LONDON — Britain’s BAE Systems became the last of the world’s top five defense contractors to reveal its 2012 results when the company reported Feb. 21 a decline in sales, but was able to point to a significant hike in non U.K. and U.S. contract awards.
BAE fared the worst of the ‘Big Five’ companies in revenue terms, recording a 6.8 percent decline to 17.8 billion pounds ($27.25 billion) against 19.1 billion pounds the previous year. Pretax profits slipped marginally to 1.3 billion pounds compared with 1.4 billion pounds in 2011.
Raytheon and General Dynamics reported sales declines of 1.5 percent and 3.6 percent, respectively, while Lockheed Martin and Boeing both registered gains.
Last year’s Defense News Top 100 list of defense companies, based on 2011 results, listed Lockheed as the sector’s largest firm followed by Boeing, BAE, General Dynamics and Raytheon. Only Lockheed showed a revenue increase in 2011 as budget pressures, principally in the U.S. and Europe, took their toll.
BAE’s revenue decline last year resulted from falling demand at the U.S.-based Land & Armaments business and a delivery freeze on a 72-aircraft Typhoon order for Saudi Arabia.
The delivery halt was triggered by a change in the plan to assemble the final 48 aircraft in Saudi Arabia and ongoing negotiations over price escalation.
The long-running negotiations continue on the price escalation, but Chief Executive Ian King said the company would only strike a deal “at the right price, timing is not driving us to make a decision.”
Analyst Howard Wheeldon of Wheeldon Strategic Advisory said the two sides are making progress.
“The two sides have come a lot closer, and I am convinced they will sort out the issues in the next 12 months,” he said.
The first 24 Typhoons have already been delivered as planned from the BAE plant at Warton in northwest England. The two sides have agreed final assembly will be completed at Warton, and the first of the new batch is due for delivery in May. A further nine aircraft are due to be handed over by the end of the year.
Deliveries on the 72-aircraft deal are scheduled to be completed during 2017, but the two sides are already discussing a possible follow-on order.
Revenue forecasts for the current year from all five companies are heading in the wrong direction, albeit mostly anticipating modest reductions. None of the estimates, though, weigh the impact of sequestration on company fortunes.
BAE’s revenue performance is partly tied to the resumption of Typhoon deliveries and the settlement of the price escalation negotiations with the Saudis.
Short-term revenue growth problems abound for the industry, but the order backlog reported by four of the five top companies in the annual results suggest it’s not all doom and gloom.
BAE’s total order backlog topped 42 billion pounds, advancing from 36 billion pounds in 2011. Lockheed announced earlier it had $82 billion of orders in the bank and Raytheon $36 billion.
General Dynamics’ backlog declined 10 percent to $51.3 billion, but that figure includes activities outside defense.
Order intake outside of its core British and U.S. markets lifted BAE. Non-U.K. and -U.S. orders totaled 11.2 billion pounds last year on the back of significant deals for CV90 armored vehicles, Typhoons, Hawk jet trainers, F-16 updates and other equipment.
The previous year the figure stood at just 4.8 billion pounds.
With an announcement that BAE is to buy back up to 1 billion pounds in shares over the next three years, and helped by what was generally seen by financial analysts here as a good performance, the company’s share price moved ahead strongly last week.
The final size of the share buyback depends on a successful conclusion to the Typhoon price talks, said company officials.
King said the figures show the company’s geographic diversity is providing resilience at a time when budget downturns are impacting some markets.
“Our strategic response has been to target international markets outside the U.K. and U.S. We have made excellent progress with our [total] backlog rising for the first time since 2009,” he said.
Speaking to reporters here, King played down the possible impact sequestration or other U.S. budget cuts may have, saying international sales growth would “more than compensate the impact of sequestration” on company revenues.
At its worst, the potential business downturn would take out “about 1 billion pounds of revenue .... the cash flow impact of that is not huge,” he said.
Wheeldon said the BAE results showed the company is in reasonable shape.
“BAE has performed well and has benefitted from being quick to adapt to changing market conditions in recent years,” he said.
The next big issue for BAE to address is the future of its surface shipbuilding yards in the U.K.
“I think we will get an announcement about rationalization of BAE’s maritime activities in the U.K. within four weeks,” Wheeldon said. Analysts and media speculation reckon the Portsmouth yard in southern England will likely be axed with the remaining yards in Glasgow, Scotland, surviving, possibly with reduced employee numbers.
On the other side of the Atlantic, BAE announced it might have to cut up to 3,500 workers from its naval support business if the U.S. Navy adopts a plan to cut warship maintenance requirements.