BAE Systems Eyes US Growth, Qatar Deals as Net Profit Falls

By Robert Wall 
 

LONDON--The new U.S. defense spending plan could bolster the outlook for British arms maker BAE Systems PLC (BA.LN), management of Europe's largest weapons maker signaled, but the benefits aren't expected to improve the outlook for a lackluster 2018.

The U.S. is the largest market for London-based BAE Systems, representing 39% of its GBP19.6 billion ($27.2 billion) in underlying sales, the company said, as it posted full-year 2017 results.

Net profit fell to GBP854 billion from GBP913 million in 2016 to reflect a write down in value on the ailing Applied Intelligence cyber-security division.

BAE Systems Chief Executive Charles Woodburn, reporting his first full-year figures after taking the top job last summer, said the growth prospects for the company's U.S. product lines go from "good growth to even better," though the benefits aren't likely to emerge until 2019 or 2020.

The Pentagon plans to spend more than $470 billion over the next two years on weapons purchases and military research, a 20% increase from the Obama administration's final plan in fiscal 2017.

The U.S. tax overhaul also benefits BAE Systems, reducing its underlying effective tax rate to 18% from 21%. The company said it wasn't looking to shift work to the U.S., though, to take greater advantage of the more liberal tax regime.

For BAE Systems, 2018 is largely seen as a transition year as some British activities, including production of Eurofighter Typhoon combat jets and support of Tornado military planes in British service slows. BAE Systems said earnings in 2018 should be largely stable with underlying earnings per share for 2018 expected to be on par with 2017, or 42.1 pence a share reflecting accounting changes.

BAE Systems shares, which opened higher, were down 1.5% in early morning trading.

The company is trying to secure additional Typhoon orders beyond an agreement with Qatar for 24 of the planes. Mr. Woodburn said opportunities for additional deals are as good as they've been in a number of years. BAE Systems is chasing a follow-on order of Typhoons from Saudi Arabia and also hopes to win a deal for the plane in Belgium and Malaysia. Mr. Woodburn wouldn't address specific campaigns.

BAE Systems is trying to secure additional Typhoon orders beyond an agreement with Qatar for 24 of the planes.

Qatar, in addition to the Typhoon fighter planes, also is in talks with the U.K. to buy nine Hawk trainer planes. BAE Systems Chief Financial Officer Peter Lynas said those would provide some upside to orders in 2018, though sales and profit wouldn't materialize until later.

The British government this week also announced plans for a new combat air strategy to examine what equipment it may need to replace the Typhoon, which should remain in service until 2040. Mr. Woodburn welcomed the review, without signaling what outcome the company may advocate.

BAE Systems said it was embarking this year on an effort to revamp its supply chain to cut cost. Mr. Lynas said the company was cutting the number of suppliers it uses to increase bulk purchases to win discounts.

Write to Robert Wall at [e-mail]

(END) Dow Jones Newswires

February 22, 2018 04:03 ET (09:03 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.