BAE Systems (LON: BA)

QUOTE AND NEWS
Reuters  Dec 15  Comment 
Britain has awarded defense company BAE Systems a 270 million pound ($422.7 million) contract to upgrade the Spearfish Heavyweight Torpedo used by the country's submarines,...
Channel News Asia  Dec 9  Comment 
mm2 Asia, whose hit productions include Ah Boys To Men I and II and The Journey, raised S$5.7 million during its IPO.
Reuters  Dec 8  Comment 
Australia has asked defence contractors BAE Systems Plc, Navantia SA and Raytheon Australia to increase their roles in the country's troubled A$8.5 billion warship building...
Cloud Computing  Dec 6  Comment 
Imagine this — you're rolling out a new version of your web app. Works great in the dev environment, and it's been signed off on in staging, so it gets rolled out to production. Things seem fine, so you call it a night. Then the support...
Forbes  Dec 5  Comment 
The first week of December brought news of two important leadership changes in the most innovative segment of the U.S. defense industry. At BAE Systems, Inc., the sprawling U.S. unit of Britain's dominant military supplier, Chief Operating Officer...
Motley Fool  Nov 15  Comment 
And millions of dollars for Iraqi weapons are just the start ...
Motley Fool  Nov 9  Comment 
BAE may have dropped the ball in Korea. Can Lockheed Martin pick it up -- and how much will investors profit if it does?
Financial Times  Nov 9  Comment 
Kenneth Bae and Matthew Miller return to US as Obama heads to Asia for Apec meeting
New York Times  Nov 8  Comment 
Mr. Bae and Mr. Miller arrived Saturday night at a base near Tacoma, Wash., after a secret negotiation by the director of national intelligence, James R. Clapper Jr.




 
TOP CONTRIBUTORS

BAE Systems is a British defense company with operations throughout the world. The company manufactures and supports products and services for air, land, and naval forces. The company also produces advanced electronics and information systems. As of 2010, BAE Systems is the second largest global defense supplier, due to an expansion of BAE's business in its home markets and export markets.[1] It is also the fourth largest supplier to the U.S. Department of Defense, the largest supplier to the UK Ministry of Defense, and the largest in-country defense supplier to the Australian Defense Force.[2][1][3] Its seven major home markets, which generate 91% of BAE's sales, are in the US, UK, Australia, Kingdom of Saudi Arabia, South Africa, Sweden, and India.[4][3]

As a large defense products supplier, BAE Systems is easily affected by reductions in defense spending in national government budgets. With the global economic downturn, there will be less demand for BAE's products; however, it seeks to combat this through reduction and efficiency improvements in its operations, which resulted in a net headcount reduction of 3,300 people in 2009.[5] As the company's main business stems from a small number of large contracts, the timing and termination of BAE Systems' contracts can also affect perception of the company's financial condition. The company's 2009 loss of a family of medium tactical vehicles (FMTV) contract with the US resulted in a net loss for the year; however, the company has sought to diversify its operations by expanding its presence in its developing home markets, such as Saudi Arabia, Australia, and India.[6][7]

This plan for expansion is reflected in BAE Systems' recent acquisitions of the remaining 45% stake in BVT Surface Fleet Ltd in October 2009, Detica in September 2008, and Tenix Defence Holdings Pty in June 2008.[8][7] The company is also engaged in research and development programs to produce performance innovations to manufacturing techniques and technology, which would result in cost reductions. In 2009, BAE filed patent applications covering over 250 new inventions, which would provide financial support for the year.[7]

On February 5, 2010, BAE Systems reached a global settlement with the UK Serious Fraud Office and the US Department of Justice where BAE Systems agreed to plead guilty to conspiring to make false statements related to certain regulatory filings and undertakings. Under this settlement, BAE Systems will pay a fine of $400 million. For the Serious Fraud Office, BAE Systems also plead guilty to the breach of duty to keep accounting records of payments related to the sale of a radar system by the company to Tanzania in 1999. Under this agreement, the company will pay a penalty of £30 million.[9] These settlements were reflected in the company's 2009 published annual results.[5]

Company Overview

BAE Systems is comprised of a portfolio of businesses focused on the provision of defense, security, and aerospace capabilities in its global home markets. Its business initiatives include creating and sustaining a global land business in the land and armaments market; strengthening border, transportation, and cyber security through its products; catering to the growing worldwide market for third party platform and systems support; and expanding its unmanned aircraft systems.[10]

Business Segments

Electronics and Intelligence (24.3% of revenue)

This operating group produces and supports systems for military and commercial applications. Its four lines of business include electronic solutions, information solutions, platform solutions, and support solutions. In 2009, BAE Systems introduced new infrared technology solutions to US Army troops and secured a seven-year IT services contract for the US treasury and a five-year urgent-needs contract for the US military counter-insurgency support services. 2009 sales in this area increased 6% from 2008.[11] [12]

Land and Armaments (29.1% of revenue)

This operating group produces and supports armored combat vehicles, tactical wheeled vehicles, naval guns, missile launchers, artillery systems, munitions, and law enforcement products. 2009 sales in this area decreased 8% from 2008.[11] This decrease in sales was due to pressure on national defense budgets as governments shift priorities and place fewer orders for such products. In February 2010, BAE Systems also suffered impairment charges of £927 million on the Family of Medium Tactical Vehicles (FMTV) program and Products Group business as BAE lost a follow-on production contract for vehicles in the FMTV program after a reevaluation of bids by the U.S. Department of Defense. BAE Systems is the leading combat systems supplier to the US Army Heavy Brigade Combat Team.[11] [13]

Programs and Support (27.2% of revenue)

This operating group produces and supports BAE Systems' UK-based air, naval, and security activities. BAE focuses on military air solutions, surface ships, submarine solutions, information intelligence technology, and integrated system technologies. 2009 sales in this area increased 33% from 2008. This increase in sales was mostly due to the start of the Saudi Typhoon program, increased sales and production of the Typhoon Tranche 2 standard aircrafts, and robust annual sales from Detica, BAE Systems' branch for information intelligence technologies. In 2009, BAE Systems acquired VT Group PLC's 45% stake in the BVT joint venture, which is now 100% owned and called BAE Systems Surface Ships.[11][14]

International Contracts with Saudi Arabia and Australia (18.3% of revenue)

This operating group consists of BAE's businesses in the Kingdom of Saudi Arabia and Australia. BAE Systems acts as a contractor for the UK government-to-government defense agreement with Saudi Arabia and its activities include operational capability support to the Royal Saudi Air and Naval Force. In 2008, BAE Systems acquired Tenix Defence, making BAE the largest defense contractor in Australia and it offers support in the aerospace, land, and maritime fields for Australia. 2009 sales in this area increased 15% from 2008 due to robust trading from the newly acquired Tenix Defence business in Australia and the deliverance of the Typhoon aircraft in the Kingdom of Saudi Arabia.[11][15]

Headquarters and Other Business (1.1% of revenue)

This operating segment includes the regional aircraft asset management, the head office, property management, research centers, and UK shared services activity. In 2009, there was a loss of £71 million on sales of £254 million from HQ & Other Businesses. This was due to challenging commercial aircraft market conditions from less funding for operators and the global economic downturn.[11][16]

Business and Financial Metrics

Half Year FY2010 Annual Summary

BAE Systems announced sales of £10.6 billion, which is a 9% increase from the half year results of 2009. It also reported £571 million in net income, which was an increase from the £63 million loss of 2009's first half year results. Its order intake was £43.6 billion, which is a 1.6% decrease from 2009's first half year.[17] These positive results were mainly due to deliveries of Typhoon aircraft and support to the Kingdom of Saudi Arabia.[5]

Due to pressure on national defense budgets as governments look for cost savings, the company expects a challenging trading market for defense products including a lower level of land vehicle activity. However, it seeks reduction and efficiency improvements to mitigate the effects of decreased demand later in the year. This cost reduction program, which was launched during the first half of the year, has already resulted in a net headcount reduction of 3,300 people.[5] BAE Systems also seeks to develop its recently acquired home market in India, where it has a 26% share in the joint venture defense company, Defence Land Systems India Private Limited.[5]

FY2009 Annual Summary

BAE Systems announced sales of £22.4 billion, which was a 21% increase from 2008. This increase is mostly due to increased deliveries of the Typhoon Tranche 2 standard aircraft and support to the Kingdom of Saudi Arabia and numerous European partner nations and a 6% increase in sales from the Electronics, Intelligence, and Support operating group. Order intakes, the value of funded orders received from customers, of £22 billion increased 3% from 2008. This was due to production orders for the Typhoon Tranche 3A, a three-year Saudi typhoon availability service contract, and support orders totaling over £3 billion for numerous types of torpedoes.[18]

However, BAE Systems reported a net loss of £45 million this year.[19] This was mostly due to a large regulatory penalty from its settlement with the UK Serious Fraud Office and the US Department of Justice and its impairment charge of £927 million for its land and armaments business due to a loss of its FMTV contract with the US.[20]

FY2008 Annual Summary

BAE Systems reported sales of £18.5 billion, which was an 18% increase from 2007. [21] The company's order intake of £21.3 billion also increased 0.5% from 2007 and its net income of £1.77 billion increased 92% from 2007.[19] These increases were primarily due to an increase in demand for high armored wheeled vehicles in the US, the award of a 15-year UK munitions capability contract and Saudi Tornado Sustainment Program, BAE's share of the Future Carrier award, and a robust full year performance from the acquisition of Armor Holdings in May 2007.[22][21]

Trends and Forces

Reductions in defense spending in national government budgets adversely affect product demand

BAE Systems' main business is selling defense-related products and services to national governments primarily in its seven home markets. Through political considerations, economic conditions, budgetary constraints, and perceived threats to security, a national government's budget for defense spending may increase or decrease each year. In the case of a decrease from BAE Systems' major purchasers, there would be an adverse effect on BAE Systems' sales and, potentially, its financial condition.[6]

As of 2009, the growth in the US Defense budget is expected to slow down in comparison to its large annual growth rates between 2001 and 2009. However, President Obama's 2011 budget request to Congress includes a 7.7% increase in the procurement budget and a 3.4% overall increase in spending.[23] In Australia, where BAE Systems is the leading provider in the defense industry, the government has planned for a 3% increase each year in the defense budget until 2017.[24] In India, defense spending increased approximately 34% between 2008 and 2009 with expected future increases.[25] Despite the global economic downturn, the expected increase in the defense budgets of these countries would provide more demand for BAE Systems' products. [26]

The existence, termination, and timing of large government contracts affect BAE's financial condition and operating results for the significant periods

BAE Systems' main business is dependent on a small number of large government contracts. These individual contracts are generally worth more than £1 billion each and the loss, expiration, suspension, cancellation, or termination would adversely affect BAE's revenue and financial condition. Therefore, BAE Systems highly prioritizes the maintenance of its relationships with its major defense products purchasers which include the governments of the UK, US, and Kingdom of Saudi Arabia. The timing of contracts is also important as the timing of the award or failure to receive anticipated orders would affect BAE Systems' operating results for the periods in question. [6]

In order to mitigate this potential risk, BAE Systems diversifies its products and potential contracts across different fields to prevent any severe adverse effects to the company in the case of a significant loss in one sector. The Board also regularly reviews its performance in the home market countries in regard to contract awards so that the Executive Committee can manage the assets and resources of BAE in line with the timing of the awards.[6]

Subcontractor and key supplier performance and component availability affect BAE's ability to meet its customer obligations

Some of BAE Systems' products require relatively scarce raw materials. Therefore, specific procurement requirements and the availability of these raw materials would limit BAE's ability to obtain these materials from its suppliers. If some of BAE's suppliers or subcontractors have been negatively impacted by the economic environment which leads to constraints on available financing, they would not be able to meet their obligations to BAE. In the case of a long-term or large volume purchase agreement, a supplier or subcontractor problem would impair BAE Systems' ability to complete its customer obligations, leading to "reduced sales, termination of contracts, and damage to its reputation and relationships with its customers."[6] This would have a negative impact on BAE's financial condition and operating results.[6]

Competition

BAE Systems' major competitors include:

  • General Dynamics (GD) is the world's fifth largest defense contractor with four main business segments in Aerospace, Combat Systems, Marine Systems, and Information Systems & Technology.[27] The company is a conglomeration of acquired companies and as of 2010, General Dynamics has acquired and integrated forty-three business.[28]
  • Lockheed Martin (LMT) is the world's largest defense contractor.[29] It is a US aerospace, defense, security, and advanced technology company that does the majority of its business with the US Department of Defense and US federal government agencies.
  • Northrop Grumman (NOC) is an American aerospace and defense company and the world's fourth largest defense contractor.[30] Its business segments include aerospace systems, electronic systems, information systems, shipbuilding, and technical services.[31]


Name 2009 Operating Revenue ($b) [32] 2009 Net Income ($b)[32] 2009 Market Cap ($b)[32] 2009 Operating Margin[32]
General Dynamics (GD) 31.47 2.44 23.06 11.85%
BAE Systems (LON: BA)20.37[33]-61[33] 10.354.74[33]
Lockheed Martin (LMT) 45.822.9026.499.13%
Northrop Grumman (NOC) 34.71 2.01 16.79 7.87%

References

  1. 1.0 1.1 BAE Systems 2009 Annual Report Market Review
  2. Sydney Morning Herald - Tenix buy secures BAE defence role
  3. 3.0 3.1 BAE Systems 2010 Half Year Results Presentation Page 24
  4. BAE Systems 2009 Annual Report Page 9
  5. 5.0 5.1 5.2 5.3 5.4 BAE Systems 2010 Half Year Results Page 4
  6. 6.0 6.1 6.2 6.3 6.4 6.5 BAE Systems 2009 Annual Report Principal Risks
  7. 7.0 7.1 7.2 BAE Systems - Our Strategy
  8. BAE Systems Acquisitions and Disposals
  9. BAE Systems 2009 Annual Report Page 7
  10. BAE Systems 2009 Annual Report Global Initiatives
  11. 11.0 11.1 11.2 11.3 11.4 11.5 11.6 BAE Systems 2009 Annual Report Operating Group Performance Summary
  12. BAE Systems 2009 Annual Report Electronics, Intelligence & Support
  13. BAE Systems 2009 Annual Report Land & Armaments
  14. BAE Systems 2009 Annual Report Programmes & Support
  15. BAE Systems 2009 Annual Report International
  16. BAE Systems 2009 Annual Report HQ & Other Businesses
  17. BAE Systems 2010 Half Year Results Page 3
  18. BAE Systems 2009 Annual Report KPI's
  19. 19.0 19.1 BAE Systems Investor Relations Five Year Summary
  20. Morningstar BAE Systems Reports 2009 Results
  21. 21.0 21.1 BAE Systems 2008 Annual Report KPI's
  22. http://production.investis.com/armorholdings/
  23. http://www.reuters.com/article/idUSN0120383520100201
  24. http://www.defensenews.com/story.php?i=4085534
  25. http://indiabudget.nic.in/ub2009-10/ubmain.htm
  26. BAE Systems 2009 Annual Report Market Review of Home Markets
  27. http://seekingalpha.com/article/217651-general-dynamics-a-strong-value-investment
  28. General Dynamics Company Overview
  29. Lockheed Martin 2009 10-K Page 1
  30. http://www.northropgrumman.com/farnborough/briefings/assets/2010-fas-unmanned-briefing.pdf
  31. http://www.northropgrumman.com/about_us/index.html#sectors
  32. 32.0 32.1 32.2 32.3 [1]
  33. 33.0 33.1 33.2 Google Finance BAE Systems
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