Cobham says U.S. defence, currency headwinds to hit 2014 profits

By Brenda Goh

LONDON, March 6 (Reuters) - British defence supplier Cobham said it expects the tough U.S. defence spending environment and unfavourable currency exchange rates to weigh on profits this year, after it posted a 4 percent decline in full-year 2013 pretax profits.

Western defence firms are being squeezed as their biggest customers in the United States and Europe reduce spending amid a withdrawal from Afghanistan and Iraq.

BAE Systems (LSE: BA.L - news) and Rolls-Royce also recently warned on earnings, citing U.S. budgetary pressures.

Cobham (Other OTC: CBHMF - news) , which pioneered in-flight fuelling and also makes communication equipment for military and commercial airplanes, said on Thursday it would maintain its forecast for low-to-mid single-digit decline in organic revenue in 2014, with a return to growth from the following year.

"The big headwind for us continues to be the U.S. defence and security market," Chief Executive Bob Murphy told reporters, saying that while a two-year budget deal passed by U.S. Congress last year provided some certainty, it was unlikely to provoke substantial change.

"I don't really see any of that funding being diverted into the investment into new technologies, new capabilities," he said.

Unfavourable currency exchange rates stemming from the strength of the pound were also a concern, it said. Should exchange rates continue at current levels, earnings per share could fall by 3-4 percent on translation.

Cobham has sought to expand in commercial markets to make up for the reduction in defence spending. Revenue from commercial customers, which made up 35 percent of group revenue of 1.79 billion pounds last year, grew by 7 percent, helping offset an 11 percent decline in its largest arm, U.S. defence and security.

Underlying profit before tax for the year to end-December fell to 288 million pounds ($482 million) from 300 million pounds in 2012.

Its orderbook fell to 2.27 billion pounds from 2.4 billion and Cobham raised its full year dividend per share by 10 percent to 9.68 pence.

Analysts said Cobham's results were mostly in line with their expectations.

"After the drama of the last two months, it is soothing to end the global A&D earnings season with a steady set of results," RBC Capital Markets analyst Rob Stallard said.

Shares in Cobham were 2.2 percent higher at 306.8 percent at 0859 GMT versus a FTSE 250 index up 0.47 percent.