BAE Systems said Thursday that the successful conclusion of negotiations about a key Saudi Arabian fighter-jet contract would underpin modest earnings growth this year, excluding the impact of a tax credit which contributed to an 18% rise in 2011 net profit, but sales growth would be flat.
However, the U.K. company’s order book shrank in 2011 to £36.2 billion ($56.81 billion) from £39.5 billion in 2010 as the spending squeeze facing governments on both sides of the Atlantic crimped demand for the group’s defense and security equipment and services.
“Whilst little sales growth can be expected for the group in 2012 in the current market conditions, modest growth in underlying earnings per share is anticipated, assuming a satisfactory conclusion to Salam negotiations in 2012,” BAE Systems said.
The group, which raised its 2011 dividend by 7.4% to 18.8 pence a share, said it would continue to take action to reduce costs while continuing to focus on services and developing faster-growth activities such as cybersecurity.
The maker of Challenger tanks, Tornado jet fighters, Astute class submarines and Queen Elizabeth-class aircraft carriers employs about 100,000 workers world-wide, said it has made a net reduction of around 22,000 jobs in the past three years.
The company reported net profit of £1.24 billion in 2011 compared with £1.05 billion in 2010 as one-off items, among them a £197 million research-and-development tax credit, offset the impact of the delay in booking sales and profits from its Salam contract to supply Typhoon fighter jets to Saudi Arabia. Operating profit fell slightly to £1.45 billion from £1.47 billion on a 15% fall in revenue to £17.77 billion as costs also fell.
Earnings before interest, taxes, amortization and impairment of intangible assets, the most closely watched indicator of BAE’s performance, fell 7.1% to £2.03 billion, in line with average expectation of analysts polled by BAE.
The group’s pension deficit was sharply higher at £4.2 billion after tax, compared with £3.0 billion at the end of 2010.
BAE Systems shares fell sharply in early trading after sharp gains earlier this week, as the group’s cautious outlook knocked some of the wind out of investors’ sails. In the European morning, they were down 4% or 13.3 pence at 3194p compared with a 0.8% fall in the benchmark FTSE 100 index.
“[The] 2012 guidance [is] very weak—little sales growth, and modest growth in EPS excluding [the] tax credit,” said analysts at Goldman Sachs in a note to clients.
“Our order book can be quite lumpy…. [but] we do expect good international business this year,” said Chief Executive Ian King.
BAE should benefit from growth in defense spending in Saudi Arabia, its main market outside the U.S. and U.K., and is confident of securing an order for Typhoon fighter jets from Oman on behalf of the Eurofighter consortium, Mr. King said.
He said Eurofighter remains in the running for a multibillion-pound contract from the Indian government, even though New Delhi has chosen France’s Dassault Aviation, the maker of the Rafale fighter jet, for exclusive final talks.
“This is just a step in the process. It is not as yet the final contract,” Mr. King said. Discussions with BAE’s Eurofighter partners—European Aerospace, Defense and Space Co. and Finmeccanica SpA—about how to recalibrate the bid, possibly by reducing the price, are under way.
BAE has become increasingly dependent on international business due to reduced defense spending in the U.S. and the U.K.
The U.S. government envisions shrinking military spending by $487 billion over 10 years, representing a cut of about 8% a year, according to Pentagon figures. In the U.K., the government plans to offset a £38 billion hole in its defense budget with a 7.5% cut the Ministry of Defence’s annual budget to save £10 billion over four years as well as make reductions in the number of military personnel and equipment programs.
Corrections & Amplifications
BAE Systems’ operating profit fell slightly to £1.45 billion from £1.47 billion on a 15% fall in revenue to £17.77 billion as costs also fell. An earlier version of this article incorrectly said operating profit fell from £1.64 billion.
By Matthew Curtin & Mark Shapland
February 16th, 2012