BAE posted lower-than-expected full year profits for 2012 as sales reduced while pre-tax profits slumped by approximately 6 percent, blaming delay in the final terms of pricing of the Saudi Arabia-based contract. The year ended on a rough note after BAE failed to seal a merger deal with EADS and stated that the growth potential in the UK and the US is likely to be “constrained”.
BAE Misses Profit Estimates
On the 21st of February, BAE Systems Plc, Europe’s largest defense and aerospace company, informed that it recorded a fall in its full year preliminary profits as the pre-tax profit and revenue of the company declined. The pre-tax profits of the company dipped 6 percent to £1.35 billion from £1.48 billion a year earlier. The lower-than-expected profits failed to match analysts’ predictions as BAE was expected to post full year profits worth around £1.9 billion. Moreover, revenue for the period dropped by 7 percent to nearly £17.5 billion from £19.1 billion in 2011. Net profits for 2012 were estimated at £1 billion, sinking by 14 percent from a year earlier. However, the order backlog of BAE rose by 8 percent to £42.5 billion in 2012.
BAE is engaged in discussions with Saudi Arabia regarding its key Salam contract and the issue of price increases. The delay in the pricing of the Salam contract has led to reduction in its full year profits of 2012. According to a statement released by BAE, the earnings per share of the company are likely to increase by 3 pence, provided that the Saudi Arabia talks end in 2013.
The company announced that it would downsize its workforce by over 3,600 people in order to ease the impact of sluggish sales. BAE dismissed around 26,000 people in the past four years, including the 3,500 job cuts in 2011.
Defense Cut Threatens BAE
The US military, the largest customer of BAE, generates more than 40 percent of the company's revenues. With the US government planning to slash down the defense budget by £320 billion, BAE is under immense pressure due to an uncertain sales target. The company expects land & armament sales in 2013 to decrease as much as 10 percent, while solution sales are predicted to slightly increase. Poor sales in the US and UK markets led to lower-than-expected profits for the company. BAE stated that there were certain “growth opportunities” in the US and UK markets, adding that sales in those regions were likely to be “constrained” due to cuts in the defense budget.
BAE failed to complete a merger deal with the Europe-based aeronautics company EADS, after the German chancellor disagreed with the contract due to the fear of government involvement. The failed attempt made by BAE decreased its full year profits as the merger of the two companies would have made it the biggest aerospace company with combined earnings worth £60 billion. BAE has planned to buyback shares worth £1 billion over a period of three years despite falling profits.