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BAE Systems Prepares for Contraction

by: Matthew Potter
May 13, 2011

Category: BAE Systems, Business Line, Companies, Congress, Contract Additions, Contract Awards, Countries, Department of Defense, development program, Earnings, England, Events, Federal Budget Process, Military Aviation, Northrop Grumman Corp., Oshkosh Truck Corp, production program, Restructuring, Services | RSS 2.0

As the large defense contractors continue to post their results with most of the large U.S. companies reporting a fairly good quarter one of Europe’s two largest defense suppliers also announced. Unfortunately BAE Systems (BAE:LSE) did not do as well and is continuing to make preparations for a downsizing of its workforce.

The company put out an update prior to their upcoming annual meeting that made clear that 2011 will see further reductions in defense sales for this year. Much of this is due to the reduced size of the British military and its operations due to the planned strategic reorganization of the the U.K.’s defense forces.

In February when it announced results for the whole of 2010 the company made clear that it expected 2011 to be difficult. Even though it made a slight profit compared to 2009 when the London based company was buffeted by the loss of the U.S. FMTV truck contract as well as fines for settling a bribery investigation it still felt that the future as a whole would be challenging. The company needs to restructure some of its business groups and offerings to maximize profitability.

This has led to large amounts of job reductions in the past and more will be expected as 2011 goes forward. The loss of the FMTV contract was a big blow and will lead to large losses in Sealy, Texas where the plant was located. Oshkosh (OSK) won the latest production contract and moved the work to their facilities in Wisconsin.

The expected decline in U.S. defense spending will have similar results with contraction and reductions by all the different contractors. Northrop Grumman (NOC) has made the first major change through spinning off its shipbuilding parts to a new company, Huntington Ingalls Shipbuilding.

The large companies will see the first major job losses as they tend to make major systems which may require substantial workforces. If these systems are cut or cut back then the need for the production base will shrink. It may also be expected that more M&A will take place as it did nit he Nineties as company’s focus on less business areas.

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