BAE Systems employees

BAE profits fall following defence cuts

Profits at BAE Systems dipped by 7 per cent today after defence cuts and its failure to seal a merger with Airbus firm EADS.

BAE's sales reduced by 7 per cent to £17.8bn in 2012 while the company warned that defence spending in the UK and United States, where it generated 20 per cent of its revenues last year, was expected to continue to be constrained.

"Growth opportunities in some segments of the US and UK markets are identified, but the overall outlook in both countries is expected to continue to be constrained," the company said in a statement.

"Subject to near-term uncertainties relating to US defence budgets, modest growth in underlying earnings per share is anticipated for 2013."

The company has been pressured by shrinking military budgets in the US and Britain where governments have been trying to reel in large budget deficits.

The UK government pledged in 2010 to slash its defence spending by 8 per cent by 2014 while the US already has plans in place to cut $487bn from its defence budget for the next decade.

BAE and its rivals such as Lockheed Martin and Northrop Grumman have warned that billions of dollars spending cuts that are due to automatically hit the US military budget in a process known as "sequestration" would harm their businesses and the defense industry.

However, contracts outside the US and UK more than doubled last year to £11.2bn, leading to an 8 per cent increase in its order backlog to £42bn.

With reduced activity in support of US operations in Iraq and Afghanistan, BAE has targeted growth in cyber, intelligence and security businesses.

BAE expects land and armament sales in 2013 to be 10 per cent below its 2012 level and forecast support solution sales to be marginally higher than in 2012.

Sales in its electronic division are expected to be at a similar level to those in 2012 while cyber and intelligence sales are expected to be marginally lower than those in 2012, BAE said.

It has also reduced headcount by 3,600 over the last year, bringing the total reduction over the past four years to around 26,000 worldwide.

Profits fell 6.6 per cent to £1.37bn today but BAE said that it expected a return to earnings per share growth this year, subject to near-term uncertainties in US budgets and the final terms of a key fighter jet contract with Saudi Arabia.

Shares rose more than 4 per cent following the update today.

BAE was recently boosted by Oman's order of 12 Typhoons and eight Hawk trainer jets, worth around £2.5bn including support packages.

But delivery of both aircraft is not expected to start until 2017.

The company was forced to scrap its tie-up with EADS after political wrangling scuppered the two companies' plans to create the world's biggest defence and aerospace group, with combined sales of around £60bn.

It said that focus on underlying business performance was "sustained as a priority" while the merger discussions were under way.

The company also said that discussions over the pricing of its Salam contract with Saudi Arabia to supply the Gulf state with Typhoon aircraft remained ongoing and that there would be an increase of 3 pence in underlying earnings per share should the negotiations conclude this year.

BAE said it had started a three-year share buyback program of up to £1bn, the full implementation of which is subject to "satisfactory resolution of Salam Typhoon price escalation negotiations".

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