BAE Systems plc

Summary

BAE Systems plc provides defense, aerospace, and security solutions worldwide. The company operates through five segments: Electronic Systems, Cyber & Intelligence, Platforms & Services (US), Air, and Maritime. The Electronic Systems segment offers electronic warfare systems, navigation systems, electro-optical sensors, military and commercial digital engine and flight controls, precision guidance and seeker solutions, military communication systems and data links, persistent surveillance systems, space electronics, and electric drive propulsion systems. The Cyber & Intelligence segment provides solutions to modernize, maintain, and test cyber-harden aircraft, radars, missile systems, and mission applications that detect and deter threats to national security; systems engineering, integration, and sustainment services for critical weapons systems, C5ISR, and cyber security; and solutions and services to intelligence and federal/civilian agencies. It also offers data intelligence solutions to defend against national-scale threats, protect their networks, and data against attacks; security and intelligence solutions to the United Kingdom government and allied international governments; anti-fraud and regulatory compliance solutions; and enterprise-level data and digital services. The Platforms & Services (US) segment manufactures combat vehicles, weapons, and munitions, as well as provides ship repair services and the management of government-owned munitions facilities. The Air segment develops, manufactures, upgrades, and supports combat and jet trainer aircraft. The Maritime segment designs, manufactures, and supports surface ships, submarines, torpedoes, radars, and command and combat systems; and supplies naval gun systems. It also supplies naval weapon systems, missile launchers, and precision munitions. The company was founded in 1970 and is based in Farnborough, the United Kingdom.

Operations

Corporate Strategy

BAE Systems has a corporate strategy that builds on their vision and mission. It is comprised of six key long-term areas of focus that will help BAE achieve their vision and mission. It is centred on maintaining and growing their core franchises and securing growth opportunities through advancing their three strategic priorities.

1. Sustain and grow our defence and security businesses

• Deliver on commitments effectively and efficiently
• Develop our offerings to meet the future defence and security needs

2. 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

3. Develop and expand our international business

• Mature our international activities, broadening our offerings to our established customers
• Develop relations with additional customers

4. Inspire and develop a diverse workforce to drive success

• Ensure we diversify our thinking and harness the full potential of our people
• Create an environment and proposition in which our people will thrive

5. Enhance financial performance and deliver sustainable growth in shareholder value

• Seek opportunities to drive efficiency, standardisation and synergies
• Identify opportunities for higher-margin offerings

6. 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

Priorities

Serving as a bridge between the long-term strategy and short term objectives, are the strategic priorities. These priorities have been successfully demonstrated by BAE Systems.

• Drive operational excellence
  • BAE Systems has been part of the F-35 programme since its inception, bringing our expertise into the development, advanced manufacture, electronic warfare systems and sustainment of the world’s largest defence programme. Led by the US, with participation from the UK, Italy, Netherlands, Australia, Canada, Denmark and Norway, this collaborative programme delivers a stealthy, multi-role combat aircraft capable of operating from land and sea to nations across the globe. As a key partner, BAE collaborates with the programme’s prime contractor, Lockheed Martin, to deliver around 15% of each aircraft (excluding propulsion), playing a major role in the development, production and sustainment of each jet.
• Continuously improve competitiveness and efficiency
  • To improve production efficiency and increase capacity, BAE has embarked on the process of constructing a new, modern ship lift/ land-level ship repair complex at our Jacksonville, Florida shipyard. Once it is fully operational, the complex will feature a ship lift that can easily move vessels in excess of 25,000 tons, and the new land-level repair complex will enable the team to work on three or more ships simultaneously parked ashore with access to their hulls. The $200m (£166m) investment will bring a 300% increase to the shipyard’s current dry-docking capacity and expand the shipyard’s customer diversity by bringing in more commercial work.
• Advance and further leverage our technology
  • BAE Systems is working with partners to design and deliver a new flying combat air demonstrator, which will play a critical role in the delivery of the UK’s Future Combat Air System. The flagship project is part of a suite of novel technologies being developed by Team Tempest, which will see BAE Systems engineers lead the design, test, evaluation and build process and bring together new digital engineering technologies. The first flight of the demonstrator is set to take place within the next five years.

Market

Total Addressable Market:

Here, the total addressable market (TAM) is the global defence market which is valued at $2.24 trillion based on worldwide military expenditure figures for 2022.

Serviceable Available Market:

Here, the serviceable available market (SAM) is the defence market in select geographical regions (shown in map) accessible to the company which is valued at $1.37 trillion based on the respective 2022 military expenditure figures.

Serviceable Obtainable Market:

Here, the serviceable obtainable market (SOM) is the defence market in select geographical regions (shown in map) accessible to the company which is valued at $1.28 trillion according to the 2022 BAE Systems Annual Report.

Region Accessible:

USA

UK

Map showing Global Presence of BAE Systems.

Kingdom of Saudi Arabia

Australia

India

France

Germany

South Korea

Japan

Italy

Largest Region:

USA

Market Drivers:

-         Invasion of Ukraine and tensions in East Asia drive increased spending.

-         Increased spending by Japan in response to perceived growing threats from China, North Korea and Russia.

-         Aids and grants to Ukraine

Market Trends:

-         Unmanned combat vehicles

-         Autonomous fighter jets

-         Edge computing

-         3D printed technology

-         Use of AI in defence equipment

Competition

Competitive Advantages:

• World class defence capabilities across multiple domains - air, land, sea and undersea
• Strong customer relationships - largest defence supplier in the UK and Australia, and among top ten in the US
• Diversified Business Portfolio - wide range of mission critical electronic systems including electronic warfare systems, flight and engine controls, night vision systems, surveillance and reconnaissance sensors, and power and energy management system.

Competitors:

Company Name	HQ	Founding Year	No. of Employees	Revenue (FY 2022)	Market Cap.
BAE Systems	Farnborough, United Kingdom	1999	93000	$26.3B	$29.6B
Lockheed Martin Corporation	Bethesda, Maryland, United States	1995	116000	$66.0B	$113.3B
Northrop Grumman Corp	Falls Church, Virginia, United States	1994	95000	$36.6B	$65.3B
General Dynamics	Reston, Virginia, United States	1952	106500	$39.4B	$61.3B
The Boeing Company	Arlington, Virginia, United States	1916	156000	$66.6B	$136.5B
RTX (Raytheon)	Arlington County, Virginia, United States	1922	182000	$67.1B	$125.4B

Risks

BAE Systems believes that managing risks effectively is key to successfully delivering on their strategies and strategic priorities. They employ a thorough, multifaceted, top to bottom risk management framework, which aims to mitigate any risk to their strategy that is identified. The Board has the overall responsibility, advised by the Audit, ESG and Executive Committees. The basis of the framework is:

Identify -> Analyse -> Evaluate -> Mitigate

All risks primarily affect their future revenue and financial health.

Government customers, defence spending and terms of trade risks

These risks affect strategies 1, 2, 3, 5

• 95% of sales in 2022 were in defence. Government expenditure on defence can vary based on policy, politics, budgetary constraints as well as national security threats, and some governments have already faced constraints. However, BAE has a geographically well-spread market, many countries within which have announced plans to defence spending in response to the currently elevated global threats. BAE also benefits from a large order backlog, as well as establishment with long-term projects.
• BAE systems faces threats to their ability to secure and maintain government contracts. Financial reviews can lead to budgetary reconsiderations and premature termination of contracts. However, BAE is established as being a major contributor to the industrial capabilities of the countries within its market.
• BAE also faces a risk with the fact that its cashflows depend on the timing and success in being awarded contracts as well as when they receive the corresponding cash. Not receiving cashflow on time can lead to an inability to focus on their own expenditure without requiring external funding - impacting credit rating. However, BAE manages their balance sheet conservatively, to ensure flexibility, as well as monitoring liquidity to ensure the retrieval of cash needed for operations.

International market risks

These risks affect strategies 1,2,3,5

• The risks of operating in international markets include: social and political changes impacting the business environment, economic downturns, political instability and civil disturbances, the imposition of restraints on the movement of capital, the introduction of burdensome taxes or tariffs, change of 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. Similar to the risk on fluctuations in government expenditure, BAE has a geographically well-spread market, many countries within which have announced plans to defence spending in response to the currently elevated global threats. BAE also benefits from a large order backlog, as well as establishment with long-term projects.
• They are exposed to volatility arising from movements in currency exchange rates, particularly in respect of the US dollar, euro, Saudi riyal and Australian dollar. There has been volatility in currency exchange rates in 2022.
• Brexit can still affect BAE System's ability to participate in, and receive contracts for, European Union-funded projects. However, BAE has a major role in certain European programmes, such as the Eurofighter, and is also supporting the UK government in maintaining the UK's role in European security and defence.