BAE Systems issues cautious update amid US cuts and floods

Defence giant BAE Systems yesterday warned that flood damage and defence budget cuts in the United States could disrupt its business.

The firm – which last month unveiled plans to lay-off almost 3,000 of its 40,000 staff in the UK – said it was assessing the implications of serious flood damage at its Johnson City electronics base in New York State following severe weather along the US east coast.

BAE has also been the subject of break-up speculation, with advisers reportedly appointed to examine its options for selling off parts of the business.

Analysts at Exane BNP Paribas said that such a move would be an “acknowledgement of the failure of a ten-year global strategy for the group”.

In its trading update, BAE warned there was “significant uncertainty” over the level of defence spending in the US as politicians mull over options for slashing the country’s huge budget deficit.

The firm, which saw overall trading in the three months to 11 October meet expectations, last month signalled the end of production at its factory in Brough, Yorkshire, which currently employs 1,300 workers, and announced further cutbacks at sites across Britain.

The group – with bases across the UK, including Hillend in Fife and Govan and Scotstoun in Glasgow – said the flood damage in the US may see some sales deferred to 2012, but should not materially affect profits.

Despite US budget cuts, BAE said it had won a $450 million (£286m) contract to participate in the development of a combat vehicle for the US army.

The group, led by chief executive Ian King, said it was also working on a proposal for the replacement of the US air force’s T-38 jet. Andrew Gollan, an analyst at Investec, said: “Unsurprisingly, the rhetoric is cautionary with respect to the outlook for defence spending, particularly in the US, but overall we view this as a solid update.”