Profits nosedive as defence cuts wound BAE Systems

Britain's largest arms company, BAE, has announced a fall in full-year profits, thanks to weak global demand for its wares, as well as a delayed deal with Saudi Arabia.

by Michael Northcott
Last Updated: 06 Nov 2013

Private individuals don’t tend to buy military jets, so with with government budget cuts come falling profits for a weapons manufacturer. BAE Systems has announced that in 2012 pre-tax profits fell 6% to £1.37bn, compared with £1.47bn in the previous year. Revenues have also bombed: they were down from £19.1bn to £17.8bn for the year to 31st December. 

Despite the poor performance, investor confidence still remains high: the price of shares was up 4.37% in mid-morning trading on Thursday, and here’s why.

The firm announced a 4% increase in its final dividend, and also a three-year share buy-back programme with a value of about £1bn – not the kind of strategy that would be pursued by a failing corporation. 

Note, though, BAE said the repurchase would only happen if the firm can achieve ‘a satisfactory resolution of price escalation negotiations’ in the attempted sale of 72 Eurofighter Typhoon jets to Saudi. And given this has been many months in the offing already, shareholders may be waiting a while for their payout.

So what does the future hold for this weapons giant? The firm is being forced to rethink its client base thanks to dramatically reduced US and UK defence budgets – 40% of its revenues come from US contracts and the government is reducing military spending by around £400bn. In fact, American defence budgets are so tight that if the Pentagon cannot sort its budgeting by 1st March, automatic spending cuts will result in 800,000 workers going without pay for one day per week for at least five months.

But in a statement, chief executive Ian King said: ‘Our geographic diversity is providing resilience and in particular, we have made excellent progress in international markets achieving a non-US and UK order intake of £11.2bn.’
King pointed out that this has increased the revenues on its order backlog by 8% to £42bn, which, given the inevitable loss of major government contracts from both sides of the Pond, is at least a positive outlook.  

It’s a turbulent time for BAE. Despite being ‘well positioned for the future’ as King claims, it was only last October that the firm finally failed to seal the deal on a lucrative merger with its European counterpart EADS, despite months of fanfare. It may still have the confidence of its stakeholders, but chuck in the little problem of an increasingly unmanageable pension deficit, and BAE definitely has its work cut out in 2013.

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