Bloomberg News

U.S. Defense Companies Look Abroad as Pentagon Budget Slows

February 03, 2012

(Updates with closing share prices in 17th paragraph.)

Jan. 26 (Bloomberg) -- The biggest U.S. defense contractors are looking to buyers abroad to sustain sales and profits as the Pentagon faces as much as $1 trillion in budget cuts over 10 years.

Lockheed Martin Corp., Boeing Co., and Raytheon Co., which announced their fourth-quarter financial results this week, told investors that export sales may make up for declining U.S. spending on weapons and technology.

“We foresee significant upside potential in international markets, which we expect will generate 25 percent to 30 percent of revenues within just a few years and offer an opportunity to offset domestic reductions,” Jim McNerney, Boeing’s chairman and chief executive officer, told investors on a conference call yesterday.

Overseas sales now account for 24 percent of defense revenue for Chicago-based Boeing, the world’s biggest aerospace company, according to company spokesman Daniel Beck. Defense sales accounted for 46.5 percent of Boeing’s 2011 revenue of $68.7 billion.

Defense suppliers are looking to piggyback on President Barack Obama’s strategy of realigning forces toward Asia-Pacific region and strengthen partnerships with friendly nations there as the U.S. draws down from Iraq and Afghanistan. Tensions in the Middle East over Iran’s nuclear ambitions may lead countries in that region to bolster their arms.

“You’re seeing softness here domestically on defense spending, and that’s likely to continue,” Peter Arment, a defense equities analyst at Sterne Agee & Leach Inc., in New York said in an interview. “But you have a threat environment globally that supports continued military sales.”

Panetta’s Plan

Defense Secretary Leon Panetta presented an outline today for $613 billion in spending for fiscal 2013. The proposal is part of an effort to cut $487 billion, or 8.5 percent, from $5.62 trillion in defense spending that had been planned for 2012 to 2021.

Global demand for U.S. technologies in cybersecurity; missile defense; intelligence, surveillance and reconnaissance; and electronic warfare is strong, Bill Swanson, chairman and CEO of Raytheon, said on a conference call today with analysts.

For Waltham, Massachusetts-based Raytheon, about 37 percent of a $35.3 billion backlog came from international customers, Swanson said. That illustrates the “continued success of our international strategy,” he said on a conference call today.

Lockheed’s F-35

Lockheed Martin, the world’s largest defense company, which has sold more than 4,000 of its F-16 jet fighters around the world, is attempting to create a similar market for the F-35 Joint Strike Fighter it is developing even as it faces challenges on the airplane’s performance in Pentagon testing.

The F-35 is the Pentagon’s largest weapons program, at an estimated cost of $382 billion for development and the purchase of planes. The Defense Department plans to buy 2,443 F-35s.

In December, Japan became the latest customer outside the U.S. to order F-35s.

Lockheed Chairman and CEO Bob Stevens told reporters on a conference call today that defense budget pressures on the U.S. “ means more cooperation on shared security objectives” with allies that are likely to embrace advanced U.S. technologies.

Countries such as Iran and China are “investing very heavily on advanced technologies that include anti-access and area denial capabilities” that will require the U.S. and its allies to counter such measures, he said.

Planes, Anti-Missile Systems

Boeing, Raytheon and Lockheed are among the U.S. defense contractors that have sold airplanes, missile defense systems, and electronic-warfare equipment to countries from the Middle East to Asia. The Pentagon’s Defense Security Cooperation Agency said in December that the U.S. had signed deals valued at $34.8 billion to sell weapons globally.

Shareholders will be looking to see how the companies’ strategies align with the revamped U.S. global military posture, Roman Schweizer, a Washington-based defense policy analyst at the investment firm Guggenheim Partners, said in an interview.

Lockheed shares rose 74 cents to $82.47 at the close in New York trading; Raytheon rose 18 cents to $49.89; General Dynamics fell 6 cents to $71.51; and Boeing declined 51 cents to $75.31.

Announcing quarterly results today, Lockheed said 2012 sales would be $45 billion to $46 billion, generating a profit per share in the range of $7.70 to $7.90. Analysts surveyed by Bloomberg expected sales of $46.2 billion and a profit of $7.75 a share.

Forecasts for 2012

Lockheed’s 2012 forecast compares with 2011 sales of $46.5 billion and per-share profit from continuing operations of $7.85.

Raytheon forecast 2012 profit from continuing operations of $4.90 to $5.05 a share on sales of $24.5 billion to $25 billion. It fell short of analysts’ estimate of per share profit of $5.26 a share and sales of $25.1 billion, according to data compiled by Bloomberg.

Boeing said yesterday that full-year net income will drop to $4.05 to $4.25 a share, trailing 2011’s $5.34 and the $4.75 average of 26 estimates compiled by Bloomberg. Sales in 2012 may rise to $78 billion to $80 billion, up from $68.7 billion and matching analysts’ projections.

General Dynamics Corp., of Falls Church, Virginia, which announced results yesterday, said its full-year profit will be $7.10 to $7.20 a share, less than the average analysts’ estimates of $7.48 a share. Defense sales may fall about 1 percent to 2 percent in 2012, Chairman and CEO Jay Johnson said on a conference call with analysts.

“We are doing everything in our control to position our defense businesses for the declining budget headwind, including continuous improvement initiatives, restructuring, divesting non core businesses, and head count reductions,” he said.

--Editors: Larry Liebert, John Walcott

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

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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