BAE waits on Typhoon renegotiation, sales slump

BAE Systems, Britain's biggest defence contractor, is suffering from reduced military spending in both the US and UK, while a crucial fighter jet deal with Saudi Arabia has been hit by delays.

Sales in the first six months of 2012 were £8,334m, 11% lower than 2011 on a like-for-like basis, while underlying earnings before interest, tax and amortisation were £939m, 3% down on 2011 but better than analyst expectations of around £920m

BAE is in the middle of a major contract to supply 72 Typhoon aircraft to Saudi Arabia, of which 24 have been delivered. The two parties are now negotiating the price of what is known as the Salam contract. BAE says, "assuming a satisfactory conclusion to the Salam pricing negotiations" it will see earnings improve in the second half of the year.

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The other problem facing the firm has been a reduction in defence spending in its home UK market and a similar situation in the United States.

In the US, BAE had to cope with a so called "continuing resolution" in Congress in 2011 which meant spending was approved month by month, based on figures in the previous year.

For a defence contractor this was a nightmare and BAE says the ending of the continuing resolution has resulted in less disruption but adds: "with US government debt reduction measures to be determined and with Presidential and Congressional elections in November, delay to the approval of Fiscal Year 2013 budgets is likely, with the possibility that the US government operates under a continuing resolution in the last quarter of calendar year 2012."

BAE adds: "The risk of further reductions in US defence budgets remains".

In today's update, BAE says the interim dividend will be raised 4% to 7.8p per share.

Since January, BAE shares have gained 9.4%, against a FTSE 100 rise of just 2.5%.

BS