BAE Systems cautious about US defence spending outlook

BAE Systems has warned that it faces uncertainty in its core US defence market, a day after the collapse of merger talks with European rival EADS.

In a trading update, BAE said US spending cuts and likely "limited trading disruption" at the end of the year was clouding the outlook.

However, BAE said that overall business was in line with expectations.

On Wednesday, BAE and EADS ended merger talks amid claims of German government opposition.

BAE gets about 40% of its revenues from US defence work, but the military budget is being cut, possibly by as much as $600m (£375m) over the next decade.

There is concern that some big military programmes could be scrapped or pushed back due to deficit-reduction cuts and worries that the federal government is surviving on stopgap funding, called continuing resolution, until Congress can agree a budget.

BAE said: "Uncertainty as to how US federal deficit reduction will be implemented, including possible sequestration measures, continues to cloud the outlook for the US government defence budget.

"Some limited trading disruption is likely in the last quarter of the 2012 calendar year as the US government operates under a continuing resolution from 1 October 2012."

The company's decision to enter talks with EADS was in part due to concerns that its revenues from the huge US defence sector would decline over the next decade or more.

Chief executive Ian King said in the statement that BAE was "obviously disappointed" not to reach an EADS deal.

However, he insisted that "our business remains strong and financially robust... and [we] look to the future with confidence".

Now the EADS talks have ended, analysts and investors want BAE to set out a clear alternative strategy. There is speculation that the company could become a takeover target or face a break-up.

The company said on Thursday that it expected modest growth in overall underlying earnings per share for 2012, but this assumed a satisfactory conclusion to pricing negotiations this year with the Saudi Arabia government on the Typhoon Salam programme to supply Eurofighter Typhoon jet fighters.

BAE is also in talks with Oman to supply aircraft and support.