Bloomberg News

Northrop to Lockheed Profits Unscathed by U.S. Budget Cuts (1)

April 24, 2013

Three top weapons makers said across-the-board U.S. budget cuts that began March 1 won’t hurt their profits for the year.

General Dynamics Corp. (GD:US) and Northrop Grumman Corp. (NOC:US) left their full-year outlooks unchanged today as they reported first- quarter net income that exceeded analysts’ estimates. Lockheed Martin Corp. (LMT:US), the No. 1 defense contractor, reported much of the same yesterday.

The companies’ quarterly results and 2013 outlooks clash with dire predictions from industry officials, who last year used words such as “devastating” and “Armageddon” to describe the effects of the $1.2 trillion in automatic cuts known as sequestration.

In the first quarter, “the sequester has proved a non- event,” Richard Whittington, a Drexel Hamilton LLC analyst in New York, said in an e-mail. Companies prepared for the reductions by cutting costs, “so profit margins are coming in above guidance and historical rates,” he said.

Bethesda, Maryland-based Lockheed yesterday reported net income of $2.33 a share, beating the average estimate of $2.04, while maintaining its forecast for a profit of $8.80 to $9.10 in 2013.

Northrop, based in Falls Church, Virginia, said profit was $2.03 a share, compared with the average estimate of $1.73. It reaffirmed its January outlook for full-year profit from $6.85 to $7.15 a share. Northrop rose 3.2 percent to $73.77 in New York trading, reaching its highest level since March 3, 2008.

F-35 Jet

General Dynamics, also based in Falls Church, said net income from continuing operations increased 1.2 percent to $1.62 a share, beating the average analyst estimate of $1.50 a share. It stuck with its January forecast for profit of $6.60 to $6.70 a share in 2013.

General Dynamics, the third-largest Pentagon contractor, rose 6.9 percent to $71.73, the biggest gain since Jan. 28, 2009.

“We do not see sequester as a significant threat to” results in 2013, Chief Executive Officer Phebe Novakovic said today on a conference call with analysts. “Most of our sales are in our backlog.”

Northrop, the No. 5 U.S. defense contractor, and Lockheed Martin both benefited from higher revenue on the F-35 jet, the Pentagon’s most expensive weapons system. The Pentagon has protected funding for the program.

Sales Decline

While the companies don’t expect their profits to be hurt by sequestration, sales already have been pinched by budget cuts.

All three weapons makers reported declines in sales in the first quarter. General Dynamics had a 2.3 percent decrease in revenue in the quarter compared with a year earlier.

“Orders have been weak and backlogs are down,’ analyst Whittington said, referring to the top contractors’ results. He said if the automatic cuts remain in effect, ‘‘that will pressure sales and most likely margins in the back half of the year, and even more in 2014.”

Wes Bush, Northrop’s CEO, said it’s “very likely” that cuts will reduce revenue next year,

“To think that the sequester somehow just dissipates and goes away and doesn’t impact the future is putting your head in the sand,” he said today on a conference call with analysts.

Defense contractors may be underestimating the effect the automatic reductions will have this year, William Loomis, an analyst at Stifel Nicolaus & Co. in Baltimore, said in a phone interview.

“It’s going to impact the industry more than what the industry is thinking about right now,” said Loomis, who has hold ratings on the three contractors.

Defense Cuts

The reductions, which will strip $41 billion from defense programs by Sept. 30 and a total of $1.2 trillion across federal agencies over nine years, may start hurting top weapon makers by the third quarter, Loomis said.

At Hartford, Connecticut-based United Technologies Corp. (UTX:US), which received 18 percent of its revenue from the government last year, automatic cuts may trim profit by 10 cents a share in 2013, according to Chief Financial Officer Gregory Hayes.

“We’re starting to see a little bit of it in terms of the order intake,” with sales of spare airplane equipment to the military dropping about 10 percent in the first quarter, Hayes said yesterday on a conference call with analysts. “It’s just going to take a while for it to play out.”

Among the company’s concerns is that furloughs by the U.S. Federal Aviation Administration may boost commercial airline costs and curb demand for spare parts, he said.

Hand-Launched Drones

Smaller contractors such as Harris (HRS:US) Corp. and Aerovironment Inc. (AVAV:US) haven’t been unscathed.

Melbourne, Florida-based Harris, which sells communications equipment to the military, on April 11 cut its profit and sales outlook for the year because of delayed orders from U.S. agencies.

Aerovironment, a maker of hand-launched surveillance drones based in Monrovia, California, surprised investors on March 5 by reporting a 35 percent drop in third-quarter revenue amid a slowdown in military orders.

“We’ve experienced acquisition delays in the past that have impacted planned revenues within a period, but never of this magnitude,” CEO Tim Conver said at the time.

To contact the reporter on this story: Nick Taborek in Washington at ntaborek@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net


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Companies Mentioned

  • GD
    (General Dynamics Corp)
    • $137.23 USD
    • 0.83
    • 0.6%
  • NOC
    (Northrop Grumman Corp)
    • $143.62 USD
    • -0.17
    • -0.12%
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