 |
| At 31 December 2025 | 202 | 11 | — | 213 |
Statutory reserve
Under Section 4 of the British Aerospace Act 1980, this reserve may only be applied in paying up unissued shares of the Company to be allotted
to members of the Company as fully paid bonus shares.
Capital redemption reserve
The capital redemption reserve represents the cumulative nominal value of the Company’s ordinary shares repurchased and subsequently
cancelled.
Hedging reserve
The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to
hedged transactions that have not yet occurred.
Purchase of own shares
In July 2022, the directors approved a share buyback programme of up to £1.5bn (the 2022 share buyback programme). The 2022 share
buyback programme was completed on 24 July 2024. In total, 163,907,003 ordinary shares were repurchased under the 2022 share buyback
programme for a total cost (including transaction costs) of £1,508m.
In August 2023, the directors approved a further share buyback programme of up to £1.5bn (the 2023 share buyback programme). The 2023
share buyback programme commenced on 25 July 2024. The 2023 share buyback programme is expected to complete within three years of
its commencement.
In the year ended 31 December 2024, 22,220,182 ordinary shares were repurchased under the 2022 share buyback programme for a total
cost (including transaction costs) of £287m. A further 20,901,154 ordinary shares were repurchased under the 2023 share buyback programme
at a total cost (including transaction costs) of £264m.
In the year ended 31 December 2025, 29,595,214 ordinary shares were repurchased under the 2023 share buyback programme at a total cost
(including transaction costs) of £502m.
All ordinary shares acquired have been subsequently cancelled, with the nominal value of ordinary shares cancelled deducted from share capital
against the capital redemption reserve.
As part of the 2022 and 2023 buyback programmes, it was agreed that should a better alternative use for the Company’s cash reserves be
identified, the share buyback programmes would be ceased and the money instead used for the alternative purpose. Therefore, when the
Company issued a mandate to the brokers to purchase shares on its behalf, the mandate was structured such that it could be revoked at any
point. As such, no financial liability has been recognised for shares not yet purchased under the programmes at 31 December.
10. Share-based payments
Options over shares of the Company have been granted to employees of the Company under various plans. Details of the terms and conditions
of each share-based payment plan are given in the Annual remuneration report on pages 111 to 126.
| 2025 | 2024 | ||||
| Range of exercise price of outstanding options |
Weighted average remaining contracted life |
Range of exercise price of outstanding options |
Weighted average remaining contracted life |
||
| £ | Years | £ | Years | ||
| Executive Share Option Plan (ExSOP) | 4.85 – 7.83 | 5 | 4.85 – 7.83 | 6 | |
| Performance Share Plan (PSP) | — | 5 | — | 5 | |
| Restricted Share Plan (RSP) | — | 4 | — | 4 |
The average share price in the year was £16.99 (2024 £12.85).
| 214 | BAE Systems plc Annual Report 2025 |
| Notes to the Company financial statements continued |
11. Employees
The average and year-end numbers of employees of the Company at 31 December 2025 were 1,532 (2024 1,363) and 1,619 (2024 1,447)
respectively. All of the Company’s employees work within head office functions.
Total staff costs, excluding charges for share-based payments, were as follows:
| 2025 | 2024 | |
| £m | £m | |
| Wages and salaries | 143 | 127 |
| Social security costs | 28 | 22 |
| Pension costs - defined contribution plans | 7 | 9 |
| Pension costs - defined benefit plans | 11 | 13 |
| 189 | 171 |
12. Other information
Company audit fee
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts totalled £3,149,000 (2024 £3,145,000). Fees payable to
Deloitte LLP and its associates for non-audit services to the Company are not required to be disclosed because the Consolidated financial
statements disclose such fees on a consolidated basis (see note 3 to the Consolidated financial statements).
Related party transactions
Disclosures in respect of related party transactions are provided in note 29 to the Consolidated financial statements.
Directors’ emoluments
Under Schedule 5 of the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 (Schedule 5), total
directors’ emoluments, excluding Company pension contributions, were £11,747,952 (2024 £11,542,570); these amounts are calculated on a
different basis to emoluments in the Annual remuneration report which are calculated under Schedule 8 of the Large and Medium-Sized
Companies and Groups (Accounts and Reports) Regulations 2008 (Schedule 8). These emoluments were paid for their services on behalf of the
BAE Systems Group. No emoluments related specifically to their work for the Company. Under Schedule 5, the aggregate gains made by the
directors from the exercise of share options in 2025 as at the date of exercise was £2,424,436 (2024 £4,439,876) and the net aggregate value of
assets received by directors in 2025 from Long-Term Incentive Plans as calculated at the date of vesting was £31,004,827 (2024 £21,067,185);
these amounts are calculated on a different basis from the valuation of share plan benefits under Schedule 8 in the Annual remuneration report.
Retirement benefits are accruing to one director in respect of defined benefit schemes and to three directors in respect of defined contribution
schemes.
Subsidiary guarantees
Borrowings by subsidiary undertakings totalling £943m (2024 £1,611m), which are included in the Group’s borrowings, have been guaranteed
by the Company. The probability of these financial guarantees being called is considered to be remote and therefore the fair value is deemed to
be negligible.
Information about related undertakings
In accordance with Section 409 of the Companies Act 2006, a full list of the Company’s subsidiaries and significant holdings is included in note
34 to the Consolidated financial statements.
13. Events after the reporting period
There were no events after the reporting period which would materially impact the balances reported in the Company financial statements.
| Strategic report | Governance | Financial statements | Additional information | 215 | ||
Additional information
| Alternative performance measures | |
| Alternative performance measures | 216 |
| Other information | |
| Double materiality assessment | 221 |
| Task Force on Climate-related Financial Disclosures (TCFD) | 222 |
| How we manage climate-related risks and opportunities | 225 |
| Climate scenario planning | 226 |
| Glossary | |
| Glossary of terms used in this Annual Report | 232 |
| Shareholder information | |
| Useful information for shareholders | 235 |
| 216 | BAE Systems plc Annual Report 2025 |
| Alternative performance measures |
We monitor the underlying financial performance of the Group using APMs. These measures are not defined in IFRS and, therefore, are
considered to be non-GAAP (Generally Accepted Accounting Principles) measures. Accordingly, the relevant IFRS measures are also presented
where appropriate.
The Group uses these APMs as a mechanism to support year-on-year business performance and cash generation comparisons, and to enhance
management’s planning and decision-making on the allocation of resources. The APMs are also used to provide information in line with the
expectations of investors, and when setting guidance on expected future business performance. The Group presents these measures to the
users to enhance their understanding of how the business has performed within the year, and does not consider them to be more important
than, or superior to, their equivalent IFRS measures. As each APM is defined by the Group, they may not be directly comparable with
equivalently named measures in other companies.
Purpose, definitions, breakdowns and reconciliations to the relevant statutory measure, where appropriate, are included below.
Sales
Purpose
Enables management to monitor the revenue of both the Group’s own subsidiaries as well as recognising the strategic importance in its industry
of its equity accounted investments, to ensure programme performance is understood and in line with expectations.
Definition
Revenue plus the Group’s share of revenue of equity accounted investments, excluding subsidiaries’ revenue from equity accounted
investments.
Reconciliation of sales to revenue
| 2025 | 2024 | |
| £m | £m | |
| Sales | 30,662 | 28,335 |
| Deduct: Group’s share of revenue of equity accounted investments | (4,194) | (3,729) |
| Add: Subsidiaries’ revenue from equity accounted investments | 1,868 | 1,706 |
| Revenue | 28,336 | 26,312 |
Underlying EBIT
Purpose
Provides a measure of operating profitability, excluding one-off events or adjusting items that are not considered to be part of the ongoing
operational transactions of the business, to enable management to monitor the performance of recurring operations over time, and which is
comparable across the Group.
Definition
Operating profit excluding amortisation of programme, customer-related and other intangible assets (see note 10 to the Consolidated financial
statements), impairment of equity accounted investments and intangible assets, net finance costs and tax expense of equity accounted
investments (EBIT) and adjusting items. The exclusion of amortisation of acquisition-related intangible assets is to allow consistent comparability
internally and externally between our businesses, regardless of whether they have been grown organically or via acquisition.
Reconciliation of underlying EBIT to operating profit
| 2025 | 2024 | |
| £m | £m | |
| Underlying EBIT | 3,322 | 3,015 |
| Adjusting items | 40 | 23 |
| Amortisation of programme, customer-related and other intangible assets, and impairment of equity accounted investments and intangible assets |
(414) | (344) |
| Net finance income of equity accounted investments | 60 | 59 |
| Tax expense of equity accounted investments | (83) | (68) |
| Operating profit | 2,925 | 2,685 |
Return on sales
Purpose
Provides a measure of operating profitability, excluding one-off events, to enable management to monitor the performance of recurring
operations over time, and which is comparable across the Group.
Definition
Underlying EBIT as a percentage of sales. Also referred to as margin.
| 2025 | 2024 | |
| £m | £m | |
| Sales | 30,662 | 28,335 |
| Underlying EBIT | 3,322 | 3,015 |
| Return on sales | 10.8% | 10.6% |
| Strategic report | Governance | Financial statements | Additional information | 217 | ||
Underlying earnings per share (EPS)
Purpose
Provides a measure of the Group’s underlying performance, which enables management to compare the profitability of the Group’s recurring
operations over time.
Definition
Profit for the year attributable to shareholders, excluding post-tax impact of amortisation of programme, customer-related and other intangible
assets, impairment of equity accounted investments and intangible assets, non-cash finance movements on pensions and financial derivatives,
and adjusting items attributable to shareholders, being underlying earnings, divided by number of shares as defined for Basic EPS in accordance
with IAS 33 Earnings per Share.
Reconciliation of underlying earnings to profit attributable to equity shareholders
| 2025 | 2024 | |
| £m | £m | |
| Underlying earnings for the year attributable to equity shareholders | 2,253 | 2,065 |
| Adjustments: | ||
| Adjusting items | 40 | 23 |
| Amortisation of programme, customer-related and other intangible assets, and impairment of equity accounted investments and intangible assets |
(414) | (344) |
| Net interest income on post-employment benefit obligations | 57 | 20 |
| Fair value and foreign exchange adjustments on financial instruments and investments | 34 | 82 |
| Tax impact of adjustments | 92 | 110 |
| Profit for the year attributable to equity shareholders | 2,062 | 1,956 |
Reconciliation of underlying EBIT to underlying earnings
| 2025 | 2024 | |
| £m | £m | |
| Underlying EBIT | 3,322 | 3,015 |
| Group and equity accounted investments' underlying net finance costs (see reconciliation on page 218) | (384) | (396) |
| Underlying tax expense (see reconciliation on page 218) | (596) | (469) |
| Underlying profit for the year | 2,342 | 2,150 |
| Deduct: Non-controlling interests | (89) | (85) |
| Underlying earnings for the year attributable to equity shareholders | 2,253 | 2,065 |
| Weighted average number of ordinary shares used in calculating basic EPS (note 8 to the Consolidated financial statements) |
2,997 | 3,013 |
| Underlying EPS – basic | 75.2p | 68.5p |
| Weighted average number of ordinary shares used in calculating diluted EPS (note 8 to the Consolidated financial statements) |
3,031 | 3,053 |
| Underlying EPS – diluted | 74.3p | 67.6p |
Adjusting items
Purpose
To adjust items of financial performance from the reported underlying results which have been determined by management as being material
by their size or incidence and not relevant to an understanding of the Group’s underlying business performance.
Definition
Adjusting items include profit or loss on business transactions, the impact of substantively enacted tax rate changes, and costs incurred which
are one-off in nature, for example non-routine costs or income relating to post-retirement benefit schemes, and other items which
management has determined as not being relevant to an understanding of the Group’s underlying business performance.
| 2025 | 2024 | |
| £m | £m | |
| Net profit on business disposals | 12 | 94 |
| Net gain related to plan amendments / settlements on pension schemes | 51 | 13 |
| Acquisition and integration-related costs | (22) | (72) |
| Other | (1) | (12) |
| Adjusting items | 40 | 23 |
| 218 | BAE Systems plc Annual Report 2025 |
| Alternative performance measures continued |
Underlying net finance costs
Purpose
Provides a measure of net finance costs associated with the operational borrowings of the Group that is comparable over time.
Definition
Net finance costs for the Group and its share of equity accounted investments, excluding net interest income/expense on post-employment
benefit obligations and fair value and foreign exchange adjustments on financial instruments.
| 2025 | 2024 | |
| £m | £m | |
| Net finance costs – Group | (353) | (353) |
| Deduct: | ||
| Net interest income on post-employment benefit obligations | (54) | (18) |
| Fair value and foreign exchange adjustments on financial instruments | (35) | (84) |
| Underlying net finance costs – Group | (442) | (455) |
| Net finance income – equity accounted investments | 60 | 59 |
| (Deduct)/add back: | ||
| Net interest income on post-employment benefit obligations | (3) | (2) |
| Fair value and foreign exchange adjustments on financial instruments | 1 | 2 |
| Underlying net finance income – equity accounted investments | 58 | 59 |
| Total of Group and equity accounted investments’ underlying net finance costs | (384) | (396) |
Underlying effective tax rate
Purpose
Provides a measure of tax expense for the Group, excluding one-off items, that is comparable over time.
Definition
Tax expense for the Group and its share of equity accounted investments, excluding any one-off tax benefit/expense related to adjusting items
and other items excluded from underlying EBIT, as a percentage of underlying profit before tax.
Calculation of the underlying effective tax rate
| 2025 | 2024 | |
| £m | £m | |
| Underlying EBIT (see reconciliation on page 216) | 3,322 | 3,015 |
| Group and equity accounted investments’ underlying net finance costs (see reconciliation above) | (384) | (396) |
| Underlying profit before tax | 2,938 | 2,619 |
| Group tax expense | (421) | (291) |
| Tax expense of equity accounted investments | (83) | (68) |
| Exclude: | ||
| Tax effect of taxable adjusting items | 10 | (33) |
| Tax effect of other items excluded from underlying profit | (102) | (77) |
| Underlying tax expense | (596) | (469) |
| Underlying effective tax rate | 20% | 18% |
| Strategic report | Governance | Financial statements | Additional information | 219 | ||
Free cash flow
Purpose
Provides a measure of cash generated by the Group’s operations after servicing debt and tax obligations, available for use in line with the
Group’s capital allocation policy.
Definition
Net cash flow from operating activities, including dividends received from equity accounted investments, interest paid, net of interest received,
net capital expenditure and financial investments, and principal elements of lease payments and receipts.
Reconciliation from free cash flow to net cash flow from operating activities
| 2025 | 2024 | |
| £m | £m | |
| Free cash flow | 2,158 | 2,505 |
| Add back: | ||
| Interest paid, net of interest received | 433 | 413 |
| Net capital expenditure and financial investment | 959 | 987 |
| Principal element of lease payments and receipts | 181 | 178 |
| Deduct: | ||
| Dividends received from equity accounted investments | (299) | (158) |
| Net cash flow from operating activities | 3,432 | 3,925 |
Operating business cash flow
Purpose
Provides a measure of cash generated by the Group’s operations, which is comparable across the Group, to service debt and meet tax
obligations, and in turn available for use in line with the Group’s capital allocation policy.
Definition
Net cash flow from operating activities excluding tax paid net of research and development expenditure credits received and including net
capital expenditure (net of proceeds from funding of assets) and lease principal amounts, financial investment and dividends from equity
accounted investments.
Reconciliation from operating business cash flow to net cash flow from operating activities
| 2025 | 2024 | |
| £m | £m | |
| Operating business cash flow | 2,787 | 3,093 |
| Add back: | ||
| Net capital expenditure and financial investment | 959 | 987 |
| Principal element of lease payments and receipts | 181 | 178 |
| Deduct: | ||
| Dividends received from equity accounted investments | (299) | (158) |
| Tax paid net of research and development expenditure credits received | (196) | (175) |
| Net cash flow from operating activities | 3,432 | 3,925 |
Reconciliation of operating business cash flow to net cash flow from operating activities by reporting segment
| Operating business cash flow |
Deduct: Dividends received from equity accounted investments |
Add back: Net capital expenditure, lease principal amounts and financial investment |
Net cash flow from operating activities |
||||||||
| 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | 2025 | 2024 | ||||
| £m | £m | £m | £m | £m | £m | £m | £m | ||||
| Electronic Systems | 1,337 | 801 | (11) | (11) | 245 | 254 | 1,571 | 1,044 | |||
| Platforms & Services | 166 | 732 | — | (1) | 226 | 245 | 392 | 976 | |||
| Air | 904 | 1,243 | (278) | (138) | 247 | 254 | 873 | 1,359 | |||
| Maritime | 373 | 436 | (10) | (8) | 310 | 306 | 673 | 734 | |||
| Cyber & Intelligence | 59 | 139 | — | — | 56 | 55 | 115 | 194 | |||
| HQ | (52) | (258) | — | — | 56 | 51 | 4 | (207) | |||
| 2,787 | 3,093 | (299) | (158) | 1,140 | 1,165 | 3,628 | 4,100 | ||||
| Tax paid net of research and development expenditure credits received |
(196) | (175) | |||||||||
| Net cash flow from operating activities | 3,432 | 3,925 |
| 220 | BAE Systems plc Annual Report 2025 |
| Alternative performance measures continued |
Net debt (excluding lease liabilities)
Purpose
Allows management to monitor indebtedness of the Group, to ensure the Group’s capital structure is appropriate and capital allocation policy
decisions are suitably informed.
Definition
Cash and cash equivalents, less loans (including debt-related derivative financial instruments). Net debt does not include lease liabilities.
Components of net debt (excluding lease liabilities)
| 2025 | 2024 | |
| £m | £m | |
| Cash and cash equivalents | 3,438 | 3,378 |
| Debt-related derivative financial instruments (net) | 3 | 89 |
| Loans – non-current | (7,190) | (7,713) |
| Loans – current | (95) | (699) |
| Net debt (excluding lease liabilities) | (3,844) | (4,945) |
Order intake
Purpose
Allows management to monitor the order intake of the Group together with its equity accounted investments, providing insight into future
years’ sales performance.
Definition
Funded orders received from customers including the Group’s share of order intake of equity accounted investments.
| 2025 | 2024 | |
| £bn | £bn | |
| Order intake | 36.8 | 33.7 |
Order backlog
Purpose
Supports future years’ sales performance of the Group together with its equity accounted investments.
Definition
Funded and unfunded unexecuted customer orders including the Group’s share of order backlog of equity accounted investments. Unfunded
orders include the elements of US multi-year contracts for which funding has not been authorised by the customer.
Reconciliation of order backlog, as defined by the Group, to order book1
| 2025 | 2024 | |
| £bn | £bn | |
| Order backlog, as defined by the Group | 83.6 | 77.8 |
| Deduct: | ||
| Unfunded order backlog | (5.6) | (5.3) |
| Share of order backlog of equity accounted investments | (20.5) | (16.6) |
| Add back: Order backlog in respect of orders from equity accounted investments | 5.6 | 4.5 |
| Order book1 | 63.1 | 60.4 |
- Order book represents the transaction price allocated to unsatisfied and partially satisfied performance obligations as defined by IFRS 15 Revenue from
Contracts with Customers.
| Strategic report | Governance | Financial statements | Additional information | 221 | ||
| Other information |
Double materiality assessment
In 2024, we conducted our first double
materiality assessment to support future
compliance with any reporting under the EU
Corporate Sustainability Reporting Directive.
As part of this, we conducted interviews
with employees, trade unions, suppliers,
customers, investors, local interest groups
and non-governmental organisations,
as well as peer reviews and desktop research.
Output from this assessment is below,
including where to find information on
material sustainability issues identified within
this report. All material issues are consistent
with our last materiality assessment and are
addressed within our sustainability agenda
and risk management framework.
| Material issue | Signpost to principal risk | Where can information be found in the report | |||||
| Environment | |||||||
| 1. | Climate change adaptation Identifying climate change-related risks and adapting our operations and value chain to address risk |
Climate change and environmental factors Business interruption |
Climate and the environment page 56 Environmental, Social and Governance Committee report page 101 Task Force on Climate-related Financial Disclosures page 222 |
||||
| 2. | Climate change mitigation Identifying climate change-related risks and mitigating risk in our operations and value chain |
Climate change and environmental factors |
|||||
| 3. | Biodiversity and ecosystems | Climate change and environmental factors |
|||||
| 4. | Waste (hazardous/non-hazardous) | Climate change and environmental factors |
|||||
| 5. | Pollution | Climate change and environmental factors |
|||||
| Social | |||||||
| 6. | Health, safety and employee wellbeing | Safety | Our investment in our people and communities page 50 Environmental, Social and Governance Committee report page 101 |
||||
| 7. | Human capital management | People | Our investment in our people and communities page 50 Environmental, Social and Governance Committee report page 101 Remuneration Committee report page 104 |
||||
| 8. | Rights of employees | People | Our investment in our people and communities page 50 Environmental, Social and Governance Committee report page 101 |
||||
| 9. | Training and skills development | People | Our investment in our people and communities page 50 | ||||
| 10. | Labour rights and working conditions in the supply chain |
Our investment in our people and communities page 50 | |||||
| 11. | Product and service quality and safety | Safety | Environmental, Social and Governance Committee report page 101 | ||||
| 12. | Information-related impacts for end‑users | Safety Cyber security and other security risks |
Environmental, Social and Governance Committee report page 101 Innovation and Technology Committee report page 103 |
||||
| Governance | |||||||
| 13. | Advanced technologies and innovations | Innovation and Technology Committee report page 103 | |||||
| 14. | Our approach to sales | Legal risk | Audit and risk Committee report page 96 Environmental, Social and Governance Committee report page 101 |
||||
| 15. | Data privacy and cyber security | Cyber security and other security risks |
Principal risk – Cyber security and other security risks page 67 | ||||
| 16. | Corporate culture | Legal risk | Audit and risk Committee report page 96 Environmental, Social and Governance Committee report page 101 |
||||
| 17. | Management of relationships with suppliers | Legal risk | Environmental, Social and Governance Committee report page 101 | ||||
| 18. | Material and resource vulnerability | Contract risk, execution and supply chain |
Environmental, Social and Governance Committee report page 101 | ||||
| 222 | BAE Systems plc Annual Report 2025 |
| Other information continued |
Task Force on Climate-related Financial Disclosures (TCFD)
The following tables summarise our disclosures relating to the four TCFD Recommendations and 11 Recommended Disclosures pursuant to the
UK Listing Rule 6.6.6R(8). We have considered our obligations in respect of climate-related disclosure under the UK Listing Rules and confirm
that these disclosures are consistent with the relevant Listing Rules and the TCFD Recommendations and Recommended Disclosures (including
the implementing guidance set out in the 2021 TCFD Annex).
| Governance | ||||
| Pillar/recommendation | Overview | Where can information be found? | ||
| Disclose the organisation’s governance around climate-related risks and opportunities | ||||
| a) Describe the Board’s oversight of climate-related risks and opportunities. |
The Board has overall responsibility for climate-related risks and opportunities impacting the Group, including consideration of climate- related matters when setting the Group’s strategy. The Board is supported by a number of Committees, including the Nominations Committee, Audit and Risk Committee, Environmental, Social and Governance (ESG) Committee, Innovation and Technology Committee and Remuneration Committee. For more information on these Committees, their roles and responsibilities, please see page 225. The Board, through the ESG Committee, ensures that appropriate climate resilience and environmental programmes are in place and remuneration is set, as required, to drive the reduction in the Group’s environmental impact. The Committee provides feedback to the Board at each quarterly meeting regarding the progress of the decarbonisation strategy and environmental programmes enabling the Board to monitor and oversee progress and consider climate-related matters when setting the Group’s strategy. Our Strategy & Planning team provides external market global context, trends and analysis to the Board to support development of the corporate strategy. We consider the impact of climate effects and the need to adapt capabilities to maintain operational effectiveness as part of this. |
Oversight and management of climate-related risk and opportunity page 225 Committee reports page 93 |
||
| b) Describe management’s role in assessing and managing climate- related risks and opportunities. |
Our Executive Committee is responsible for managing climate-related risks and opportunities, climate-related expenditure and investments and for delivering the decarbonisation strategy through our business and value chain. The Director for Climate, Environment and Infrastructure actively engages, directly and indirectly, the ESG Committee and Executive Committee, Sustainability Council and the Climate and Environment Working Group on the progress of our climate and environmental programmes, enabling two-way discussion and oversight. Climate- related risks and opportunities are embedded across our Operational Framework, including how climate-related matters are managed and implemented and embedded in key policies and processes. |
Oversight and management of climate-related risk and opportunity page 225 |
| Strategic report | Governance | Financial statements | Additional information | 223 | ||
| Strategy | ||||
| Pillar/recommendation | Overview | Where can information be found? | ||
| Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning where such information is material |
||||
| a) Describe the climate‑related risks and opportunities the organisation has identified over the short, medium and long term; and b) Describe the impact of climate- related risks and opportunities on the organisation’s businesses, strategy and financial planning. |
An overview of our climate-related transition and physical risks and opportunities are explained on pages 56, 72 and 231 of this report. Our decarbonisation strategy aims to mitigate the potential impacts of the material transition risks we have identified by. decarbonising our operations and product and service portfolio, while supporting our customers and suppliers, as a minimum in line with a science-based target. Our decarbonisation strategy supports our purpose and strategic framework underpinning business operations, growth and resilience and delivery of capability to our customers. 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. Our business continuity mitigations respond to climate- related physical risks. Our decarbonisation strategy and business continuity mitigations are embedded in our sectors’ five-year business plans and our ongoing Business Continuity Management systems. The Group’s decarbonisation strategy and activities; and business continuity measures are embedded in our financial reporting, forecasting and governance processes. The impact of climate-related transition and physical risk and opportunity is also considered in preparing the consolidated financial statements – see page 147. In putting together the decarbonisation strategy we have considered the commitments made by the UK Government. |
Our strategic framework page 16 Our business model page 14 Climate and the environment page 56 How we manage risk page 62 Our principal risks page 65 Impact of climate on the consolidated financial statements page 147 Other supplementary information online: 2024 cdp – baesystems.Com/en/sustainability/ sustainability- reporting Other information – scenario planning page 227 |
||
| c) Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario. |
During 2025, we refreshed our scenario planning analysis, building on the work we had progressed in 2021 and 2022. This explored what climate-related risks and opportunities the Group is most exposed to and how they might affect the Group's revenue, costs and asset values over a range of time horizons and hypothetical future scenarios, taking into consideration our key markets and operations. The four most material climate-related physical and transition risks and opportunities identified for the Group and its operational activities were prioritised for analysis. The climate scenarios selected included: 1.5C warming equivalent (Net Zero scenario); 2.5C warming equivalent (Delayed transition scenario); and 4C warming equivalent (No further policy scenario). See page 226 for further details. We considered our decarbonisation strategy and approach to business continuity in light of the outputs of this refreshed analysis. Our current assessment is that our strategy and approach take into account the material climate risks identified and their potential impacts over the short, medium and long-term in all scenarios assessed and that the financial risk associated with the potential impact of climate risks on our operations is appropriately managed and mitigated. |
How we manage risk page 62 Our principal risks page 65 Impact of climate on the consolidated financial statements page 147 Other information – scenario planning page 227 Decarbonising our operations page 56 |
||
| Risk management | ||||
| Pillar/recommendation | Overview | Where can information be found? | ||
| Disclose how the organisation identifies, assesses and manages climate-related risks | ||||
| a) Describe the organisation’s processes for identifying and assessing climate-related risks; b) Describe the organisation’s processes for managing climate- related risks; and c) Describe how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s overall risk management. |
We have assessed our material sustainability impacts, risk and opportunities (see our Double Materiality Assessment on page 228) which identified climate adaptation and climate mitigation as being a material sustainability issue and have conducted dedicated climate risk assessments. Our approach to identifying, assessing and managing environmental risks, including climate-related risk, is embedded within our approach to risk management. Climate and environmental risk is addressed within the Group’s principal risks: climate change and environmental factors; business interruption; and legal risk (see pages 70 to 72). We consider current and emerging regulations as part of the environmental management system, including energy-related taxes and schemes. |
Climate and environment page 56 How we manage risk page 62 Our principal risks page 65 Oversight and management of climate-related risk and opportunity page 225 |
| 224 | BAE Systems plc Annual Report 2025 |
| Other information continued |
| Metrics and targets | ||||
| Pillar/recommendation | Overview | Where can information be found? | ||
| Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material |
||||
| a) Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process. |
We report against the following cross-industry metrics: – GHG emissions – absolute Scope 1 and 2 emissions and carbon intensity measure. – Scope 3 estimated emissions. – Capital deployment – disclosure within ‘impact of climate ambitions on the consolidated financial statements’. – Remuneration – 10% ESG weighting for ESG metrics in the Performance Share metric. – We include revenue from alternative energy-related products within our Annual Report (see Power & Propulsion on page 38) and Sustainability Accountability Standards Board (SASB) disclosure – Resource Transformation: Aerospace & Defence sector disclosure. – We disclose our energy consumption within our Annual Report; We also disclose other key environmental metrics – electricity consumption. – We disclose our investment in R&D within our Annual Report (see page 15). |
Remuneration Committee report page 104 Impact of climate on the consolidated financial statements page 147 Other supplementary information online: sustainability accounting standards board (sasb) disclosure | sustainability reporting | sustainability | bae systems |
||
| b) Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 GHG emissions and the related risks. |
We report our absolute GHG Scope 1, 2, 3 (employee 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. Reduction percentage in absolute Scope 1and 2 emissions is a key performance indicator linked to executive remuneration. We estimated our scope 3 emissions based on financial revenues, one year in arrears. The Group’s total scope 3 emissions figure for all material categories for 2024 is 6,600,000 tCO2e. Based on our current data processes we have a one-year lag in data, except for employee business travel, due to complete category data sets required to calculate scope 3 emissions, not being available until Q2 each year, therefore 2025 scope emissions data will not be available until the 2026 reporting year. We continue work to improve data accuracy and timeliness. |
Key performance indicators page 18 Value chain page 58 GHG emissions and methodology page 231 |
||
| c) Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets. |
Our near-term absolute target is to reduce GHG emissions across our operations (Scopes 1 and 2) by 44% by 2030, reducing operational emissions by 4.2% year-on-year. During 2025, our overall GHG emissions have decreased by 8.9%. Following the integration of SMS into our environmental data systems in 2024, we recalculated our 2020 GHG emissions baseline in 2025 to include the emissions from this business, in line with our GHG reporting methodology. Our updated 2020 baseline for scope 1 and 2 GHG emissions is 526,434 tonnes CO2e. The integration of SMS has added 39,037 tonnes CO2e and the impact of these emissions is not significant to our targets. Against our near-term absolute target, based on our recalculated 2020 GHG emissions baseline (explained above), we have reduced our absolute Scope 1 and 2 GHG emissions by 35% since 2020. We continue to work towards our long-term absolute target of achieving a net zero value chain by 2050. We continue to engage and collaborate with our suppliers to make progress towards decarbonisation of our supply chain. UK In the UK, our long-term energy strategy includes future business growth to 2040. To support our near-term absolute GHG reduction target, in the UK, we aim to have 90% of our UK electricity requirement met from renewable sources by 2030, subject to commercially reasonable availability. At the end of 2025, we had renewable energy source contracts in place to meet 60% of our future energy requirements. |
Remuneration Committee report page 104 Other supplementary information online: https://www.baesystems.com/en/sustainability/ climate-and-environment |
| Strategic report | Governance | Financial statements | Additional information | 225 | ||
How we manage climate-related risks and opportunities
| BAE Systems Board Quarterly |
||
| Overall responsibility for climate-related risks and opportunities impacting the Group, including consideration of climate- related matters when setting the Group’s strategy. The Board is supported by a number of Committees, as shown below. |
||
| Nominations Committee Ensures the Board retains the required skills and experience, including climate-related matters. |
Audit and Risk Committee Reviews and approves TCFD disclosures, including analysis of any financial impact of climate-related risks. |
Environmental, Social and Governance Committee Monitors the Group’s approach to, and relevant policies on, climate resilience and transition plans. |
Innovation and Technology Committee Oversees the Group’s application of technological advancements through low- or zero-emission technologies. |
Remuneration Committee Determines the Group’s Remuneration policy, including performance conditions linked to climate change and ESG- related matters. |
| Read more Page 93 |
| Read more Page 96 |
| Read more Page 101 |
| Read more Page 103 |
| Read more Page104 |
| Executive Committee Monthly |
||
| Responsible for managing climate-related risks and opportunities and for delivering the decarbonisation strategy, including climate-related expenditure and investments. Our Group ESG, Culture & Business Transformation Director, who has day-to-day responsibility for climate and environmental issues and ownership of the Group’s Environmental policy, sits on the Executive Committee and provides the Committee with regular updates on our environmental and decarbonisation strategy. |
||
| Core Business Processes and Policies | ||||
| Chief Executive’s Business Review Quarterly Top-level review of progress against decarbonisation strategy and key sector deliverables. |
Business Risk Annual The identification, analysis, evaluation and mitigation of business risks, including those relating to the environment and climate change. |
|||
| Quarterly Business Review Quarterly Management review of the performance of each of the Group’s businesses against decarbonisation objectives and targets. |
Integrated Business Plan (IBP) Annual Annual long-term strategy review and five-year plan for each sector, including investment case to decarbonise. |
|||
| Sustainability Council Monthly Reports to the Group ESG, Culture & Business Transformation Director, providing recommendations for areas of sustainability to be given priority and focus, as well as supporting the sectors in implementation of the Group’s sustainability agenda. |
Climate and Environment Working Group Monthly Reports to the Director Environment, Climate & Infrastructure and coordinates the progression of our decarbonisation strategy. The Group is made up of functional representatives, business leads and environmental specialists. |
|||||
| Businesses/sectors Each business/sector has climate and environment leads who progress the decarbonisation strategy for each business/sector. |
| 226 | BAE Systems plc Annual Report 2025 |
| Other information continued |
Climate scenario planning
We use climate scenarios to assess the
resilience of our business, decarbonisation
strategy and our approach to managing
potential future climate-related risk and
opportunities, including their potential
impact on our financial results. During 2025,
we refreshed our previous scenario planning
work and reviewed current material climate-
related risks and opportunities of relevance to
our operations and sector.
Climate scenarios demonstrate different
possible future outcomes, 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 supports
our understanding of 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.
We ranked climate-related risks and
opportunities within the Group’s wider risk
management framework, using the
categories of impact and probability/
likelihood. Additionally, we used a third
dimension – speed onset of risk (velocity).
Speed refers to the expected time horizons
for a risk to materialise.
Climate scenarios
We selected three distinct climate scenario
narratives for analysis of transition risks and
opportunities:
– 1.5°C warming equivalent – Net zero
– 2.5°C warming equivalent – Delayed
transition
– >4°C warming equivalent – No further
policy action
The scenarios selected supported an
assessment of the Company's strategy in a
wide range of hypothetical future scenarios.
We modelled transition risks and
opportunities according to the
Intergovernmental Panel on Climate
Change’s (IPCC) climate scenarios known as
Representative Concentration Pathways
(RCPs). We also used scenarios from IPCC’s
Sixth Assessment Report (AR6), which
combines Shared Socioeconomic Pathways
(SSPs) and RCPs, and public data sources
including IEA, NGFS, and IPCC-aligned
CMIP-6.
For physical risk, we use output from climate
modelling tools to model physical risks.
Scenarios used include those defined by the
Representative Concentration Pathways
(RCP) 2.6, 4.5, and 8.5, with 4.5 reflecting the
current predicted global warming trajectory.
The tools are updated periodically to take
account of new information about climate
hazards and risks.
Climate risk and opportunity
identification
In order to refresh our scenario planning, we
assessed our current climate-related risk and
opportunities and climate scenarios and
conducted a peer and institutional review to
benchmark the Group against current
regulatory and market expectations and
changes to the external environment. This
enabled the Group to compile and rank a
long list of climate-related risks and
opportunities according to impact and
likelihood.
We engaged internal stakeholders to test
assumptions and methodologies in order to
develop a shortlist of material climate-related
risks and opportunities. We assigned the
shortlist preliminary qualitative impact ratings
based on their potential business disruption
or financial loss and likelihood of occurrence.
Based on this process, we took forward four
climate-related risks and opportunities for
climate scenario analysis.
Assumptions within scenarios
We have used the following key assumptions
within our scenarios:
– Mitigation plans are incorporated into each
risk assessed;
– Business activities include future forecast
growth; and
– Impacts are not aggregated or offset.
| Strategic report | Governance | Financial statements | Additional information | 227 | ||
Scenario planning – material climate-related risk and opportunity
| Transition risk | Materiality of risk or opportunity/ timeframe 1 |
||||
| Short, medium and long term | |||||
| Description | Potential impact without taking into account mitigation measures |
Mitigation measures | Link to principal risk | ||
| Climate-related increased scarcity and restricted access to commodities due to increased demand on critical minerals stemming from energy transition (eg aluminium, chromium, graphite used for advanced military technology) resulting in delays in securing revenue. |
BAE Systems is at risk of climate-related disruptions to global supply chains that may impact the availability of critical materials, such as aluminium, chromium and graphite, which are essential for the production of advanced military technology. |
The Group’s supply chain function holds regular regional and global supply chain risk and disruption reviews to ensure that the latest risk data is appropriately shared and to identify emerging risks through horizon scanning. Critical materials are reviewed as part of this. We are expanding our understanding of climate-related impacts on material scarcity and supplier resilience – see page 58. We have work streams underway to review critical materials that are essential to the production of products. We have identified high-risk materials and targeted mitigations have been put in place. Specific workstreams have been established to identify and quantify the exposure to critical minerals across our programmes. Monthly briefs to the Executive Committee are undertaken articulating the exposure, mitigation activity and development of methodology to control the risk. We are researching how we can replace critical minerals with alternative materials and identifying opportunities to recover and recycle materials. In the UK, we have a number of collaborations underway, with academic institutions, focused on energy transition and materials resilience. We have collaborated with customers, trade groups and suppliers on key business impacts. Financial impact Low |
Contract risk, execution and supply chain |
- Short- (less than two years), medium- (three to ten years) and long-term (beyond ten years) time horizons. Time horizons are linked to the IBP process.
| 228 | BAE Systems plc Annual Report 2025 |
| Other information continued |
| Transition risk | Materiality of risk or opportunity/ timeframe 1 |
||||
| Short, medium and long term | |||||
| Description | Potential impact without taking into account mitigation measures |
Mitigation measures | Link to principal risk | ||
| Disruption in global energy markets (eg energy sources) leading to an increase in opex costs due to transfer of electricity sourcing to renewable energy. |
BAE Systems may encounter risks stemming from disruptions in global energy markets, which may lead to increased energy costs. |
We have developed a long-term energy strategy mapped to future business growth to 2040, to address the potential transfer of electricity sourcing to renewable energy across our sites where prudent, providing energy security and future price certainty for the Group. We have included growth projections within the strategy, which we review regularly. We have power purchase agreements in place covering wind and solar projects, which have supported various transitions to renewable energy since 2024 and, in the UK and Australia, we also have local to private wire and self-generation renewable supplies at key industrial sites. In the UK, as at the end of 2025, 60% of our future energy requirements will be met by renewable sources. We plan to have 90% of our UK electricity requirement met from renewable sources by 2030. Financial impact Low |
Climate transition and environmental factors |
||
| Transition Opportunity | Materiality of risk or opportunity/ timeframe 1 |
||||
| Short, medium and long-term | |||||
| Description | Potential impact without taking into account mitigation measures |
Mitigation measures | Link to principal risk | ||
| Switching to lower-emission energy sources (eg solar, wind, etc) and improving energy efficiency in operations resulting in a decrease in opex costs. |
Switching to lower-emission energy sources, such as solar and wind, across the Group’s defence estate can significantly reduce carbon emissions and enhance energy resilience. Additionally, we have the opportunity to enhance operational efficiency and decrease energy consumption across our global sites by optimising heating, ventilation and air conditioning (HVAC) controls and transitioning from inefficient fluorescent lighting to energy-efficient LED alternatives. |
We have developed a long-term energy strategy mapped to future business growth to 2040, to address the potential transfer of electricity sourcing to renewable energy across our sites where prudent, providing energy security and future price certainty for the Group. We have included growth projections within the strategy, which we review regularly. We have power purchase agreements in place covering wind and solar projects, which have supported our transition to renewable energy since 2024. And in the UK and Australia, we also have local to private wire and self-generation renewable supplies at key industrial sites. In the UK, as at the end of 2025, 60% of our future energy requirements was met by renewable sources. We plan to have 90% of our UK electricity requirement met from renewable sources by 2030. We have significant capital investment planned across our UK sites over the next 10 years and are integrating energy efficiency and decarbonisation considerations within our infrastructure programme. We have developed and rolled out a global energy efficient building standard, incorporating energy efficiency and modern building standards into both refurbishments and new buildings, to help us optimise and reduce our energy consumption. We also proactively manage our estate and have undertaken site consolidation across our markets. We are seeking to reduce energy use across our sites and, where possible and prudent, switch to low carbon alternatives to heat our buildings. Projects include: metering; LED lighting installations; energy switching for fleet vehicles; and initial investments in heat pump and other gas-alternative heating systems. Financial impact Low |
Climate transition and environmental factors |
- Short- (less than two years), medium- (three to ten years) and long-term (beyond ten years) time horizons. Time horizons are linked to the IBP process.
| Strategic report | Governance | Financial statements | Additional information | 229 | ||
| Physical Risk | Materiality of risk or opportunity/ timeframe |
||||
| Short, medium and long-term | |||||
| Description | Potential impact without taking into account mitigation measures |
Mitigation measures | Link to principal risk | ||
| Increase in frequency and severity of extreme weather events, including flood levels (water level rising) and windstorm, leading to increased repair costs, adaptation investments, and reductions in productivity, thereby decreasing revenue and increasing opex and capital expenditure costs. |
Increases in frequency and severity of extreme weather events – including flood events (water level rising) and windstorm occurrences – potentially pose serious challenges to BAE Systems’ own operations. While the risk profile varies regionally, general impacts include damage to operational facilities and offices, delays in product testing, and disruptions to manufacturing and build rates. |
We proactively assess and manage climate-related physical risk, gaining an ongoing understanding of how physical risk will impact our current and future group strategy. Our business continuity plans includes physical risk mitigation plans, that support the Group to remain resilient and adapt to the impacts of climate change, while mitigating the financial impacts. The Group uses output from climate modelling tools to model physical risks. The hazards modelled include exposure to flood risk including pluvial, fluvial and storm surge, precipitation (low and high), windstorm, wildfire, heatwave, heat and cold stress. The analysis considers the impact of climate change on the frequency and severity of these hazards and models how this may change over time against different scenarios. We review our exposure to climate hazards on an annual basis and review the climate impact whenever new data is available and at least every three years. The time horizon we use for physical risk is different to transition risk – short term – 2030, medium term – 2050 and long term – 2085. We use this approach due to climate science representing an average of possible outcomes over a 30-year period. The financial impact to our business of climate related physical risk is considered low, as insurance is in place to respond to such events. Our greatest exposure is to flood and windstorm events. For sites where we have a high risk of flooding conditions, we prioritise activities including engineering assessments as appropriate to further evaluate these risks. For sites that are at high risk of windstorm events, we conduct assessments during ongoing building maintenance and development of new facilities to ensure resilience capability is built in. This enables the quantification of potential loss to determine the level of insurance cover to purchase. As a result, the insurance will provide coverage and, although the interruption may last weeks or even months, the financial impact on the company will remain minimal. Current and planned physical risk mitigation activities are embedded as part of the Group’s wider decarbonisation ambitions and activities and are embedded in our financial reporting, forecasting and governance processes through the Integrated Business Plan (IBP). Of our 510 sites globally, 701 have been identified as potentially having high exposure to physical climate risks. These risks are primarily concentrated in the US and UK, with a smaller number of exposed sites located in Australia, Sweden and the Kingdom of Saudi Arabia. During 2024, we assessed all major manufacturing sites and took several actions to make our sites and future developments more resilient. Following the assessments of major manufacturing sites, during 2025, site teams worked to prioritise additional mitigation actions required and incorporate them into site level and/or Business Continuity improvement plans. Concurrently, the business units are embedding the climate and natural hazard assessment process into their local business management systems. This integration will provide a consistent approach across the organisation and ensure that there is a mechanism for triggering a review and/or new assessments in response to changes, such as proposals for new site developments. Financial Impact Low |
Business interruption; climate transition and environmental factors |
- Increased from 66 to 70 sites due to the integration of SMS acquisition during 2024.
| 230 | BAE Systems plc Annual Report 2025 |
| Other information continued |
Greenhouse gas (GHG) emissions data
Absolute energy consumption
| 20251 | 2024 | ||||
| Global2 | UK | Global | UK | ||
| kWh | kWh | kWh | kWh | ||
| Energy consumption Scope 1 and 2 | 1,369,125,163 | 559,879,677 | 1,378,244,469 | 542,330,247 |
GHG emissions data1
| 2025 | 2024 | ||||
| Scope definition | Global tonnes2 | UK tonnes | Global tonnes | UK tonnes | |
| CO2e | CO2e | CO2e | CO2e | ||
| 1 Emissions from activities which BAE Systems owns or controls (Scope 1) | 114,074 | 51,878 | 104,948 | 52,662 | |
| 2 Emissions from the electricity and steam purchased for BAE Systems’ use (Scope 2 – location-based) |
227,612 | 51,968 | 267,202 | 57,616 | |
| Total gross Scope 1 and 2 emissions | 341,686 | 103,846 | 372,150 | 110,278 | |
| 3 Emissions from employee business travel (Scope 3) | 91,977 | 40,389 | 122,383 | 54,880 |
GHG emissions per employee
| 20251 | 2024 | ||||
| Global tonnes 2 | UK tonnes | Global tonnes | UK tonnes | ||
| CO2e | CO2e | CO2e | CO2e | ||
| Per each full-time equivalent employee (Scope 1 and 2) | 3 | 2 | 3 | 2 |
-
Relevant reporting period 1 January 2025 to 31 December 2025.
-
Deloitte has provided independent limited assurance in accordance with the International Standard for Assurance Engagements 3000 (ISAE 3000) and
Assurance Engagements on Greenhouse Gas Statements (ISAE 3410) issued by the IAASB over the selected metrics identified with a 2. Deloitte’s full
unqualified assurance opinion, which includes details of the selected metrics assured, can be found at baesystems.com/annual-report.
To see our Basis of Reporting 2025 visit baesystems.com/annual-report
| Strategic report | Governance | Financial statements | Additional information | 231 | ||
Methodology
Greenhouse gas emissions data is reported
in line with an operational control method
and in accordance with the Greenhouse Gas
Protocol Corporate Accounting and
Reporting Standard. Our reporting
boundary for Streamlined Energy and
Carbon Reporting (SECR) is consistent with
our reporting boundary for the purposes of
our financial statements. Data covers a 12-
month period from 1 January 2025 to 31
December 2025. Pro-rated methods have
been used where data does not cover the
full 12-month period.
Under the GHG Protocol, organisational
boundaries can be established using the
equity share or the control approach. The
business applies the control approach and,
within this, uses the operational control
method.
As a business, we use a tool called the
Global Property Database (GPD) to record
and monitor locations which we either own
or lease. All locations listed on the GPD for
the purpose of GHG emissions reporting
falls within our organisational boundary.
We do not report emissions from every
location as some fall outside of our
operational boundary. We assess each
location using defined criteria to determine
operational control. More information is
available in the Basis of Reporting.
Regional-specific emissions factors are used
where available. Where these are not
available, we use emissions factors
published by the UK Department for Energy
Security and Net Zero (DESNZ).
Emissions factors for electricity consumed by
commercial locations in the United States
are published by the United States
Environmental Protection Agency (US EPA).
The most up-to-date Emissions and
Generation Resource Integrated Database
(eGRID) factors are published by US EPA.
Emissions factors for both electricity and
natural gas consumption in Australia are
published by the Department of Climate
Change, Energy, the Environment and
Water. Emissions factors for Sweden’s
(SWE) natural gas are published by
Swedenergy and electricity emissions
factors are taken from the European
Residual Mix (AIB). Electricity emission
factors for Saudi Arabia (KSA), Sweden
(where not already covered), all other
international locations and US residential
are published by the IEA.
For this reporting cycle, the latest UK
Government emissions factors published by
the DESNZ have been used for majority of
Scope 1 and 3 calculations.
Emissions factors published by both DESNZ
and the US EPA are presented as CO2e and
cover all six applicable greenhouse gases
listed under the Kyoto Protocol. For further
information on the inclusion of HFCs in the
reported inventory, please refer to the section
on fugitive emissions.
Scope 2 greenhouse gas emissions using the
GHG Protocol ‘market-based’ method are
calculated in line with the GHG Protocol
Guidance, using residual-mix emission factors
where available for our UK, US and Swedish
operations. For the KSA, Australia and
International, ‘location-based’ emissions
factors are used as supplier emissions factors
or residual mix factors are not currently
available. Sites that consume grid electricity
backed by Renewable Energy Guarantee
of Origin (REGOs) have been taken into
consideration within the calculations.
The Scope 2 greenhouse gas emissions1
associated with the GHG Protocol
‘market‑based’ method are 183,562 tCO2e.
Greenhouse gas emissions related to business
travel include air travel data for most of the
global business, rail data for business units
operating in the UK and US, and vehicle travel
(including hire car, company car and personal
car) data for business units operating in the
UK, US and Australia. These data sets are
taken from supplier procurement records.
In 2025, due to data quality, 2024 data was
used for 2025 and adjusted based on
headcount. This has been resolved for 2026.
The principal record of the Group’s
worldwide facilities is the Legal
department’s GPD. The database holds
records of all locations which are either
wholly owned, leased or licensed sites.
Greenhouse gas emissions are primarily
calculated from energy consumption
records, eg invoiced data or meter readings.
For the UK & International businesses, these
are reported via the Group’s global
environmental database (CR Desktop).
Data related to the US business is provided
quarterly for internal use, in addition to a
full annual data submission. Where
consumption records are not available,
estimates may be used; these are
highlighted within the database.
Where actual usage data is not available
for facilities and residences within the GPD,
estimated consumption is based on the
type and size of the building. If this data is
unavailable, a default benchmark factor or
alternative estimation method is used.
Emissions from non-wholly owned
subsidiaries are included in the dataset if
BAE Systems has operational control of the
location. For most of these locations, the
joint venture either operates from a CR
Desktop reporting location or is included in
benchmarked estimates. For the purposes
of calculating emissions, we have excluded
dormant companies as it has been assumed
that they do not consume energy.
Equity accounted investments detailed in
the Annual Report are not currently
included. These investments represent BAE
Systems Scope 3 emissions. Emissions from
pension scheme properties not occupied by
the Group are not included. Trading of
emissions are not considered for the
purposes of reporting. For example, where
the business has a requirement to maintain
compliance with trading schemes, eg UK
ETS, the total energy consumed is reported
regardless of emissions trading.
Climate-related data, models and
methodologies are often relatively new,
are rapidly evolving and are not of the same
standard as those available in the context
of other financial information, nor are they
subject to the same or equivalent disclosure
standards, historical reference points,
benchmarks or globally accepted
accounting principles. In addition, we may
face challenges in relation to our ability to
access data on a timely basis and the lack
of consistency and comparability between
data that is available.
Some of the data, models and
methodologies used to prepare the
information set out in this report may derive
from third parties over which BAE Systems
plc has no control, and may have been
based on different or unknown
methodologies. The underlying
assumptions, interpretations or
methodologies may not have been
independently verified and could therefore
be inaccurate.
As these challenges and the market’s
response to them evolve, we may re-
evaluate our approach, update
methodologies and data we use, and may
amend, update and recalculate certain
sustainability disclosures in the future.
- Deloitte has provided independent limited assurance in accordance with the International Standard for Assurance Engagements 3000 (ISAE 3000) and
Assurance Engagements on Greenhouse Gas Statements (ISAE 3410) issued by the IAASB over the selected metrics identified with a 1. Deloitte’s full
unqualified assurance opinion, which includes details of the selected metrics assured, can be found at baesystems.com/annual-report.
| 232 | BAE Systems plc Annual Report 2025 |
| Glossary |
| A | |
| ACV | Amphibious Combat Vehicle |
| ADR | American Depositary Receipts |
| AGM | Annual General Meeting |
| AI | Artificial Intelligence |
| AMPV | Armored Multi-Purpose Vehicle |
| APKWS | Advanced Precision Kill Weapon System |
| APM | Alternative Performance Measure |
| AUKUS | Trilateral agreement between Australia, the UK and the US |
| B | |
| BEC | Bose-Einstein Condensate |
| C | |
| C4ISR | Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance |
| C5ISR | Command, Control, Computers, Communications, Cyber, Intelligence, Surveillance and Reconnaissance |
| CGU | Cash-Generating Unit |
| CMI | Continuous Mortality Investigation |
| CPI | Consumer Prices Index |
| D | |
| DEI | Diversity, Equity and Inclusion |
| DESNZ | Department for Energy Security and Net Zero |
| DRIP | Dividend Reinvestment Plan |
| DSEI event | Defence and Security Equipment International Event |
| DTR | Disclosure Guidance and Transparency Rule |
| E | |
| EBIT | Earnings before interest and tax |
| EBITDA | Earnings before interest, tax, depreciation and amortisation |
| eGRID | Emissions and Generation Resource Integrated Database |
| EPA | Environmental Protection Agency |
| EPS | Earnings per Share |
| ERP | Enterprise Resource Planning |
| ES | Electronic Systems |
| ESG | Environmental, Social and Governance |
| ESOP | Employee Share Option Plan |
| ExSOP | Executive Share Option Plan |
| F | |
| FCA | Financial Conduct Authority |
| FCF | Free Cash Flow |
| FIFO | First in first out |
| FRC | Financial Reporting Council |
| FRS | Financial Reporting Standard |
| G | |
| GAAP | Generally Accepted Accounting Principles |
| GCAP | Global Combat Air Programme |
| GHG | Greenhouse gas |
| GPD | Global Property Database |
| Strategic report | Governance | Financial statements | Additional information | 233 | ||
| H | |
| HVO | Hydrogen vegetable oil |
| I | |
| IAASB | International Auditing and Assurance Standards Board |
| IAS | International Accounting Standard |
| IBP | Integrated Business Plan |
| IEA | International Energy Agency |
| IFRS | International Financial Reporting Standard |
| IPO | Initial Public Offering |
| IRS | Internal Revenue Service |
| ISAE | International Standard for Assurance Engagements |
| ISAs (UK) | International Standards on Auditing (UK) |
| IT | Information Technology |
| J | |
| JAIEC | Japan Aircraft Industrial Enhancement Co. Ltd |
| JORN | Jindalee Operational Radar Network |
| K | |
| KPI | Key Performance Indicator |
| KSA | Kingdom of Saudi Arabia |
| L | |
| LCM | Lifecycle Management |
| LEAP | Learn, Engage, Apply & Progress |
| LLM | Large Language Models |
| LTI | Long-Term Incentive |
| LTIP | Long-Term Incentive Plan |
| M | |
| MES | Marconi Electronic Systems |
| MoD | Ministry of Defence |
| MSR | Minimum Shareholding Requirement |
| N | |
| NGAA | Next Generation Adaptable Ammunition |
| NGMS | Next Generation Munitions Solution |
| NOAA | National Oceanic and Atmospheric Administration |
| O | |
| OAS | Operational Assurance Statement |
| OCF | Operating Cash Flow |
| OEM | Original Equipment Manufacturer |
| P | |
| PBT | Profit before tax |
| PPA | Power Purchase Agreement |
| PSP | Performance Share Plan |
| R | |
| R&D | Research and Development |
| RBSL | Rheinmetall BAE Systems Land |
| RCF | Revolving Credit Facility |
| RCP | Representative Concentration Pathway |
| REGO | Renewable Energy Guarantee of Origin |
| RMWT | Resilient Missile Warning & Tracking |
| ROCE | Return on Capital Employed |
| RPI | Retail Prices Index |
| RSP | Restricted Share Plan |
| 234 | BAE Systems plc Annual Report 2025 |
| Glossary continued |
| S | |
| SASB | Sustainability Accountability Standards Board |
| SCOD | Sovereign Capability and Option Deed |
| SDG | Sustainable Development Goal |
| SECR | Streamlined Energy and Carbon Reporting |
| SID | Senior Independent Director |
| SIF | Significant injury or fatality |
| SIP | Share Incentive Plan |
| SIPS | Shipbuilding Industries Pension Scheme |
| SME | Small and medium-sized enterprise |
| SMS | Space & Mission Systems |
| SSA | Special Security Agreement |
| SSP | Shared Socioeconomic Pathway |
| STEM | Science, Technology, Engineering and Mathematics |
| T | |
| TCFD | Task Force on Climate-related Financial Disclosures |
| TSR | Total Shareholder Return |
| U | |
| UAS | Uncrewed Air System |
| Strategic report | Governance | Financial statements | Additional information | 235 | ||
| Shareholder information |
Registered office
6 Carlton Gardens
London
SW1Y 5AD
United Kingdom
Telephone: +44 (0)1252 373232
Company website: baesystems.com
Registered in England and Wales, No. 01470151
Registrars
Equiniti Limited (0140)
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
United Kingdom
If you have any queries regarding your shareholding or need to notify
any changes to your personal details, please contact Equiniti.
Equiniti’s website (help.shareview.co.uk) includes a comprehensive
set of answers to many frequently asked questions relating to
managing a shareholding. If you cannot find the answer to your
question, there is an online email form, which will help to ensure your
question is directed to the most appropriate team for a response.
Alternatively, you can call the BAE Systems Helpline on 0371 384 2044
or, from outside the UK, +44 371 384 2044. Lines are open from
8.30am to 5.30pm Monday to Friday, excluding UK bank holidays.
In addition, the following services are offered to shareholders:
– Shareview – online access to your shareholding, including balance
movements, indicative share prices and information on recent
payments.
– Dividend mandates – have your dividends paid directly into either
your UK bank/building society account or an overseas bank account.
– Dividend reinvestment plan (DRIP) – a DRIP is provided by Equiniti
Financial Services Limited. The DRIP enables the Company’s
shareholders to elect to have their cash dividend payments used to
purchase the Company’s shares. More information can be found at
More information on all these services can be found on Equiniti’s
website (shareview.co.uk).
American Depositary Receipts
BAE Systems plc American Depositary Receipts (ADRs) are traded on
the over-the-counter market under the symbol BAESY. One ADR
represents four BAE Systems plc ordinary shares.
JP Morgan Chase Bank N.A. is the depositary. If you should have any
queries please contact:
JP Morgan Chase Bank N.A.
PO Box 64504
St Paul
MN 55164-0504, USA
Email: [email protected]
Telephone (toll free from within US and Canada): +1 800 990 1135
Telephone from outside US and Canada: +1 651 453 2128
ShareGift
ShareGift, the share donation charity (registered charity number
1052686), accepts donations of small parcels of shares which may be
uneconomic to sell. Details of the scheme are available from ShareGift
at sharegift.org, by telephone on 020 7930 3737 or by email:
Share price information
The middle market price of the Company’s ordinary shares on
31 December 2025 was 1,714p and the range during the year was
1,146p to 2,060p.
For more information
Visit the Shareholder information section of our website:
Financial calendar
| Annual General Meeting | 7 May 2026 |
| 2025 final ordinary dividend payable | 4 June 2026 |
| 2026 half-yearly results announcement1 | 30 July 2026 |
| 2026 interim ordinary dividend payable1 | 2 December 2026 |
| 2026 full-year results1 | February 2027 |
| 2026 final ordinary dividend payable1 | June 2027 |
- These dates are indicative and subject to change.
| Beware of share fraud Investment scams are often sophisticated and difficult to spot. |
|||||||
| Spot the warning signs | How to avoid investment scams | ||||||
| Fraudsters will often: – contact you out of the blue; – apply pressure to invest quickly; – downplay the risks to your money; – promise tempting returns that sound too good to be true; and – say that they’re only making the offer available to you or even ask you to not tell anyone else about it. If you’re suspicious, report it You can report the firm or scam to the FCA by contacting their Consumer Helpline on 0800 111 6768 or using the reporting form using the link shown below. If you’ve lost money in a scam, contact Action Fraud on 0300 123 2040 or www.actionfraud.police.uk |
Reject unexpected offers Scammers usually cold call, but contact can also come by email, post, word of mouth or at a seminar. If you’ve been offered an investment out of the blue, chances are it’s a high-risk investment or a scam. Check the FCA Warning List Use the FCA Warning List to check the risks of a potential investment – you can also search to see if the firm is known to be operating without its authorisation. Get impartial advice Get impartial advice before investing – don’t use an adviser from the firm that contacted you. Be ScamSmart and visit www.fca.org.uk/scamsmart |
||||||
| 236 | BAE Systems plc Annual Report 2025 |
Cautionary statement
All statements other than statements of historical fact included in this document, including, without
limitation, those regarding the financial condition, results, operations and businesses of BAE Systems
plc and its strategy, plans and objectives and the markets and economies in which it operates, are
forward-looking statements. Such forward-looking statements, which reflect management’s
assumptions made on the basis of information available to it at this time, appear in a number of places
throughout this document and include statements regarding the intentions, beliefs or current
expectations of BAE Systems plc concerning, among other things, its results in relation to operations,
financial condition, liquidity, prospects, growth, commitments and targets (including environmental,
social and governance commitments and targets and the methodologies it uses to assess its progress in
relation to these), strategies and the industry in which it operates. Forward-looking statements can be
identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “intends”,
“will”, “will continue”, “should”, “would be”, “seeks”, “anticipates” or similar expressions or the
negative thereof or other variations thereof or comparable terminology. Forward-looking statements
can be made in writing but may also be made verbally by directors, officers, and employees of BAE
Systems plc (including during presentations) in connection with this document. By their nature,
forward-looking statements involve risks and uncertainties because they relate to events and depend
on circumstances that may or may not occur in the future.
Forward-looking statements are not guarantees of future performance and the actual results of
operations, financial condition and liquidity of BAE Systems plc, the development of the industry in
which it operates and the ability of BAE Systems plc to meet its commitments and targets may differ
materially from those made in or suggested by the forward-looking statements contained in this
document. In addition, even if results of operations, financial condition and liquidity of BAE Systems plc,
the development of the industry in which it operates and/or performance against commitments and
targets are consistent with the forward-looking statements contained in this document, those results,
developments or performance may not be indicative of results, developments or performance in
subsequent periods.
These forward-looking statements speak only as of the date of this document. Subject to the
requirements of the Disclosure Guidance and Transparency Rules, the Market Abuse Regulation or
applicable law, BAE Systems plc explicitly disclaims any intention or obligation or undertaking publicly
to release the result of any revisions to any forward-looking statements in this document that may
occur due to any change in its expectations or to reflect events or circumstances after the date of it. All
subsequent written and oral forward-looking statements attributable to either BAE Systems plc or to
persons acting on its behalf are expressly qualified in their entirety by the cautionary statements
referred to herein and contained elsewhere in this document.
BAE Systems plc and its directors accept no liability to third parties in respect of this document save as
would arise under English law. Accordingly, any liability to a person who has demonstrated reliance on
any untrue or misleading statement or omission shall be determined in accordance with Schedule 10A
of the Financial Services and Markets Act 2000. It should be noted that Schedule 10A and Section 463
of the Companies Act 2006 contain limits on the liability of the directors of BAE Systems plc so that
their liability is solely to BAE Systems plc.
Website references
None of the websites referred to in this document (including where a link is provided), and none of the
information contained on such websites, are incorporated by reference into this document.
Printed by Park Communications on FSC®-certified paper.
Park works to the EMAS standard and its Environmental Management System is certified to ISO 14001.
100% of the inks used are vegetable oil based, 95% of press chemicals are recycled for further use and,
on average, 99% of any waste associated with this production will be recycled.
This document is printed on material containing 100% recycled paper.
This is a certified climate neutral print product for which carbon emissions have been calculated and
offset by supporting recognised carbon offset projects. The carbon offset projects are audited and
certified according to international standards and demonstrably reduce emissions. The climate neutral
label includes a unique ID number specific to this product which can be tracked at
www.climatepartner.com, giving details of the carbon offsetting process including information on the
emissions volume and the carbon offset project being supported.
Designed and produced by Radley Yeldar.
| BAE Systems plc 6 Carlton Gardens London SW1Y 5AD United Kingdom T +44 (0)1252 373232 baesystems.com |
Registered in England and Wales, No. 01470151 © BAE Systems plc 2026. All rights reserved BAE SYSTEMS is a registered trade mark of BAE Systems plc. |
Independent auditor’s reasonable Assurance Report to the Members of BAE Systems Plc on the compliance of the Electronic Format
Annual Financial Report with Financial Conduct Authority (FCA) Disclosure Guidance and Transparency Rule (DTR) 4.1.15R-DTR 4.1.18R
Report on compliance with the requirements for iXBRL mark up (‘tagging’) of consolidated financial statements included in the
Electronic Format Annual Financial Report
We have undertaken a reasonable assurance engagement on the iXBRL mark up (‘tagging’) of consolidated financial statements for the year
ended 31 December 2025 of BAE Systems plc (the “company”) included in the Electronic Format Annual Financial Report prepared by the
company.
Our assurance conclusion
Based on our procedures described in this report, and evidence we have obtained, in our opinion, the consolidated financial statements for the
year ended 31 December 2025 of the company included in the Electronic Format Annual Financial Report, are marked up, in all material
respects, in compliance with DTR 4.1.15R-DTR 4.1.18R.
Scope of our work
BAE Systems plc has engaged us to conduct an independent reasonable assurance engagement in accordance with International Standard on
Assurance Engagements (UK) 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information (“ISAE (UK) 3000”)
issued by the Financial Reporting Council, to express an opinion on whether the iXBRL mark up of consolidated financial statements complies in
all material respects with DTR 4.1.15R-DTR 4.1.18R based on the evidence we have obtained.
Directors’ responsibilities
The directors are responsible for preparing the Electronic Format Annual Financial Report in compliance with DTR 4.1.15R-DTR 4.1.18R. This
responsibility includes:
– The selection and application of appropriate iXBRL tags using judgement where necessary.
– Ensuring consistency between digitised information and the consolidated financial statements presented in human-readable format.
– The design, implementation, and maintenance of internal control relevant to the application of DTR 4.1.15R-DTR 4.1.18R.
Our responsibilities
We are responsible for:
– Planning and performing procedures to obtain sufficient appropriate evidence in order to express an independent reasonable assurance
conclusion on the iXBRL mark up.
– Reporting our conclusion in the form of an independent reasonable Assurance Report to the Members.
Our independence and competence
In conducting our engagement, we complied with the independence requirements of the FRC’s Ethical Standard and the ICAEW Code of Ethics.
The ICAEW Code is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and
professional behaviour.
We applied the International Standard on Quality Management (UK) 1 (“ISQM (UK) 1”), issued by the Financial Reporting Council. Accordingly,
we maintained a comprehensive system of quality management including documented policies and procedures regarding compliance with
ethical requirements, professional standards and applicable legal and regulatory requirements.
Key procedures performed
A reasonable assurance engagement in accordance with ISAE (UK) 3000 involves performing procedures to obtain reasonable assurance about
the compliance of the mark-up of the consolidated financial statements with the DTR 4.1.15R-DTR 4.1.18R. The nature, timing and extent of
procedures selected were based on our professional judgement, including the assessment of the risks of material departures from the
requirements set out in DTR 4.1.15R-DTR 4.1.18R, whether due to fraud or error. Our reasonable assurance engagement consisted primarily of:
– Obtaining an understanding of the iXBRL mark-up process, including internal control over the mark up process relevant to the engagement.
– Reconciling the marked-up data with the audited consolidated financial statements of the company dated 31 December 2025.
– Evaluating the appropriateness of the company’s mark-up of the consolidated financial statements using the iXBRL mark-up language.
– Evaluating the appropriateness of the company’s use of iXBRL elements selected from a generally accepted taxonomy and the creation of
extension elements where no suitable element in the generally accepted taxonomy has been identified.
– Evaluating the use of anchoring in relation to the extension elements.
In this report we do not express an audit opinion, review conclusion or any other assurance conclusion on the consolidated financial statements.
Our audit opinion relating to the consolidated financial statements of the company for the year ended 31 December 2025 is set out in our
Independent Auditor’s Report dated 17th February 2026.
Use of our report
This report is made solely to the company’s members, as a body, in accordance with ISAE (UK) 3000 and our agreed terms of engagement. Our
work has been undertaken so that we might state to the company those matters we have agreed to state to them in this report and for no other
purpose.
Without assuming or accepting any responsibility or liability in respect of this report to any party other than the company and the company’s
members, we acknowledge that the company may choose to make this report publicly available for others wishing to have access to it, which
does not and will not affect or extend for any purpose or on any basis our responsibilities. To the fullest extent permitted by law, we do not
accept or assume responsibility to anyone other than the company and the company’s members as a body, for our work, for this report, or for
the conclusions we have formed.
Claire Faulkner (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Deloitte LLP
London, United Kingdom
23 March 2026