Government spending cuts puts BAE on defensive
DEFENCE giant BAE Systems pledged to stick to its defence business despite saying that government spending cuts would hit its profits this year, prompting investors to wipe £1billion off its value.
BAE expects 2014 earnings to drop by up to 10 per cent partly as a result of UK and US spending cuts, with US markets still tough despite a recent bi-partisan federal budget deal in Congress.
It also blamed the dip on a non-recurring windfall in 2013 from settling a long-running row with Saudi Arabia over the price of the so-called Salam deal for 72 Eurofighter Typhoons.
Last November BAE Systems unveiled 1,775 job cuts in Scotland and England and ended shipbuilding in Portsmouth.
The group’s shares tumbled 36½p to 400½p as it flagged up the profit impact of Salam, as it had already delivered 34 of the jets, meaning it recouped the benefits of the deal against those aircraft in last year’s results rather than in 2014.
There has been speculation that US budget pressure could force BAE to sell under-performing US businesses or revive its failed bid to merge with Europe’s Airbus, formerly EADS.
The company is trying to expand activities outside traditional defence, such as civil aircraft avionics, but these make up only about 5 per cent of the business.
BAE chief executive Ian King said the EADS tie-up “would have been a great deal” but down-played talk it could re-emerge if European governments resolve differences that scuppered it.
King added: “We’ve moved on. Defence is our heart and we’re going to succeed in defence.”
BAE posted a 3 per cent rise in earnings to £1.9billion on a 2 per cent sales gain to £18.2billion as orders rose slightly to £42.7billion.
Its US businesses – including intelligence and military vehicles – took a £865million hit in 2013 due to higher financing costs and estimated reduced US defence spending.
The company expects vehicles and armaments sales to fall by up to a quarter in 2014.
Jefferies analyst Sandy Morris said: “The storms of US defence cuts have passed but their shadows linger.”