BAE Systems continued to make good progress during 2008 in addressing its strategy to deliver sustainable growth in shareholder value by being the premier global defence and aerospace company.
The Group performed well with organic growth in our US businesses benefiting from strong demand in their respective market sectors. The Group has also delivered growth from recent acquisitions. Increased profitability is being achieved across this higher volume of business from good programme execution.
The Group continues to benefit from delivery against its strategic framework. The Group’s progression has been achieved through the focus on existing defence capabilities, the broadening to other domains such as the land systems sector, and the substantial expansion of the business footprint across its markets. Activity is starting to increase in India as resources are committed to developing that market.
In 2008, the Group has further developed the business with targeted value-adding acquisitions.
In June, the acquisition of US-based MTC Technologies was completed. The acquisition focuses on the substantial readiness and sustainment opportunities seen in the US defence market and builds on the Group’s established through-life support capabilities.
Also in June, the acquisition of the Australia-based defence business Tenix Defence was completed, positioning the Group as the industry leader in the Australian defence market with air, land and naval capabilities. The acquisition is another step in progressing the Group’s strategy to grow through the provision of through-life capability in partnership with the armed forces in its home markets.
The acquisition of Detica in September addressed the Group’s strategy of targeting national security markets. Opportunities are being identified to leverage the Group’s system integration capabilities to meet adjacent, non-military, security requirements for government customers.
The Group will continue to increase emphasis on maximising defence and security capabilities across the home markets in the US, UK, Saudi Arabia, Australia, Sweden and South Africa. In addition, the Group will look to expand where it sees opportunities to establish an industrial presence in new markets, such as India.
Export performance has remained solid with awards including RG-series vehicles to a number of countries, including Spain and Sweden, M777 guns to Canada, CV90 infantry fighting vehicles, and a number of orders for Electronics, Intelligence & Support products, including those in support of US platforms.
In July, BAE Systems completed an agreement with VT Group plc (VT) to consolidate the UK naval shipbuilding industry supported by the signing of the manufacturing contract for the Future Aircraft Carrier programme and by an agreement for the future domestic warship workload with the UK government. The merger of the warship build and support businesses of VT and BAE Systems into the BVT joint venture was achieved in 2008. The joint venture is subject to put and call options and, in January 2009, VT announced that it had decided to exercise its put option to sell its interest in BVT to BAE Systems and that VT expects to be in a position to exercise that option by 1 July 2009.
Even after the active programme of acquisitions over recent years, good cash generation has enabled BAE Systems to maintain a strong balance sheet. Diligent treasury management enabled the Group, during 2008, to avoid the effects of the extreme dislocation in capital markets. Bank counterparty risk has been and continues to be monitored closely on a systematic and ongoing basis, taking account of the size of the institution, its credit rating and its credit default swap price.
The difficult economic environment, and in particular the falls in equity markets in 2008, has affected the Group’s pension schemes. Pension scheme funding is regularly reviewed with the Trustees of the schemes. The agreed funding plans have been considered over the longer term and are deemed to continue to be reasonable. An agreement with the Trustees of the Main UK Pension Scheme has recently been concluded following the actuarial valuation carried out as at April 2008. The recovery plan to clear the deficit has been accepted by the Pensions Regulator.
In May 2008, the Woolf Committee, an independent body appointed by the Board under the chairmanship of Lord Woolf to review the Group’s ethical standards, published its report. A steering group and associated working groups have been established to address all 23 recommendations and a plan has been developed for implementation of recommendations within three years. The aim is to establish the Group as a leader in business conduct, not just within our sector but within the global business community.
Consistent with the importance attached to Corporate Responsibility and the drive towards leadership in business ethics, the Group has taken steps to embed such issues more directly in its day-to-day operations. An important part of this drive is the establishment of a Global Code of Conduct in which all employees have a clear understanding of what is expected of them. The Code of Conduct was launched in January 2009 to codify the required standards of personal and business conduct.
The Group has been reorganised and the Executive Committee restructured. The operating group heads and functional leaders are all now represented on the Executive Committee.
The Executive Committee’s top ten objectives for 2009 are summarised here. Many of these objectives are consistent with those from 2008. In particular, the team will remain focused on delivering financial performance, consistent programme execution and developing business in its defined home markets. In addition, further emphasis is being placed on safety performance and the Corporate Responsibility agenda is made a key objective for the executive team in 2009.
A well implemented strategy and good programme execution are only two of the elements of high performance. BAE Systems comprises well over 100,000 talented people working in numerous locations around the globe. The challenge and the opportunity is to further develop the Group as a cohesive, inclusive organisation. The move to embrace a single, Group-wide, high performance culture is creating an environment in which all employees can make a real contribution and be recognised for their part in BAE Systems’ drive for continuing success.
BAE Systems has consistently delivered progressive performance over recent years. BAE Systems is not insulated from the difficult wider economic environment. The Group recognises that defence budgets are likely at some stage in the future to come under further pressure and it will continue to apply conservatism to its planning assumptions. The Group is well positioned, having a large forward order book, a good balance of market positions around the globe, a well spread portfolio of programmes and a strategy to address anticipated priority areas of spend for its customers.
Ian King Chief Executive
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