Reaction to the interim results of BAE Systems, Britain's biggest defence contractor, has been lukewarm, with the slump in sales overshadowing a slight beefing up of the order backlog and a solid showing by the UK operations.
Sales in the first six months of 2012 fell to £8,334m from £9,229m, 11% lower than 2011 on a like-for-like basis and a bit below what the market was expecting.
Underlying earnings before interest, tax and amortisation (EBITA) of £939m, were 3% down on 2011 but better than analyst expectations of around £920m.
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Good old profit before tax ebbed to £655m from £691m in the first half of last year, while diluted earnings per share (EPS) were unchanged year-on-year at 14.5p. The group is still expecting to achieve a modest improvement in EPS over the full year, but that is assuming that the drawn-out negotiations over what is known as the Salam contract - the provision of 72 Typhoon aircraft to Saudi Arabia - are successfully concluded.
The good news is that, although sales are down, the order backlog over the six month period improved to £40.0bn from £39.1bn at the year-end.
Declining sales in the current cost-cutting environment is not altogether surprising but the order backlog suggests that BAE may not have to batten down the hatches for much longer.
Sandy Morris at broker Jefferies usually uses operating cash flow as a health check on the company and so is naturally encouraged that this came in at +£742m this time round versus +£11m in the first half of 2011.
"Assuming the Typhoon price variation negotiations with Saudi Arabia complete, that [cash flow performance] will extend through 2H12 [second half of 2012], in our view," Morris said.
"We recognise that advance payments will ebb and flow, but we believe BAE's operational cash flows point to quite positive outlooks for the P&S [Platforms & Services] (UK) and P&S (International) divisions," asserts Morris, who has a "buy" recommendation on the stock.
The UK P&S business managed to increase underlying EBITA to £420m from £310m the year before, despite sales diving to £2,651m from £3,052m. It remains the biggest money earner for BAE Systems, just edging out P&S (US), where underlying EBITA fell to £189m from £256m on sales that fell to £2,254m from £2,685m.
The performance of P&S (UK) surprised to the upside versus Jefferies's projection, "probably on Typhoon Tranche 2 and T45 Destroyer" the broker notes.
There was also some good news on the debt front. Net debt, as defined by BAE Systems, narrowed to £1,230m from £1,439m at the end of 2011. Jefferies thinks there may have been a significant payment received from Saudi Arabia late in the reporting period in respect of the Tornado upgrade programme.
Ever the optimist, Morris suggests that "BAE's financial position is steadily moving towards a point where a share buyback programme is feasible again, although even allowing for the better-than-expected inflow seen in 1H12 that point is most likely to be reached in FY13 [full year 2013]."
Investec, which is neutral on the stock, described the performance as a steady one in challenging markets, with the UK P&S division saving the day, "due to profit take on maturing UK programmes (specifically Type-45)."
"Overall results are fine given the challenging environment, but we feel there is not quite enough here to materially drive the rating following the share's recent strong performance (+15% from beginning of June - admittedly from depressed levels)," is Investec's view.
That seems to be a view echoed by the market, which marked the shares down a few pence to 309.5p, still north of Investec's price target of 290p. Until the Salam project negotiations are sorted out, the shares look set to remain under a cloud.
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