BAE Signals Armored Vehicle Slowdown Approaching Low-Point

BAE Systems Plc (BA/) Chief Executive Officer Ian King said demand for armored vehicles may be reaching the bottom after Europe’s largest weapons maker suffered a shortfall in sales.

BAE had a 14 percent drop at its U.S. land and systems business in the first half, the London-based company said today. Overall, sales fell 9.8 percent to 8.3 billion pounds ($12.9 billion). Analysts estimated 9.1 billion pounds. BAE fell as much as 3.3 percent in London trading as disappointing revenue overshadowed better-than-estimated profit.

“For the full year, BAE must demonstrate that the revenue weakness in the first half can be made up, something management appears to be confident of,” Rupinder Vig, an analyst at Morgan Stanley (MS), said in a note to clients.

King has been using cost cuts and efficiency improvements to battle shrinking state defense budgets. Further action will become necessary unless the U.S. Congress and President Barack Obama take action to avoid another $500 billion in defense spending cuts due to take effect in January. BAE generated more than 40 percent of revenue from the U.S. last year.

Shares of BAE Systems were trading down 2.8 pence at 309.6 pence, at 11:20 a.m. in London, after dropping as much as 3.3 percent earlier. BAE, the builder of the U.K.’s two new aircraft carriers, has advanced 8.7 percent this year, valuing the company at 10 billion pounds.

BAE has made a series of disposals in recent months, including in the land-systems division. King said efforts to “tidy up” the company will continue, but that no major divestments are planned.

U.S. Cuts

King added that the company has planned for U.S. defense cuts of $600 billion, beyond the $487 billion already implemented, and is ready to “be very agile” should more reductions become necessary.

“BAE Systems is operating in a challenging environment,” said King. The company is “taking the actions necessary to reduce cost, protect and grow margins and generate good cash flow.”

Given the clouded U.S. defense spending outlook, a buyback program is not on the agenda for this year, said Finance Director Peter Lynas.

Sales were down on lower support sales in the U.K. as the government reviews its force structure plans for the Army. “We are taking the action to accelerate some rationalization from 2013 into 2012,” King said.

Pentagon Order

While sales for Medium Mine Protected Vehicles are shifting to 2013 from 2012, the company said it has finalized a contract for $645 million with the Pentagon for Bradley armored vehicle work.

Earnings before interest, taxes and amortization, excluding one-time items, fell to 939 million pounds, beating the 903.4 million-pound average estimate of analysts surveyed by Bloomberg.

BAE confirmed its full-year guidance of modest earnings per share growth. Lower full-year sales will be offset by greater efficiency, Lynas said. BAE has 97 percent of 2012 sales already in the orderbook and more than 90 percent for 2013, he said. “We are not looking for a lot of new awards to meet the guidance.”

The guidance assumes long-running pricing negotiations with Saudi Arabia over the sale of Eurofighter Typhoon fighter aircraft is resolved. Saudi Arabia already has 24 of the twin- engine fighters built by BAE, Finmeccanica SpA (FNC) and European Aeronautic, Defence & Space Co. BAE said the price escalation contract will be finalized this year.

The delivery of 48 additional Typhoons to Saudi Arabia will resume next year, and production is already underway, King said.

Saudi Deals

Other deals with Saudi Arabia are under discussion, including contracts to support Typhoon and Tornado fighters. Negotiations should be completed this year with Saudi Arabia for training services to the air force and to sell weapons for both fighter jets, said Guy Griffith, managing director of the company’s international business.

Commercial discussions with Oman over the sale of a dozen Typhoon fighters will begin early next month, King said, with the goal of finalizing a deal before year-end.

BAE’s cyber and intelligence unit had the fastest first- half growth, with revenue rising 9.7 percent. The U.S. cybersecurity business has seen a slowdown, offset by the prospect of as much as $2 billion in potential new contracts for BAE, King said. Internal spending to bolster the division will see margins toward the lower end of the 8.5 percent to 9.5 percent earnings margin guidance, Lynas said.

To contact the reporter on this story: Robert Wall in London at rwall6@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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