NEWS that BAE Systems' main pension scheme deficit had ballooned to more than £3 billion overshadowed a double-digit rise in underlying profits yesterday, sending shares in the defence and shipbuilding giant down 5 per cent.
The group, which generates about half its sales in the United States, said underlying earnings before interest, tax and amortisation (Ebita) topped £979 million in the first half, up from £820m a year ago.
Operating profits fell to £500m from £789
m last year – a decline that BAE put down to exceptional items, including the write-down of goodwill related to a recent acquisition.
But it was the 30 per cent rise in the firm's main UK pension scheme deficit, to just under £3.1bn, that the City chose to focus on yesterday.
Shares in the group, whose defence projects include the Eurofighter Typhoon and new aircraft carriers for the Royal Navy, to be built at Scotstoun and Govan on the Clyde, closed 16p lower at 312p, valuing BAE at about £11bn.
Evolution analyst Nick Cunningham said: "It's down to the pension deficit … the mix of the results are a bit different to what was expected – very strong UK programmes, but international margins are down."
Numis analyst Allan Smylie described the £900m increase in the pension deficit as "a negative", but noted that the increase was down more to a change in accounting assumptions than the value of assets.
"The underlying operating business remains extremely robust," he said.
BAE blamed the rise in bond and inflation volatility and stressed it would have no impact on the group in the near term, as it is just two years into a 20-year deficit recovery programme.
Fears about a downturn in defence spending on both sides of the Atlantic are also likely to have played on the share price, which has slipped about 11 per cent since the start of the year.
The value of the company's order book dropped to £45bn at the end of June, compared with £46.5bn in December, but BAE said its activities were "well aligned" to changes in priorities in the US defence programme.
The group recently bolstered its exposure to the US with the acquisition of Armor Holdings, a major supplier of equipment, including Humvee vehicles, to the military and security forces.
There was no further update yesterday on the British carrier programme, which is running over budget raising a question mark over hundreds of Scottish jobs.
BVT Surface Fleet – BAE's joint venture with VT Group – has two shipyards on the Clyde, which together employ up to 4,000 people when they are at full strength.
BAE also employs hundreds of staff at separate group facilities at Hillend, near Dunfermline, and at Prestwick airport.
Chief executive Ian King said: "The Typhoon and (US] Joint Strike-Fighter will be the main drivers for growth in the medium term."
Sales in the six months to the end of June were 28 per cent up on the same period last year, at £9.94bn. On a like-for-like basis, sales rose 6 per cent.
