* BAE sees 2014 earnings per share down 5-10 pct
* Shares in biggest one-day fall in five years
* 2013 EBITA 1.93 bln stg vs 1.87 bln stg in 2012
By Brenda Goh
LONDON, Feb 20 (Reuters) - Europe's biggest defencecontractor BAE Systems (LSE: BA.L - news) warned on Thursday it expectedearnings this year to drop by up to 10 percent as a result ofU.S. spending cuts, with conditions still difficult despite arecent budget deal in Congress.
The British group, which had announced on Wednesday that ithad at last agreed a price increase on its sale of EurofighterTyphoon jets to Saudi Arabia, saw its shares suffer theirbiggest one-day percentage fall since Oct. 2008.
They fell 11.1 percent in early trading to 388.1 pence,wiping 1.5 billion pounds ($2.5 billion) off the firm's marketvalue.
"The storms of U.S. defence cuts ... have passed, but theirshadows linger in full-year 2014," said Jefferies analyst SandyMorris, adding that BAE's earnings per share expectations were 4to 5 percent lower than Jefferies' forecast of 40.8 pence.
Agency Partners analyst Nick Cunningham called the guidance"very weak" saying that it measured against previousexpectations of flat earnings per share.
At 1311 GMT, shares in BAE cut some of their early lossesto trade 8.2 percent lower at 401 pence. It was the biggestfaller on the FTSE 100 which was down 0.26 percent.
For 2013 BAE reported a 9 percent rise in underlyingearnings per share to 42 pence and said it expected earnings tofall by 5 to 10 percent in 2014, driven down by the combinationof U.S. budgetary pressures and the non-recurring benefit fromthe settlement of the Salam deal with Saudi Arabia, which hadalready been anticipated in the 2013 result.
Finance Director Peter Lynas said the majority of theforecasted fall in earnings was due to the price settlement, asthe company had already delivered 34 of the 72 aircraft sold,meaning that it had recouped the benefits of the pricing dealagainst those aircraft in last year's results.
Nervousness amongst investors over defence spending cuts wasalready evident last week when Rolls-Royce's share pricetumbled after it said U.S. and European spending cuts would halta decade-long run of profit growth for the engine maker.
BAE said while a two-year bi-partisan federal budget dealpassed by U.S. Congress late last year eased "the significantand indiscriminate cuts that were expected in 2014 and 2015", itexpected 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 865million pounds in 2013 due to increased weighted average cost ofcapital and an estimate of reduced U.S. defence spending. Itexpects Land & Armaments sales to fall 20-25 percent in 2014.
"Budget pressures in some of the group's larger markets areexpected to prevail but BAE Systems has a broad-basedportfolio," Chief Executive Ian King said.
Lynas, however, said that they believed the U.S. businesses had endured most of the pain in 2013 and that it was close to"bottoming out" in 2014. BAE had previously forecast a declineof 15 percent in its U.S. defence and security units.
BAE's results for last year were in line with analystexpectations, with underlying earnings before interest, tax andamortisation (EBITA) up 3.4 percent at 1.925 billion pounds onsales up 2 percent at 18.2 billion pounds. It maintained itsorder book backlog at 2012 levels at 42.7 billion pounds.
Analysts on average had expected the company to make aprofit at the EBITA level of 1.897 billion pounds, on revenue of18.8 billion pounds, according to Thomson Reuters (Frankfurt: TOC.F - news) data. Earningsper share were on average expected to be 42.5 pence.
The firm's net debt was 699 million pounds, compared with anet cash position of 387 million pounds at the end of 2012,which analysts said was much better than their expectations.BAE's cash flow is traditionally volatile as it is affected bywhen customers make payments on contracts.
The company also said it would be "upping the pace" on its 1billion-pound share buyback programme following the Salam deal'sresolution. So far it has bought back 65 million shares forabout 271 million pounds.
On Germany's cancellation of its final shipment of 37Eurofighter jets, King said BAE would not be affected as it hadtook the order out of its financial assumptions three years ago.
Following the conclusion of Salam, BAE is still in talkswith Saudi Arabia over future contracts, he said.
The company raised its final dividend to 12.1 pence a sharefrom 11.7 a year ago to increase the total payout for the yearby 3 percent to 20.1 pence.
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