BAE Systems says defence cuts are biting

City A.M. Reporter
BAE Systems, which posted a slight rise in profits for 2010, said it expected sales to fall in 2011 as the impact of defense cuts in the UK and US begin to hit home.

BAE, Europe's biggest defense contractor, announced that underlying earnings before interest, tax and amortization (EBITA) for 2010 rose 0.8 per cent to £2.21bn.

The rise was driven by cost savings and growth at its services and international business, which offset ongoing weakness at its land armaments unit.

"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," the company said in a statement.

"Continuing actions to reduce cost and improve efficiency are expected to benefit return on sales and mitigate the impact of that lower activity."

The company was expected to report an average EBITA of 2.12 billion pounds, according to a Thomson Reuters poll of 18 analysts.

Britain last year slashed its defense budget eight per cent 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.

In October, BAE said it would be negatively hit by the UK government spending review and the possible cancellation of a patrol vessel program in Trinidad and Tobago.

BAE, which is involved in the production of the F-35 jet, the Astute class submarine and the Queen Elizabeth-class aircraft carriers, said 2010 revenues rose 1.8 per cent to £22.39bn.

It raised its final dividend by 9.4 per cent to 10.5 pence, taking the total dividend for the year to 17.5 pence – up from 16 pence a year earlier.

Shares in the company, which have risen 6.3 per cent so far this year, closed at 355.70 pence on Wednesday, valuing the company at around £12bn.