Contractor Earnings Rise Amid U.S. Budget Cuts, ShutdownJonathan D. Salant and Tim Catts
The biggest U.S. defense contractors, led by Lockheed Martin Corp. and Northrop Grumman Corp., have endured federal budget cuts and a partial government shutdown with little harm so far to their profits.
Lockheed and Northrop were among the leading federal suppliers reporting third-quarter earnings that beat analysts’ estimates even as sales declined. The top five U.S. contractors’ shares have soared this year, with Northrop climbing 56 percent. Its shares rose 4 percent to $105.56 -- the biggest advance since September 2010 -- after the company raised its full-year profit forecast today.
The companies had been preparing for an era of declining defense spending with the end of the Iraq war and the continuing withdrawal of U.S. troops from Afghanistan. They have continued to reduce costs, make their operations more efficient and, in some cases, cut their workforces.
“When everything’s going up, there hasn’t been an incentive for the defense industry to work as a regular business,” said Brian Ruttenbur, an analyst with CRT Capital Group LLC in Stamford, Connecticut. “Now that things are flattening out and going down, there’s an incentive for them to become more efficient.”
No. 1 contractor Lockheed, which furloughed 2,400 employees during the 16-day government shutdown this month, said yesterday that it cut 600 workers last week from its Mission Systems and Training unit. The segment’s sales fell 8.8 percent to $1.7 billion in the third quarter from a year earlier, the company said yesterday.
‘Managing Very Well’
“These companies have essentially been able to cut costs, streamline” and “frankly, downsize in some cases, but they are managing very well,” Marion Blakey, president and chief executive officer of the Aerospace Industries Association, said on Bloomberg Television yesterday.
“There’s a limit, though” if cuts continue, she said.
The Arlington, Virginia-based trade group has begun a new lobbying campaign to persuade Congress to come up with an alternative to the across-the-board budget reductions known as sequestration. Unless the law is changed, $50 billion is to be cut from Pentagon programs during the year that began Oct. 1. Current spending legislation funds the government only until January.
“Considering the budget environment, we would expect lower sales in 2014,” Wes Bush, chairman and chief executive officer of Falls Church, Virginia-based Northrop, said during a conference call with analysts.
Northrop, the fifth-largest federal contractor, today raised its full-year sales forecast by less than 1 percent to $24.4 billion. The company said net income in the third quarter climbed 8.3 percent to $497 million, or $2.14 a share, from $459 million, or $1.82 a share, a year earlier. That beat the $1.82-a-share average estimate of 18 analysts surveyed by Bloomberg. Revenue declined 2.6 percent to $6.11 billion.
Lockheed yesterday projected full-year earnings per share of $9.40 to $9.70, an increase from the $9.20 to $9.50 estimated in July. The company said its profit from continuing operations climbed to $842 million, or $2.57 a share, from $727 million, or $2.21 a share, a year earlier, even as sales declined 4.4 percent to $11.35 billion.
Boeing, General Dynamics
Boeing Co., the No. 2 U.S. federal contractor, also beat analysts’ profit estimates in earnings reported today as airlines bought more of the Chicago-based company’s fuel-efficient commercial planes. Its shares rose 5.3 percent to close at $129.02 in in New York, the biggest advance since August 2011.
Investors didn’t reward all the government’s contractors.
General Dynamics Corp., the third-largest federal supplier, fell 2.2 percent to close at $86.23. The Falls Church, Virginia-based company had raised its full-year profit forecast slightly, to $6.90 to $7 a share from $6.85 to $6.95 a share.
The company also reported a backlog of $47.9 billion at the end of the third quarter, down from $49.4 billion in the previous quarter, and cited slower payments from the Pentagon and other customers.
Even with those concerns, General Dynamics reported third-quarter net income of $651 million, or $1.84 a share, up from $600 million, or $1.70 a share, a year earlier. That compared with the $1.68-a-share estimate of 19 analysts surveyed by Bloomberg.
Higher sales of General Dynamics’ Gulfstream business jets have helped offset some of the declines in military revenue. The company delivered 99 of the planes during the first nine months of 2013, compared with 88 during the same period in 2012.
United Technologies Corp., the No. 6 federal contractor, was an outlier among the biggest defense companies, reducing its full-year sales forecast yesterday. The company, based in Hartford, Connecticut, blamed Pentagon spending cuts for the decline.
So far, the Pentagon has managed to protect some of the bigger weapons systems, such as Lockheed’s F-35 jet, from sequestration cuts.
EMC Corp., the world’s largest maker of storage computers, declined the most since May 2012 yesterday after the company said third-quarter sales fell $250 million short of its forecasts. David Goulden, president and chief executive officer of the Hopkinton, Massachusetts-based company, attributed the shortfall in part to “a decline in U.S. federal government spending.”
Just as the biggest contractors didn’t immediately profit from the military buildup following the Sept. 11, 2001, terrorist attacks, the top defense companies won’t feel the impact of a decline in government spending until their long-term contracts expire, analyst Ruttenbur said.
“The long lead-time products, they’re taking a while on the downside to see it,” he said. “They took a while on the upside to see it.”