BAE Systems said it expected sales to fall in 2011 as the impact of defense cuts in the UK and U.S. begin to hit home, sending its shares lower.
BAE, Europe's biggest defense contractor, said its 2011 sales would be dented by ongoing weakness at its land and armaments business, which makes artillery and armored combat vehicles, and accounts for around a quarter of its profits.
Land and armaments 2011 sales are guided to be around $7 billion versus $9.2 billion in 2010 -- the trough is deeper than we expected, said Royal Bank of Scotland analyst Sandy Morris.
Shares in BAE, which had risen 6.3 percent so far this year, were 3.7 percent down at 342.50 pence by 0940 GMT, valuing the company at around 12 billion pounds.
The company posted a slight rise in 2010 profits, reporting underlying earnings before interest, tax and amortization (EBITA) up 0.8 percent to 2.21 billion pounds ($3.55 billion) on revenues 1.8 percent higher at 22.39 billion pounds.
The rise was driven by cost savings and growth at its services and international business, which offset a 6 percent fall in land and armaments sales.
BAE, which is involved in the production of F-35 fighter jets and Astute class submarines, was expected to report an average EBITA of 2.12 billion pounds, according to a Thomson Reuters poll of 18 analysts.
In 2011, a reduction in sales is anticipated as the volume reduction in land and armaments is expected to complete and as the changes arising from the Strategic Defense and Security Review (SDSR) reduce activity in the UK businesses, said BAE'S Chief Executive Ian King.
The 2011 performance is expected to be weighted toward the second half of the year.
Britain last year slashed its defense budget by 8 percent to help reduce the country's huge budget deficit, cutting its army, navy and air force.
U.S. defense spending, also very important to BAE, was seen as flat at best. BAE derives 51 percent of its revenues from the U.S.
There is plenty of caution on continued pressures on defense budgets and the impact of contract delays and in the U.S. where there is an ongoing resolution, which is limiting new contract awards, said Investec analyst Andrew Gollan, who added he was reviewing his 'buy' recommendation on the stock.
Revenues are to decline in 2011 but it feels to us that profits will be flattish.
The company raised its final dividend by 9.4 percent to 10.5 pence, taking the total dividend for the year to 17.5 pence -- up from 16 pence a year earlier.
BAE, which is part of the four-nation consortium building the Eurofighter jet, has cut around 15,000 employees in the last two years in a bid to lower costs.
The company, which has five 'home' markets -- the U.S., UK, Saudi Arabia, India and Australia -- is also looking at the possibility of adding a sixth in South America, according to its CEO.
(Editing by Neil Maidment, Jane Merriman and Sophie Walker)