Bloomberg News

BAE Profit Down as Arms Budgets Shrink, Afghan War Nears End

July 31, 2014

BAE Systems Plc (BA/), Europe’s largest defense company, said first-half profit slid 7.5 percent as dwindling military spending in western states outweighed the impact of higher demand from the Middle East and Asia.

Earnings before interest, tax and amortization before one-time items dropped to 802 million pounds ($1.4 billion) from 867 million pounds a year earlier, the maker of Eurofighter Typhoon warplanes and Astute submarines said today in a statement.

Full-year profit remains headed for a 10 percent drop, the London-based company said, reiterating guidance given in February, when the stock slumped the most in 5 1/2 years. BAE has sought to make itself less reliant on British and American defense spending by establishing five other “home markets” around the world while seeking to boost civil sales and develop or buy new technologies in areas such as cyber-security.

While U.S. and U.K. markets “remain more constrained,” the company’s underlying performance has been “robust,” Chief Executive Officer Ian King said on a conference call. “Sales are anticipated to be weighted towards the second half of 2014, including the timing of Typhoon aircraft deliveries,” he said.

BAE declined as much as 7 pence, or 1.7 percent, to 418 pence and was trading 0.2 percent lower as of 9:30 a.m. in London. The stock has lost 2.5 percent so far this year, valuing the company at 13.4 billion pounds.

Currency Drag

First-half revenue dropped 10 percent to 7.61 billion pounds, reflecting the distribution of Eurofighter deliveries and lower volumes in the Land & Armaments unit, where demand has declined as western powers prepare to exit Afghanistan.

BAE reported pretax profit of 541 million pounds, compared with the average analyst estimate of 634 million pounds.

The company continues to anticipate that earnings per share for the full year will be 5 to 10 percent lower than in 2013, it said, while an exchange rate of $1.7 to the pound would impact returns by another penny a share versus previous guidance.

Last year’s earnings were padded out by an agreement this February on pricing terms for Saudi Arabia’s purchase of 72 Typhoon warplanes under the so-called Salam contract, which the company included in the 2013 reporting period.

Saudi Upgrades

King said 1.3 billion pounds of new orders are currently being finalized, mostly relating to upgrades of existing Saudi Typhoons. Some 42 of the Eurofighters are due to be delivered this year in Europe and the Middle East, 30 in the second half.

BAE has said Land & Armaments sales may fall a further 20 percent to 25 percent in 2014, while revenue will shrink 5 percent at the U.K. platform arm that makes the Typhoon.

The company’s other major warplane commitment, Lockheed Martin Corp. (LMT:US)’s F-35 Joint Strike Fighter, won’t be hurt by a no-show at this month’s Farnborough Air Show following an engine fire, King Said. BAE is the main sub-contractor on the world’s largest defense program, making the F-35’s rear fuselage, tail and wing parts and overseeing production of the fuel, ejection and life-support systems and elements of weapons integration.

One of two 65,000 metric-ton aircraft carriers on which the Royal Air Force’s F-35s will be deployed was successfully floated two weeks ago and work is poised to begin on assembly of the second vessel, King said. BAE is building the ships with Babcock International Group Plc (BAB) and Thales SA (HO) of France.

The CEO said that European cooperation on developing an unmanned combat-drone that could one day replace fighter planes is likely to remain a joint effort between BAE and Dassault Aviation SA. (AM) While a wider regional program might develop “over time,” Airbus Group NV (AIR) in particular doesn’t currently have the appropriate capabilities to become involved, he said.

BAE also said today that it has entered into an agreement for the bolt-on purchase of U.S. imaging-technologies provider Signal Innovations Group Inc., and that a deal should close in the third quarter following regulatory approvals.

SIG, which has 35 world-class imaging experts, according to King, will be combined with BAE’s existing capabilities to help clients analyze tactical and strategic intelligence. There should also be commercial applications, such as pipeline protection for the oil and gas industry, the CEO said.

To contact the reporter on this story: Christopher Jasper in London at cjasper@bloomberg.net

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


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