BAE warns of lower sales as UK and US cut spending

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The Independent Online

The defence giant BAE Systems expects sales to fall in 2011 as both the British and American governments scale back military spending.

The admission of a continued squeeze came as the group published annual results showing sales up by 1.8 per cent to £22.4bn and pre-tax profits of £1.44bn, up from last year's earnings of £266m, which were dragged down by £1bn of impairment charges and the costs of settling two corruption investigations. Stripped of one-off costs underlying earnings were broadly flat at £2.2bn.

BAE Systems is two years into a three-year programme to cut costs and rebase its Land and Armaments division after the spike of activity from the Iraq conflict.

The company is also facing straitened public spending in both the UK and US markets and has cut 15,000 staff in the last year, including stripping out a layer of executives in the US management team.

Ian King, the BAE Systems chief executive, was upbeat yesterday, claiming that the company is performing well in tricky conditions, and pointing to the rise in the Land and Armaments division's return on sales to 10 per cent rather than the division's 6 per cent fall in sales. "We said we would restructure the business, cut costs, focus on what we need to focus on to get the return on sales up, and we've done that," he said.

The UK Government sliced 8 per cent off its defence budget in the autumn Strategic Defence and Security Review, with cuts including the Nimrod and Harrier jet programmes expected to hit BAE Systems to the tune of 1p per share.

But both governments are making a strong push to boost defence exports, and the company is expanding its overseas sales, particularly in India and Saudi Arabia, according to Mr King.

"We can see a palpable difference already in both the UK and US governments' support of defence exports," he said. "Overseas sales rely on strong products, governments that want to buy, and home government support – at the moment these three moons are all very aligned."

The biggest growth areas for BAE Systems will continue to be in services, cyber and electronic systems. In the past year the company has bought three services companies, two electronic systems groups and another four cyber and intelligence players. And it is still looking around for more.

"The group is delivering on our strategy of services, electronic systems and cyber, and we continue to see growth coming through on those," Mr King said. "We have the same level of appetite for acquisitions as we have had in 2010."

The company raised its final dividend by 9.4 per cent to 10.5p. The shares closed down by 4.7 per cent at 338.9p.