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Defense firms post lower profits as US budget pressures mount
July 25, 2012 / 2:04 PM / 5 years ago

Defense firms post lower profits as US budget pressures mount

* Results generally better than expected

* Weaker revs reflect pressure on US defense budget

By Andrea Shalal-Esa

WASHINGTON, July 25 (Reuters) - Three top U.S. defense contractors reported lower second-quarter earnings on Wednesday, reflecting mounting pressure on U.S. defense budgets, but they largely beat expectations due to tough cost-cutting and share buybacks.

Northrop Grumman Corp, which builds Global Hawk unmanned surveillance planes, radars and electronic systems, posted lower earnings and sales, as did General Dynamics Corp .

Boeing Co’s defense division revenues were higher, following Lockheed Martin Corp’s lead on Tuesday, but Boeing’s earnings and operating margins came under pressure in the second quarter.

Analysts said results were generally better than expected, but the longer-term outlook for the sector was shaded by continued uncertainty about an additional $500 billion in defense spending cuts due in January, on top of $487 billion in cuts already on the books for the next decade.

“Defense companies earnings are holding up fairly well, but investor perceptions are being driven by the prospect of across the board cuts next year,” said Loren Thompson, chief operating officer of the Lexington Institute.

“What we’re seeing here is the last gasp of the Bush defense bonanza, but with each passing quarter, softening demand of the Obama years will take its toll on company results.”

Northrop Grumman’s profit fell to $480 million in the second quarter from $520 million a year earlier, while revenue dropped to $6.27 billion from $6.56 billion.

But operating margins rose to 12.5 percent from 12.0 percent and earnings per share increased to $1.88 from $1.81 as outstanding shares were reduced. Analysts polled by Thomson Reuters I/B/E/S estimated Northrop earnings at $1.61.

Northrop Chief Executive Wes Bush said the company was increasing its earnings outlook by over 30 cents to a range of $7.05 to $7.25 a share, citing a “robust level” of new business, a higher total backlog and strong cash generation.

General Dynamics Corp’s second-quarter earnings fell and it lowered the outlook for full-year profit, citing delays in contract awards for its information systems business due to a continued cloudy outlook about the U.S. budget.

The company, which builds warships, ground combat vehicles and Gulfstream business jets, said earnings from continuing operations fell 4.8 percent to $634 million, or $1.77 per share on a fully diluted basis, from $666 million, or $1.79, a year earlier.

Revenues edged up 0.5 percent to $7.9 billion in the second quarter from $7.89 billion.

Analysts expected earnings per share of $1.73 on revenues of $7.93 billion.

General Dynamics said operating margins rose slightly to 12.2 percent, reflecting continued cost-cutting.

Boeing said revenues at its defense, space and security division rose 7 percent to $8.2 billion from $7.7 billion, but earnings from operations fell 6 percent to $748 million, and operating margins dropped to 9.1 percent from 10.4 percent.

Rob Stallard, defense analyst with RBC Capital Markets, said the companies had been offsetting soft revenues with cost-cutting and share buybacks for over a year.

“You’re arguably now in a situation where revenue expectations are far more realistic (i.e. conservative), and so defense companies are no longer missing these forecasts, whilst also making progress on costs and the buybacks,” he said.

He questioned how long they could sustain higher earnings per share and margins, given the challenging budget environment.

Referring to Northrop’s results, Stallard said, “We’ve seen this story before. We will be looking for an update from the company on the contracting and award environment.”

On Tuesday, Lockheed Martin also beat analysts’ expectations, posting higher quarterly net profit, and raised its full-year forecast. The company said it was still concerned about the threat of more U.S. defense spending cuts.

Despite uncertainty about future budgets, Lockheed, which builds F-35 and F-16 fighter jets, Aegis missiles and coastal warships, raised its forecast for 2012 operating profit to $4.025-$4.125 billion from $3.9-$4.0 billion, or by 20 cents a share to $7.90 to $8.10. (Reporting By Andrea Shalal-Esa; editing by Jeffrey Benkoe)

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