32 BAE Systems | Annual Report 2016 Segmental performance We report our performance through five principal reporting segments. Electronic Systems Cyber & Intelligence P34 P38 Platforms & Services Platforms & Services (US) (UK) P42 P46 Platforms & Services (International) P50 BAE Systems | Annual Report 2016 33 Strategic report Directors’ report Financial statements Financial performance measures as defined by the Group KPI KPI KPI KPI Operating Underlying Return business Order Order Sales EBITA on sales cash flow intake2 backlog2 Employees2 £m £m % £m £m £bn Number Electronic Systems 3,282 494 15.1 469 3,322 5.2 13,800 Cyber & Intelligence 1,778 90 5.1 83 1,885 2.4 11,800 Platforms & Services (US) 2,874 211 7.3 58 3,308 4.6 11,300 Platforms & Services (UK) 7,806 810 10.4 199 8,024 17.8 30,100 Platforms & Services (International) 3,943 400 10.1 435 6,175 13.1 13,700 HQ1 233 (100) (240) 226 – 2,400 Deduct Intra-group (896) (497) (1.1) Total 19,020 1,905 10.0 1,004 22,443 42.0 83,100 We use these measures to monitor the underlying financial performance of the Group’s reporting segments. Financial performance measures defined in IFRS3 Net cash flow from Operating Return operating Revenue profit/(loss) on revenue activities £m £m % £m Electronic Systems 3,282 474 14.4 568 Cyber & Intelligence 1,778 59 3.3 106 Platforms & Services (US) 2,783 182 6.5 129 Platforms & Services (UK) 7,699 780 10.1 385 Platforms & Services (International) 3,037 365 12.0 473 HQ1 – (118) (245) Deduct Intra-group (789) Deduct Taxation4 (187) Total 17,790 1,742 9.8 1,229 Reconciliations from the financial performance measures as defined by the Group to these measures are provided in the Financial review on pages 24 to 30. Reconciliations by reporting segment for revenue and operating profit are included in note 1 to the Group accounts (see page 128) and for net cash flow from operating activities in note 23 to the Group accounts (see page 167). 1. HQ comprises the Group’s head office activities, together with a 49% interest in Air Astana. 2. Including share of equity accounted investments. 3. International Financial Reporting Standards. P06–07 4. Taxation is managed on a Group basis. Alternative performance measure definitions 34 BAE Systems | Annual Report 2016 Segmental performance Electronic Systems 1 Electronic Systems, with 13,800 employees , comprises the Our strategy in action Continue to grow our electronic US and UK‑based electronics activities, including electronic systems business warfare systems, electro‑optical sensors, military and Increasing production of commercial digital engine and flight controls, next‑generation electronic warfare systems military communications systems and data links, persistent In September, we delivered the surveillance capabilities, and hybrid electric drive systems. 250th electronic warfare suite for the F-35 Lightning II combat aircraft Electronic Combat includes the Electronic Intelligence, Surveillance & Reconnaissance programme, the world’s largest Protection, Electronic Warfare and Electronic addresses the market for actionable defence programme. The advanced Attack product lines, and provides a depth intelligence through innovative technical technology helps pilots to identify, of capability in integrated electromagnetic solutions for airborne persistent surveillance, monitor, analyse and respond to systems for airborne applications, mission identification systems, signals intelligence, potential threats. planning and battle management solutions, underwater and surface warfare solutions, Driven by growth in our electronic secure networked communications and and space products. warfare programmes, the business is navigation systems, radio frequency Controls & Avionics addresses the military making an investment of more than communication and data links. and commercial aircraft electronics markets, $100m (£81m) in our ‘Ramp 2 Rate’ Survivability, Targeting & Sensing exploits including fly-by-wire flight controls, full initiative to improve our efficiency the electro-optical and infrared spectrum authority digital engine controls, flight deck and capacity in defence electronics to provide leading threat warning and systems, cabin management systems and production over the next decade. This infrared countermeasures systems, precision mission computers. investment includes the construction guidance and seeker solutions, advanced of an Electronic Warfare Integrated Power & Propulsion Solutions delivers targeting solutions, head-up displays and Manufacturing Centre, modernised electric propulsion and power management state-of-the-art tactical imaging systems. with advanced manufacturing performance, with innovative products capabilities in robotics and automation. and solutions that advance vehicle mobility, efficiency and capability in the transit, military, marine and rail markets. 1. Including share of equity accounted investments. 2. International Financial Reporting Standards. 3. Re-presented for the transfer of the GEOINT-ISR (Geospatial Intelligence – Intelligence, Surveillance and Reconnaissance) business from Cyber & Intelligence to Electronic Systems. BAE Systems | Annual Report 2016 35 Strategic report Directors’ report Financial statements Operational and strategic highlights Sales by domain (%) – Delivered the 250th electronic warfare suite for the F-35 Lightning II combat aircraft programme Land Air Initiated our ‘Ramp 2 Rate’ capital investment strategy to support 17% – Maritime 8 1% growth in defence electronics production 2% – Awarded a $146m (£118m) engineering and manufacturing development contract for the US Air Force’s Eagle Passive Active Warning Survivability System – Signed a three-year Indefinite Delivery, Indefinite Quantity contract for Advanced Precision Kill Weapon System (APKWS™) Full-Rate Production Lots 5 to 7, worth up to $600m (£486m) – Awarded a $249m (£201m) contract modification on the Common Missile Warning System programme Sales by line of business (%) – Awarded a contract on the US Army’s Family of Weapon Sights – Crew Served programme worth up to $384m (£311m) Controls & Avionics/ Power & Propulsion Electronic – Integration of the GEOINT-ISR business transferred from Cyber Solutions Combat & Intelligence completed 27% 3 2% Financial performance Financial performance measures Financial performance as defined by the Group measures defined in IFRS2 2016 20153 2016 20153 Sales KPI £3,282m £2,922m Revenue £3,282m £2,922m Underlying EBITA KPI £494m £437m Operating profit £474m £419m Intelligence, Return on sales 15.1% 15.0% Return on revenue 14.4% 14.3% Surveillance Survivability, & Reconnaissance Targeting & Sensing Operating business Cash flow from KPI cash flow £469m £370m operating activities £568m £445m 21% 20% Order intake1 KPI £3,322m £2,799m Order backlog1 £5.2bn £4.4bn Sales analysis: – Sales compared with 2015 were almost unchanged at $4.4bn (£3.3bn). The commercial Defence and commercial (%) areas of the business now amount to 24%, having seen sales growth in the year of 11% primarily in HybriDrive® systems. On the defence side, sales were slightly down Commercial Defence on timing of production deliveries on the Digital Electronic Warfare System and other 24% 76% electronic warfare programmes. – The return on sales achieved of 15.1% (2015 15.0%) was largely from continued strong programme execution and risk retirement. – Cash conversion of underlying EBITA for the year was at 97%, excluding pension deficit funding. – Order backlog1 was sustained at $6.5bn (£5.2bn) benefiting from awards for F-35 Lightning II electronic warfare systems, the F-15 Eagle Passive Active Warning Survivability System programme and APKWS™. P06–07 Alternative performance measure definitions 36 BAE Systems | Annual Report 2016 Segmental performance Electronic Systems Operational performance Survivability, Targeting & Sensing On the Enhanced Night Vision Goggle III Electronic Combat Our Advanced Precision Kill Weapon System and Family of Weapon Sights – Individual ™ BAE Systems has sustained its leadership (APKWS ) laser-guided rocket is experiencing programme, we completed the first round position in the US electronic warfare and growing demand, with deliveries exceeding of qualification and reliability testing in communications and navigation markets. 8,000 units through 2016. In addition to September under a five-year, $434m Production is ramping up across a expanding its use in the US military, the (£351m) Indefinite Delivery, Indefinite number of programmes. Low-Rate Initial system is generating strong international Quantity contract. attention, with 16 nations expressing Production hardware deliveries on the F-35 On the US Army’s Family of Weapon Sights – interest. In October, the US Navy awarded Lightning II programme continue with Lot 9 Crew Served programme, we were awarded us a three-year Indefinite Delivery, Indefinite and 10 deliveries. We have received initial a seven-year contract with a potential value Quantity contract for Full-Rate Production funding for Lot 11 with deliveries expected of up to $384m (£311m) in September. The Lots 5 to 7 worth up to $600m (£486m) to commence in 2018. sight is designed to allow soldiers to acquire that could increase production to 10,000 and engage targets at extended range. The business is under contracts, from units per year. Boeing and Warner Robins Air Logistics We continue to leverage our technology and We continue to perform well on the Terminal Complex, totalling more than $1.0bn (£0.8bn) engineering capabilities, and the LiteHUD® High-Altitude