BAE Systems Banking on Rising Defense Budgets
(Source: Forecast International; issued April 9, 2018)
NEWTOWN, Conn. -- As political changes sweep the U.S. and U.K, defense is rebounding following several years of austerity.

Military spending in the U.K. and U.S. had been slowly moving upward thanks to the risk of terrorism, the ongoing conflict in Syria, and a belligerent Russia. To respond to these threats, the administrations in the U.S and U.K. are looking to increase military spending. As such, BAE Systems may find new opportunities for its services in its primary "home" markets.

This is welcome news for BAE Systems as it is limited in its diversity vis-à-vis commercial opportunities. While the company is not broadly diversified across many disparate markets, it does possess a strong measure of diversity in the defense market. The firm is well positioned to support changing program priorities across air, on land, at sea, and in cybersecurity markets.

The group is leveraging its positions in electronic warfare and infrared technologies, as well as a diverse mix of commercial and civil government businesses in areas such as ship repair, information technology, and commercial aviation to maintain stability as markets change.

While U.K. aerospace manufacturers are facing an uncertain outlook due to the decision to leave the European Union, BAE Systems is not. Thanks to earlier expansion into the U.S. and Saudi Arabia, the company's sales are well diversified geographically. Further, the defense strategy of the U.K. is unlikely to change, leading to continued stability for military contractors in country.

That said, the company has tightened its operations in certain sectors such as air and maritime. In late 2017, BAE Systems initiated a restructuring of its operations. Under this revision the company created three new sectors and removed management layers including the Platforms & Services (P&S) UK and P&S International operating groups. Under the new structure, which took effect January 1, 2018, the company has five principal reporting segments, Electronic Systems, Cyber & Intelligence, Platforms & Services (US), Air and Maritime, which align with the strategic direction of the Group.

As part of the restructuring, some 1,400 jobs will be cut in the Air sector due to reduced production rates for the Hawk trainer and final assembly work on Eurofighter Typhoon. In addition, 375 jobs in the Maritime sector and 150 jobs within its Applied Intelligence business were also eliminated.

Difficult moves such as this will help to strengthen the company for the long term. Future program wins abroad will nearly all call for site production in customer countries. As such, BAE Systems is preparing itself for the "new normal" of defense spending.

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