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WRAPUP 1-Defense firms post lower profits; US budget cuts loom
July 25, 2012 / 5:25 PM / 5 years ago

WRAPUP 1-Defense firms post lower profits; US budget cuts loom

* Northrop, General Dynamics, Boeing report Q2 results

* Results generally better than expected

* Analysts say leaner defense spending to take a toll

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 , which lowered its guidance for the full year.

Boeing Co’s defense division revenues were higher, following Lockheed Martin Corp’s lead on Tuesday, but Boeing’s defense 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.”

General Dynamics Chief Executive Jay Johnson told analysts there was increasing attention to the additional cuts required under the process known as “sequestration” and he remained hopeful U.S. lawmakers would find other ways to reduce the U.S. deficit.

In the meantime, he said General Dynamics was focused on meeting on current contracts, working with suppliers, analyzing contract terms, and safeguarding capital since it appeared increasingly unlikely that any budget clarity would emerge before the November presidential election.

“We are focused on what we can control,” Johnson said.

Northrop Chief Executive Wes Bush told analysts that his company was developing contingency plans for sequestration and other budget scenarios, but all of them required continued focus on innovation, cost reductions and customer affordability.

He said he hoped sequestration would be avoided since it would clearly result in lower earnings, sales and cash flow.

“Exactly how this is going to play out is anybody’s guess right now,” Bush said.

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 the number of outstanding shares was reduced. Analysts polled by Thomson Reuters I/B/E/S estimated Northrop earnings at $1.61 per share.

Bush said Northrop was increasing its full-year earnings outlook by more than 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, the gain depressed by a 10 percent drop in the information systems and technology sector, where expected orders for already awarded tactical communication equipment contracts failed to materialize. Earnings in that sector dropped 24.4 percent.

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

Operating margins remained high across most of the company’s sectors, increasing in combat systems, shipbuilding and aerospace, but dropping in the information systems sector.

Johnson said the Gulfstream brand had a sizable, multi-year, large-cabin backlog and a robust order pipeline, and saw its lowest order default rates since the begin of the global financial downturn in 2008.

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 defense budget environment.

On Tuesday, Lockheed Martin 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 and Tim Dobbyn)

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