Cobham warns U.S. defense cuts are hurting equipment sales

LONDON Mon Nov 11, 2013 5:59am EST

LONDON (Reuters) - British defense and aerospace supplier Cobham (COB.L) lowered its sales forecast for 2014, becoming the latest company to warn shareholders over the impact of U.S. budget cuts.

The United States cut spending by $37 billion for the fiscal 2013 year in March and is set to reduce its budget by $50 billion annually over the next nine years unless Congress acts to avoid such cuts.

The pioneer of in-flight refueling, which makes over a third of its sales from the U.S. defense and security sector, said on Monday that it now expects a low-to-mid single digit percentage fall in revenue in 2014, down from a previous forecast for modest growth.

The cuts hit smaller equipment providers, such as Cobham, harder than larger rivals, such as Raytheon (RTN.N) and Lockheed Martin (LMT.N), because they rely on short-term orders which are vulnerable to scrapping, unlike the latter, who can depend on long-running contracts.

Defense equipment maker Chemring (CHG.L) in October warned of an 8-million-pound ($12.80 million) hit to 2013 profits.

Shares in Cobham, which have risen almost 29 percent since the start of the year, were down 6.5 percent by 1003 GMT.

Analysts said Cobham's efforts to increase its commercial exposure would help it offset the impact of the cuts.

Jefferies analysts said the lowered forecast "appears to reflect an even more challenging U.S. defense and security market rather than any shortcomings in the commercial businesses."

Cobham has been trying to lower its reliance on U.S. and European defense, which accounts for 64 percent of its revenue, by making acquisitions in the commercial sector and cost-cutting.

The company said trading for the first ten months of the year was in line with its expectations and it kept its 2013 outlook unchanged. Analysts on average had expected Cobham to post 1.818 billion pounds in 2014 revenue, up from a forecast for 2013 of 1.773 billion pounds in sales.

Cobham already tempered its 2014 outlook in August, saying it had the "potential to deliver modest organic growth in 2014" compared to a previous forecast for "modest growth".

It said it expected to return to revenue growth from 2015 thanks to progress it was making in cost cutting and its business shift, which would enable it to maintain its 10 percent annual dividend increase.

($1 = 0.6252 British pounds)

(Reporting by Brenda Goh; Editing by Rhys Jones and Louise Heavens)