General Dynamcs Cites’ Anxiety Over Pentagon Budget Cuts

General Dynamics Corp. (GD) and Northrop Grumman Corp. (NOC) are working to cut costs and improve productivity to compensate for declining defense sales, the companies said in reporting first-quarter results.

Defense orders are slowing, particularly for information- technology services, as the Pentagon seeks cuts of $490 billion over a decade, with the potential of $500 billion more if automatic reductions take effect in January, Jay Johnson, chairman and chief executive officer of General Dynamics, said today.

“Anxiety over these issues will almost certainly escalate as we move into the summer months and election campaigns roll into high gear,” Johnson said on a conference call with analysts.

Net income at General Dynamics declined to $564 million, or $1.57 a share, in the first quarter from $618 million, or $1.64 a share, a year earlier, the maker of Abrams battle tanks and Gulfstream jets, said today in a statement.

After adjusting for a non-cash charge of 13 cents a share, profit was $1.70 a share compared with the average estimate of $1.69 a share by 20 analysts surveyed by Bloomberg. Sales declined 2.8 percent to $7.58 billion.

In the first quarter, Northrop’s net income from continuing operations was $506 million, or $1.96 a share, compared with $496 million, or $1.67 a year earlier, the company said today in a statement. The average estimate of 19 analysts compiled by Bloomberg was $1.59 a share. Sales declined 8 percent to $6.2 billion.

Northrop’s Forecast

Northrop boosted its 2012 profit forecast today to $6.70 to $6.95 a share, compared with its prediction in January of $6.40 to $6.70 a share. General Dynamics reaffirmed its profit projection of $7.10 to $7.20 a share made in January.

Northrop rose 28 cents to $63.01 at the close of trading in New York. General Dynamics fell $2.50, or 3.6 percent, to $67.56, the biggest decline since Nov. 23. Both are based in Falls Church, Virginia.

Defense sales growth will continue to be elusive for the companies, according to Joel Levington, a bond analyst at Brookfield Investment Management Inc. in New York

“Both companies experienced that this quarter and will likely for years to come,” Levington said in an e-mail.

All four of Northrop’s business units reported better margins in the quarter than a year earlier. Wes Bush, the chairman and chief executive officer, attributed that to cost- cutting and productivity gains.

Gulfstream Jets

A 20 percent increase in sales and an 18 percent rise in profit at General Dynamics’ Gulfstream jet business was offset by a one-time charge at its Combat Systems unit as operating income declined.

Demand for Gulfstream jets was “healthy” in the quarter with “particularly strong interest from North American customers,” General Dynamics said in the statement.

The aerospace unit, which makes the business jets, had a funded backlog of $16.7 billion at the end of the first quarter, the company said.

The threat of automatic federal budget cuts, known as sequestration, is slowing orders for General Dynamics’ military radios, satellites, and information-technology systems, Johnson said.

Revenue at the Combat Systems unit, maker of Abrams tanks and Stryker vehicles, fell 2.3 percent to $1.91 billion and unit income declined 27 percent to $203 million, the company said.

General Dynamics said the European operations of its Combat Systems unit had a $67 million non-cash charge during the first quarter.

Sales at the Marine Systems unit, maker of the Navy’s destroyers and nuclear-powered submarines, fell 4.2 percent to $1.61 billion and profit gained 11 percent to $185 million.

Information Systems and Technology sales fell 13.3 percent to $2.44 billion and profit declined 21 percent to $218 million, the company said.

Northrop’s Drones

Northrop faces challenges from proposed cuts in the Pentagon’s fiscal 2013 budget that would affect the company’s top-selling programs, including the Global Hawk drone and the F-35 Joint Strike Fighter, on which it is a subcontractor to planemaker Lockheed Martin Corp. (LMT)

The Pentagon proposed in its 2013 budget saving $800 million by reducing purchases of the Global Hawk Block 30 model. The Defense Department would also gain $1.6 billion from the F-35 program by eliminating 13 planes.

Bush has said he is focused on increasing profit margins and returning cash to shareholders. He has raised dividends for eight consecutive years. In 2011, Northrop paid out about $2.8 billion as dividends and share repurchases.

Cybersecurity, Sensors

While Northrop’s business in cybersecurity, unmanned systems, intelligence, sensors and reconnaissance systems and logistics are well-aligned with Pentagon’s priorities, “we do not expect much growth in these areas over the next several years, given the budget situation,” Douglas Harned, an analyst at Sanford C. Bernstein LLC in New York, wrote in an April 23 note to clients. He rates the stock market-perform.

Performance improvements at the company’s Electronic and Information Systems units contributed to an increase in operating income and profit during the quarter even as sales fell, Northrop said in the statement.

Sales at Electronic Systems, the maker of radar equipment, fell 4.6 percent to $1.72 billion, while profit rose 28 percent to $304 million, the company said.

Information Systems sales fell 9 percent to $1.84 billion whereas profit increased 5.6 percent to $205 million, the company said.

Sales and profit at the Aerospace unit, maker of Global Hawks, fell, according to the company. Revenue declined 8 percent to $2.38 billion and profit fell 2.7 percent to $279 million.

To contact the reporter on this story: Gopal Ratnam in Washington at gratnam1@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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