Budget cuts blow hole in profits at Rolls and BAE

First-half figures show strain of reduced defence spending and the rise in sterling

Tight defence budgets and the strong pound combined to weigh down the first-half figures of FTSE 100 giants Rolls-Royce and BAE Systems yesterday.

The Rolls chief executive John Rishton said the engine maker is experiencing “growing pains”, including restructuring costs of £67m from January to June, although its current woes also include a 32 per cent fall in operating profits to £489m, while revenues were down by more than £700m to £6.63bn.

However, Rolls said that it has 600 engineers specifically working on reducing costs and that out-of-date facilities will “retire” by 2020.

Mr Rishton explained that the results “reflected the expected reduction in our defence business”; there have been military spending cuts on both sides of the Atlantic as the mission in Afghanistan winds down and as a result of economic austerity measures.

Meanwhile, BAE’s first-half revenue slumped by 10.3 per cent year on year to £7.61bn, while operating profit was £689m – a fall of £63m.

Its chief executive, Ian King, insisted that the defence and aerospace giant was proving its “resilience in this challenging business cycle”.

He added that there is a more “stable environment” in the US after a two year-budget agreement was finally settled in December, following a protracted battle over defence spending on Capitol Hill.

Investors were rewarded for sticking by BAE with a 2 per cent increase in the interim dividend to 8.2p per share.

Shares in BAE stayed steady, creeping up 2.8p to 427.8p. But Rolls-Royce was on the slide, dropping by 15p to close at 1,040p.

Harry Breach, an analyst at the broker Westhouse Securities, said: “Weak first-half bookings match what most of the US prime contractors posted, and we see it as clearly fitting into our thesis of a protracted US defence down cycle and flattish UK spending.” The companies have vast international operations and what Rolls describes as “significant exposure to foreign currencies”, with the strong pound taking a toll on both companies’ results. Both, however, said they expected a far stronger second half of the year.

BAE also announced that it is buying Signal Innovations Group, a US analytics and imaging technology company. The deal should be completed by the end of September.

Rolls also unveiled a new non-executive director, Ruth Cairnie, who was previously an executive vice president of strategy and planning at Royal Dutch Shell.