BAE on the defensive as cuts loom in global arms budgets

DEFENCE giant BAE Systems yesterday braced investors for a tough year ahead as governments cut their defence budgets, despite the group posting bumper profits in line with City forecasts.

Underlying profits at Europe's largest military contractor rose 17 per cent to 2.2 billion on the back of a 21 per cent increase in sales to 22.4bn.

The profits allowed BAE to increase its dividend by 10 per cent to 16p, with each employee receiving 567 worth of free shares. The firm also launched a 500 million share buyback scheme.

But the loss of a major deal to build trucks for the United States army – confirmed earlier this week – led to a 973m write-off at its Armor Holdings business, which BAE bought in 2007.

The firm is also paying 278m and pleading guilty to two charges after a investigation of its activities in several countries by the US department of justice and the UK Serious Fraud Office.

Although BAE enjoyed a one-off pension gain in the US, operating profits slumped to 982m from 1.72bn the previous year.

The firm expects further growth this year, but it is steeling itself for belt-tightening measures as governments attempt to tackle soaring deficits.

BAE said: "Defence budgets in the UK and the US are expected to come under further pressure, and with expectations of a more challenging business environment ahead, the focus on driving performance and efficiency in the business will be key."

It added that the UK outlook was "difficult" because of "shifting national priorities", although the firm had several long-term contracts in place with the Royal Navy and RAF for Typhoon fighters.

Cost-cutting moves include consultations on 1,100 potential job losses across four UK sites announced last year.

In the US, headcount has been reduced by more than 10 per cent to reflect the loss of the vehicle contract.

The firm, which made 8,400 trucks for the US army last year, will continue production until the end of 2010.

Despite the setback for its land and armaments division, BAE expects growth at its three other businesses. Orders across the group – which employs about 4,200 staff in Scotland at shipyards at Govan and Scotstoun and sites at Prestwick, Hillend in Fife and RAF Kinloss – grew slightly to a record 46.9bn, after it bought VT Group's 45 per cent stake in its shipbuilding joint venture.

Howard Wheeldon, a senior strategist at BGC Partners, said: "Despite a significant US impairment charge that essentially wiped out the bottom-line profit, BAE Systems remains in very rude health. Despite warranted medium-term concern on the future impact of defence cuts, BAE will continue to grow."