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UPDATE 2-BAE warns U.S. defence spending cuts to hit earnings this year

LONDON, Feb 20 (Reuters) - Europe's biggest defence contractor BAE Systems warned on Thursday that it expected earnings this year to drop by up to 10 percent as a result of U.S. spending cuts, with conditions still difficult despite a recent bi-partisan federal budget deal in Congress.

The British group, which had announced on Wednesday that it had at last agreed a price increase on its sale of Eurofighter Typhoon jets to Saudi Arabia, saw its shares fall almost 11 percent in early trading to a 30-week low of 389.6 pence, wiping 1.5 billion pounds ($2.5 billion) off its market value.

"The storms of U.S. defence cuts ... have passed, but their shadows linger in full-year 2014," said Jefferies analyst Sandy Morris, adding that BAE's expectations over earnings was 4 to 5 percent lower than their own forecast of 40.8 pence per share.

Agency Partners analyst Nick Cunningham called the guidance "very weak" saying that it measured against previous expectations of flat earnings per share.

For 2013 BAE reported a 9 percent rise in underlying earnings per share to 42 pence and said it expected earnings to fall by 5 to 10 percent in 2014, driven down by the combination of U.S. budgetary pressures and the non-recurring benefit from the settlement of the Salam deal with Saudi Arabia, which had already been anticipated in the 2013 result.

Finance Director Peter Lynas told reporters that the majority of the forecasted fall in earnings was due to the price settlement, as the company had already delivered 34 of the 72 aircraft sold, meaning that it had recouped the benefits of the pricing deal against those aircraft in last year's results.

Nervousness amongst investors over defence spending cuts was already evident last week when Rolls-Royce's share price tumbled after it said U.S. and European spending cuts would halt a decade-long run of profit growth for the engine maker.

BAE said while a two-year budget deal passed by U.S. Congress last year eased "the significant and indiscriminate cuts that were expected in 2014 and 2015", it expected pressures to reduce spending and address the U.S. deficit to continue.

Its U.S. businesses - Intelligence & Security and Land & Armaments - took a non-cash goodwill impairment charge of 865 million pounds in 2013 due to increased weighted average cost of capital and an estimate of reduced US defence spending. It expects Land & Armaments sales to fall by 20-25 percent in 2014.

"Budget pressures in some of the group's larger markets are expected to prevail but BAE Systems has a broad-based portfolio," Chief Executive Ian King said.

The company's results for last year were in line with analyst expectations with underlying earnings before interest, tax and amortisation (EBITA) up 3.4 percent at 1.925 billion pounds on sales up 2 percent at 18.2 billion pounds.

It maintained its order book backlog at 2012 levels at 42.7 billion pounds.

Analysts on average had expected the company to make a profit at the EBITA level of 1.897 billion pounds, on revenue of 18.8 billion pounds, according to Thomson Reuters data. Earnings per share were on average expected to be 42.5 pence.

The company also said it would be "upping the pace" on its 1 billion-pound share buyback programme that it launched last year following the Salam deal's resolution. So far it has bought back 65 million shares for about 271 million pounds.

The company raised its final dividend to 12.1 pence a share from 11.7 a year ago to increase the total payout for the year by 3 percent to 20.1 pence.

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