Cuts in armed forces spending bring down BAE sales figure

The group, which produces Astute nuclear-powered submarines and is the largest supplier of land vehicles to the United States army, has suffered from cut-backs in transatlantic markets, while orders for Eurofighters for the Saudi Arabian forces have been delayed.

This contributed to a fall in sales at one of the UK’s biggest manufacturing employers to £8.3bn in the six months to June 30, while underlying earnings fell three per cent to £939m.

However, the group said its order book grew by £900m to £40bn, driven by a £4.3bn increase in demand from outside the UK and the United States.

This included a £1.6bn contract to supply Hawk trainer aircraft to the Royal Saudi Air Force, which helped to save some jobs at Brough.

BAE has around 1,100 staff at the East Yorkshire plant. It plans to cut this number to 800 by next June.

Shares fell as the revenues figure was worse than the City had forecast, although earnings were slightly ahead of expectations.

Last night the shares closed at 309p, a fall of just under 3.5p.

Its main UK manufacturing division saw earnings lift 35 per cent to £420m despite a drop in sales, helped by building a new destroyer for the Royal Navy.

The increase in profitability is welcome news for the division after its shipbuilding operations were placed under review in a move that could result in the closure of its Portsmouth dockyard, threatening up to 3,000 jobs.

Investec analyst Andrew Gollan said BAE had put in a “steady performance in challenging markets”.

However, the group’s Land and Armaments division saw underlying sales fall 26 per cent as governments shrink the size of their armies and equipment in the wake of western forces withdrawing from Iraq.

BAE said the outlook for defence spending in the UK had stabilised, with the group working on new aircraft carriers for the Government and plans for the next generation of nuclear-armed submarines.

But it warned further delays to next year’s US military spending budget were likely in the wake of the presidential election.

Yesterday’s results highlighted the importance of Saudi Arabia – the world’s largest oil exporter – to the group as it looks to diversify away from selling to the US and the UK.

It hopes a contract to supply Saudi with a further 48 Typhoon jets will be finalised in the second half of the year.

Other orders outside the UK and the US included a £500mdeal to supply armoured combat vehicles to Norway.

It remains on track to meet previous guidance providing the Saudi deal is signed this year but will continue to focus on cutting costs to make it more competitive.

Ian King, chief executive, said: “BAE Systems is operating in a challenging environment but taking the actions necessary to reduce cost, protect and grow margins and generate good cash flow.

“The group continues to demonstrate sustained earnings performance and is successfully winning new business, generating order intake that will underpin future sales.

“The group’s order backlog grew for the first time since 2009 to £40bn.”

US rivals, such as Northrop Grumman and General Dynamics, also reported lower earnings last month, and flagged uncertainty about an additional $500bn in US defence spending cuts that could come in January, on top of $487bn in cuts already made.

“BAE were similar to other large US defence companies,” said RBC analyst Rob Stallard.

“I see more of the same in big defence with sales below expectations as the United States budget declines.”

BAE, which makes around half of its revenues in the United States, said sales at its US platforms and services unit fell 16 per cent in the first half.

The group said it had seen less disruption to the award of US defence contracts this year than in 2011 but that it was making plans to cope with further delays caused by presidential elections in November, which could push back 2013 budgets.

“We have been running through plans with all of our US businesses and will take actions on a programme-by-programme basis when we get more clarity,” Mr King said.

“It’s not all plain sailing given the challenging environment.”

BAE has a training academy at Doncaster’s Robin Hood Airport.