UPDATE 2-U.S. defence budget uncertainty clouds Chemring outlook

Tue Jun 18, 2013 1:47pm EDT

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By Abhishek Takle

June 18 (Reuters) - British military equipment maker Chemring Group Plc said results for the year would likely be at the lower end of its expectations as it restructures its business to cope with the uncertainty around defence budget cuts in the United States.

Chemring had in January said it expected difficult market conditions to persist in 2013.

About $85 billion in across-the-board government cuts to both civilian and defence programmes, known as sequestration, kicked in in March after President Barack Obama and Congress failed to agree on a plan to bring down the United States' budget deficit.

The budget reductions have weighed on military equipment makers such as Chemring and have made it difficult for them to predict exactly how much of an impact the cuts would have on their businesses.

Chemring supplies equipment such as flares and pyrotechnics for ejection seats in aircraft, and minefield breaching systems to the U.S. military.

Europe's largest defence contractor, BAE Systems, last month left its outlook for the year unchanged, saying its 2013 forecast does not reflect the impact of U.S. defence spending cuts because it does not have sufficient detail.

"The U.S. market dominates the global defence industry, and the ongoing lack of clarity caused by sequestration makes forecasting increasingly difficult," Chemring said in a statement.

RESTRUCTURING PAINS

Apart from having to cope with the defence spending cuts, Chemring is also trying to overcome a torrid 2012 that was marred by profit warnings and failed takeover talks.

The company has embarked on a restructuring under Chief Executive Mark Papworth, who took over last November and was assigned to turn around the business.

Chemring said it would operate its businesses under four units. The company also decided to close its administrative offices at Pall Mall and Derby in the UK and in Washington and Philadelphia in the United States.

The restructuring, expected to reduce head office headcount by 40 percent, or 20 jobs, would cost Chemring 15 million pounds and is expected to help the company save about 10 million pounds a year, mostly from 2014.

"My judgement was that for what is going to be a pretty lean next few years that we really did need to simplify and minimize the overhead or the burden that we were placing on what are in the main very good operating companies," Papworth told Reuters.

The company has also revised its financial covenants with lenders and cut its interim dividend to 3.4 pence per share from 5.3 pence last year.

"The positives are the fact that they've successfully renegotiated their banking covenants and that they've got this cost-cutting programme... the reduction in dividend is quite sensible," said Paul Mumford, senior investment manager at Cavendish Asset Management, which owns 917,210 Chemring shares.

Shares in Chemring closed up 0.34 percent at 266.6 pence on Tuesday on the London Stock Exchange. (Reporting by Abhishek Takle in Bangalore; Editing by Supriya Kurane)

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