Lockheed Martin Corp. (LMT:US) and Northrop Grumman Corp. (NOC:US) reported weak sales at their information technology units and predicted the operations will drag down revenue next year, especially if automatic U.S. budget cuts take effect.
Sales of computer services to U.S. agencies, including the Pentagon, “would probably be impacted sooner” than traditional, longer-term military contracts, especially if across-the-board spending cuts, known as sequestration, aren’t averted, Wes Bush, chairman and chief executive officer of Northrop, said today on a conference call with analysts.
Lockheed said in a statement that the company’s revenue next year would decline “at a low single-digit rate from 2012 levels” because of weak sales anticipated in its Information Systems & Global Solutions unit, which provides computer- services to clients including agencies such as NASA.
Defense contractors renewed their warnings about budget cuts as they announced third-quarter results today. Lockheed and Northrop beat analysts’ profit estimates, while General Dynamics Corp. (GD:US) fell short.
Lockheed rose 2.1 percent to $93.92 at the close in New York trading, the biggest gain since June 29. General Dynamics climbed 2.4 percent to $67.79, the most since Sept. 6. Northrop rose less than 1 percent to $69.33.
The U.S. government faces sequestration, automatic budget cuts of about $1 trillion over a decade starting in January, unless Congress and the president can agree on alternative deficit reduction measures. About $500 billion will come from the defense budget in addition to the $487 billion the Pentagon already plans to cut from its previously planned budgets over 10 years.
Defense contractors expanded in information services to government agencies to diversify their revenue sources beyond the Pentagon. Now, civilian agencies with smaller budgets than the Pentagon’s may be especially hard-hit by the budget cuts, Bush said.
The information technology business is “one sector where everybody feels the competitive pressure, whatever the budget scenario,” Byron Callan, a defense industry analyst in Washington with Capital Alpha Partners LLC, said in a phone interview today. “I wouldn’t be surprised if that sector goes through more restructuring in 2013 and 2014,” such as mergers and acquisitions, he said.
Lockheed, the world’s largest defense contractor, said third-quarter profit rose 9.3 percent and raised its full-year profit forecast.
Net income from continuing operations for the quarter rose to $727 million, or $2.21 a share, from $665 million, or $1.99 a share, a year earlier, the company said today in a statement. The average estimate (LMT:US) of 22 analysts surveyed by Bloomberg was for a profit of $1.85 a share. Sales declined 2.1 percent to $11.9 billion.
Full-year profit will be $8.20 to $8.40 a share compared with the forecast of $7.90 to $8.10 a share made in July, the Bethesda, Maryland-based company said. Analysts surveyed by Bloomberg forecast profit of $8.18 a share.
Sales at Lockheed’s Information Systems & Global Solutions unit fell 1.3 percent to $2.3 billion. Profit at the unit fell 1.9 percent to $209 million.
Earlier this month Lockheed dropped plans to issue layoff notices to its employees after warning that it may have to fire as many as 10,000 workers if the automatic budget cuts go into effect in January.
The company changed its intention to issue notices after the White House Office of Management and Budget on Sept. 29 said the government will cover legal and compensation costs if defense and domestic cuts take effect in January and contractors are held liable in court for not giving enough notice under the federal Worker Adjustment and Retraining Notification Act.
Lockheed decided not to issue layoff notices after the Pentagon reassured the company that no contract disruptions would occur on January 2 or for several months after as a result of sequestration, Chairman and Chief Executive Officer Robert Stevens told reporters today on a conference call.
“We will comply with the law and issue WARN Act notices at the appropriate time” if sequestration-related actions are likely to affect the company’s contracts, Stevens said.
Stevens said on a conference call with analysts later in the day that “it would be hard to get a grand bargain in the lame-duck session of the Congress,” when lawmakers return after the Nov. 6 elections, to call off the sequestration.
A grand bargain “tends to have value ranges of $4 trillion to $5 trillion and involves significant amount of work looking at taxes, entitlements and spending,” said Stevens. He said one alternative would be for Congress to delay the automatic cuts until March, when a stopgap spending measure now in effect expires and it must be extended or a budget approved.
Lockheed is under pressure as it negotiates a contract with the Pentagon for the next lot of its F-35 Joint Strike Fighter, the Pentagon’s single biggest weapons program. Officials including Air Force Major General Christopher Bogdan, the deputy program executive officer, have criticized the company for poor relations, delays in software development and problems with helmets worn by the plane’s pilots.
The company has received 75 percent of the funds toward that fifth lot of F-35 trial production orders, pending completion of contract talks, Bruce Tanner, Lockheed’s chief financial officer, told reporters today.
Lockheed has 94 F-35 jets on its production line from various lots, and the lack of a completed contract for the fifth lot won’t affect this year’s profit, Tanner said.
General Dynamics, the maker of Abrams tanks and Gulfstream business jets, said third-quarter profit fell 9.7 percent on weaker sales and profit at its information technology unit.
Net income from continuing operations was $600 million, or $1.70 a share, compared with $665 million, or $1.83 a share, a year earlier, the Falls Church, Virginia-based company said today in a statement. It missed analysts’ forecast of $1.78 a share, the average of 20 estimates compiled by Bloomberg. Sales rose 1 percent to $7.93 billion.
While the company has said the prospect of cuts in defense spending already is slowing contract awards at some of the company’s units, sales in its aerospace operation, the maker of Gulfstream business jets, rose 30 percent and profit increased 20.3 percent during the quarter.
“We remain encouraged by Gulfstream’s sizable large-cabin backlog and healthy order pipeline,” Jay Johnson, chairman and chief executive, said on a conference call. “We continue to believe that we will realize several multi-aircraft international orders in the coming months.”
Northrop today boosted its full-year profit forecast to $7.35 to $7.40 a share from a previous estimate of $7.05 to $7.25 a share. The average of 20 analysts surveyed by Bloomberg is for $7.25.
Northrop’s income from continuing operations for the third quarter was $459 million, or $1.82 a share, compared with $520 million, or $1.86, in the same period last year, the company said in a statement. The average of 20 analysts surveyed by Bloomberg was for profit of $1.69 a share. Sales fell 5.1 percent to $6.27 billion.
Sales at the company’s Information Systems unit fell 9.2 percent to $1.78 billion, and profit at the unit declined 9.1 percent to $170 million.
Bush, the Northrop CEO, said the uncertainty about defense cuts is compounded because Congress has failed to pass a spending measure for fiscal 2013, which began on Oct. 1. Interim funding restricts how money can be used, limiting new contracts in areas such as information technology, he said.
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