Defence & Aerospace · Defence Primes
Backlog and Book-to-Bill in Defence
Funded versus unfunded backlog, the book-to-bill formula, why ratios above 1.0 build backlog, and why Lockheed Martin's ratio is call-cited, not filed.
Selborne Research · Defence Primes coverage: 9 guides, 6 company profiles, a primer and Excel model
Educational analysis. This guide is not investment advice or a recommendation to buy or sell any security, and it is not personalised.
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Book-to-Bill Above 1.0 Means Backlog Is Building
Backlog is forward revenue visibility under signed contracts. Book-to-bill tells you whether new orders are outpacing revenue recognised in the period. When orders exceed revenue, the ratio sits above 1.0 and backlog grows. That is the first screen equity analysts run on defence primes before they open a DCF.
The metric sounds simple. Filers define the numerator differently, and backlog itself mixes funded and unfunded amounts. Treat cross-peer rankings as indicative until you have reconciled each filer’s definition.
What Counts as Backlog
General Dynamics’ FY2025 10-K is the cleanest US definition in the peer set:
| Component | Treatment |
|---|---|
| Funded backlog | Appropriated contract value remaining |
| Unfunded backlog | Firm contract value not yet appropriated |
| Options / IDIQ (indefinite-delivery, indefinite-quantity) ceilings | Outside backlog; in estimated potential contract value |
BAE Systems publishes two measures: Group order backlog of £83.6B and IFRS order book of £63.1B (FY2025). Do not merge them. L3Harris reports contractual backlog of $38.7B. RTX’s total backlog was $268B at 31 December 2025, split $107B defence and $161B commercial.
Backlog is a stock; book-to-bill is a flow. A prime can carry a large backlog with a sub-1.0 book-to-bill if revenue recognition accelerates on mature programmes.
Book-to-Bill Arithmetic
The formula is orders (or net awards, or order intake) divided by revenue (or sales) in the same period:
Book-to-bill = Orders ÷ Revenue
When the result exceeds 1.0, orders exceeded revenue and backlog should rise, assuming no major cancellations. GD’s defence segments ran 1.6-to-1 in FY2025, and defence-segment backlog grew from $70.9B to $96.2B (+36%).
Typical screening bands:
| Band | Ratio | Read |
|---|---|---|
| Contracting | <0.95 | Backlog likely shrinking |
| Steady | 0.95-1.05 | Orders tracking revenue |
| Growth | >1.05 | Backlog building |
Above 1.0 is the healthy threshold in our screening.
FY2025 Peer Ladder
Ranking the six-name set on FY2025 book-to-bill takes more than reading off a single ratio. Each filer defines orders and revenue slightly differently, so the ladder below only holds once those definitions sit next to the numbers they produce.
| Position | Company | Book-to-bill |
|---|---|---|
| Top | RTX | 1.56x |
| Middle | L3Harris | 1.30x |
| Bottom | Northrop Grumman | 1.10x |
The full six-company ranking, with each filer’s own formula and its filed-versus-call-cited status beside it, is in Defence Prime Book-to-Bill Benchmarks.
Backlog Scale in Context
Backlog size relative to revenue sets the conversion horizon:
| Company | Backlog | FY2025 revenue | Backlog ÷ revenue |
|---|---|---|---|
| RTX | $268B | $88.6B | ~3.0x |
| Lockheed Martin | $193.6B | $75.0B | ~2.6x |
| General Dynamics | $118B | $52.6B | ~2.2x |
| Northrop Grumman | $95.7B | $42.0B | ~2.3x |
| BAE Systems | £83.6B | £30.7B sales | ~2.7x |
| L3Harris | $38.7B | $21.9B | ~1.8x |
A backlog worth two to three years of revenue is a working assumption for platform primes; systems and electronics names run nearer two. The book-to-bill ratio tells you whether that stock is still growing.
Where This Shows Up in Filings
RTX’s ratio sits on a backlog split more commercial than defence. So a US budget move doesn’t pass through to RTX revenue the way it does at a pure-play prime. The demand-cycle guide and the RTX profile work through that dilution.
General Dynamics reports two book-to-bill figures because it reports two businesses. The defence segments run hotter than the group number because Gulfstream, a commercial aircraft business, sits inside the company-wide denominator and pulls it down. The GD profile breaks out submarine revenue at 24% of consolidated sales, the programme behind that defence-segment strength.
Lockheed Martin is the opposite case: one ratio, and it is call-cited. That gap between call-cited and filed matters more here than anywhere else in the set, because F-35 concentration at 27% of consolidated sales means Lockheed Martin’s backlog momentum rides on a single programme’s order cadence; see the LMT profile.
Reading Book-to-Bill in a Model
- Pull each filer’s stated definition from the 10-K or earnings exhibit before computing your own ratio.
- Compare year-on-year backlog change against the ratio as a sanity check (GD defence backlog +36% with 1.6x is consistent).
- Separate defence backlog from commercial where disclosed (RTX, GD Aerospace/Gulfstream).
- Flag call-only ratios (LMT) and dual backlog measures (BAE Group vs IFRS).
- Cross-check backlog conversion with FCF yield in the valuation guide: a prime can show strong book-to-bill but weak cash if working capital or capex timing shifts.
Northrop Grumman’s ratio is the lowest of the six, still comfortably above 1.0. That matters more once you rank backlog momentum against segment margin dispersion on classified platforms, where less disclosure is available to check the number against.
Funded backlog and FCF conversion are the inputs. This primer takes them to a ten-year cash-flow value and an FCF yield you can screen.
- 15 sections, backlog roll-forward to a discounted cash-flow value
- 44 pages
- platform prime (Meridian) and diversified systems (Vectra)
- 2 worked archetypes
- book-to-bill, FCF conversion, programme concentration, segment margin
- 6-company screen
The Excel model is the primer's two archetype builds live across 11 sheets: a ten-year, backlog-driven free-cash-flow DCF with a Gordon terminal. Change the book-to-bill, the FCF conversion ratio or the WACC and the value per share moves; the backlog, conversion-bridge and concentration sheets update alongside it.
See what's in the Defence Primes Sector Primer →£25 PDF · £59 with the Excel model · £159 for all three Defence & Aerospace industries
Frequently Asked Questions
- What is backlog in defence contracting?
- Backlog is the estimated remaining sales value under firm contracts. Filers split funded backlog (appropriated) from unfunded backlog (firm but not yet appropriated). Options and IDIQ (indefinite-delivery, indefinite-quantity) ceilings sit outside backlog in estimated potential contract value. General Dynamics' FY2025 10-K states that backlog includes funded and unfunded amounts on signed contracts; option years and IDIQ task orders are excluded until exercised.
- How do you calculate book-to-bill for defence primes?
- Book-to-bill is orders (or net awards) divided by revenue in the period. When the ratio exceeds 1.0, orders exceeded revenue recognised and backlog should build. Definitions differ: GD uses orders ÷ revenue; Northrop Grumman uses net awards ÷ sales; BAE uses order intake ÷ sales. Always match the filer's numerator and denominator before ranking peers.
- What is a healthy book-to-bill ratio for defence contractors?
- We screen at above 1.0 as healthy backlog growth. Bands: below 0.95 contracting; 0.95-1.05 steady state; above 1.05 growth. FY2025 filed ratios span RTX 1.56x, GD 1.5x company-wide (1.6x defence segments), L3Harris 1.3x, BAE 1.2x and Northrop Grumman 1.10x. Lockheed Martin management cited ~1.2x on the Q4 2025 call; that figure is not in Exhibit 99.1 or the 10-K.
- Why do backlog definitions differ between defence primes?
- Contract accounting rules allow different disclosure choices. BAE publishes Group order backlog (£83.6B) separately from its IFRS order book (£63.1B). L3Harris reports contractual backlog ($38.7B). GD splits defence-segment backlog ($96.2B) from company-wide backlog ($118B, which includes Gulfstream). Cross-peer screens need a footnote stating which definition each filer uses.
Read next
Funded vs Unfunded Backlog in Defence
What appropriation does to a backlog number, why each prime defines funded and unfunded in its own words, and a worked example from one FY2025 filing.
Defence Prime Book-to-Bill Benchmarks
FY2025 book-to-bill ranked across RTX, GD, LHX, LMT, BAE and NOC, each with backlog and the filer's own orders-to-revenue definition beside it.
Cost-Plus vs Fixed-Price Contracts
NOC cost-type vs FFP margin/risk language, verified portfolio mix (~50% fixed at NOC; GD 51% fixed / 44% cost-reimb), and segment margin dispersion across the peer set.
Free Cash Flow Conversion for Primes
Why primes screen on FCF ÷ net income: GD incentive weight 25%, OCF 122% vs FCF 94%, and the FY2025 ladder from LHX 170% to NOC 79%.
Valuing Defence Primes (FCF Yield)
How to compute FCF yield for defence primes and cross-check it against P/E, using FY2025 filed figures, the BAE FX adjustment, and FCF conversion.
Defence Budgets and the Demand Cycle
US DoD FY2026 request $961.6B (+11.8%), NATO 2% met by all 32 Allies, Hague 5%-by-2035, and how RTX 52/48 vs LMT ~99.6% government changes budget-beta.
See it applied
These company profiles apply the concepts from this guide to real public companies.
Also in Defence Primes
- Backlog and Book-to-Bill in Defence
- Defence Prime Book-to-Bill Benchmarks
- Defence Prime Segment Margin Benchmarks
- Funded vs Unfunded Backlog in Defence
- Free Cash Flow Conversion for Primes
- FAS vs CAS Pension Accounting for Defence Primes
- Cost-Plus vs Fixed-Price Contracts
- Defence Budgets and the Demand Cycle
- Valuing Defence Primes (FCF Yield)