BAE sees modest hit from UK military spending cuts

Last Updated: Sun, Oct 24, 2010 21:50 hrs

Defense contractor BAE Systems PLC said Thursday that the British government's military spending cuts are expected to knock about 2 percent off underlying earnings, though details of the reductions are still to be worked out.

BAE said its earnings would be hit by the early retirement of the Royal Air Force Harrier jet fleet, and might also suffer from the decision to cancel the Nimrod MRA4 reconnaissance plane.

The government had ordered 21 of the new Nimrods from BAE in 1996, but the order had been cut to nine. The first production aircraft made its maiden flight last year; one other has been completed and seven more are in various stages of production, BAE said.

"The group will now work with government to agree commercial terms resulting from changes to the Nimrod program," BAE said.

BAE shares were down 0.3 percent at 348.7 pence after the first hour of trading on the London Stock Exchange. Shares have skidded from a six-month peak of 369.9 percent on Monday, the day before the British government announced its defense cuts.

BAE said the cuts — including the early retirement of the Harrier aircraft fleet — would reduce earnings per share by 1 pence. Last year, BAE reported underlying earnings per share of 40.7 pence per share, and paid a dividend of 16 pence per share.

BAE said "the U.S. defense market continues to generate a number of business opportunities despite budget pressures.

"These pressures are leading to program reprioritizations and a drive for greater efficiencies in procurement, which are helping to fund continued modest growth in investment on defense capability," BAE said.

The company estimated it will to take a 150 million pounds ($236 million) charge on pretax profit following Trinidad and Tobago's decision to cancel its order for three patrol vessels.

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