Shares of defense companies fall on spending cuts

AP News
Posted: Oct 26, 2011 5:41 PM
Shares of defense companies fall on spending cuts

Defense contractors Lockheed Martin and Northrop Grumman reported surprisingly strong third-quarter earnings Wednesday. But executives at both companies used the same discouraging word to describe what the future will look like: Flat.

They warned that government spending cuts in 2012 will pinch future sales. The warnings dragged down the stock prices of defense contractors after they reported earnings.

"It's certainly going to be a more challenging environment," Northrop Grumman CEO Wes Bush said during a conference call Wednesday morning. He said his company expects revenue to fall slightly in a "flatter environment."

Lockheed Martin Corp. said its future revenue looked "flattish."

Two other defense contractors on Wednesday reported strong earnings for the third quarter, but also reported stagnant revenue in the face of government cutbacks.

Congress already has agreed to cut federal spending by $1.5 trillion over the next decade. If a designated committee of legislators can't agree on cuts by the end of this year, many will automatically be made to defense spending. At the same time, Congress hasn't even agreed on a budget for fiscal 2012, which began this month, and is funding operations through a temporary resolution.

That leaves investors guessing if next year's spending will change, said Wells Fargo analyst Sam Pearlstein.

"There is clearly support for defense spending. I think exactly how those events (in Congress) shake out is still unclear," Pearlstein said.

It appears that even Lockheed and Northrop Grumman were surprised by the extent of spending cuts now being proposed in Washington. Military contractors rely on billions a year in spending on everything from unmanned aerial drones to fighter jets and training equipment.

Bush told analysts that Northrop has been relying on forecasts of government spending that now appear too optimistic. Bush said that based on what the company know now, fourth-quarter revenue should be roughly even with last quarter's $6.6 billion, which was down 5 percent from the year before.

Falls Church, Va.-based Northrop said it earned $520 million, or $1.86 per share, in the July-September quarter. That was up from $497 million, or $1.67 per share, during the same period last year.

The company said much of its profit growth came from earnings on its pension program. Pearlstein noted that such gains really are just an accounting adjustment showing the surplus of pension funds Northrop has compared with its liabilities.

Revenue fell 5 percent in Northrop's biggest division, aerospace, and dropped 8 percent in its information systems and 22 percent in its technical services businesses. Revenue rose 2 percent in its electronic systems unit.

Bethesda, Md.-based Lockheed Martin said its third-quarter net income jumped 25 percent on higher sales and profits in its aeronautics division. The company reported net income of $700 million, or $2.10 per share, for the quarter. That's up from $560, or 1.54 per share, a year earlier.

Also Wednesday, defense contractor General Dynamics Corp. said its third-quarter profit was relatively flat on lower revenue. The Falls Church, Va.-based company said its net income of $652 million, or $1.80 per share, up less than a percent from $650 million, or $1.70 per share, in the same quarter last year.

Revenue fell 2 percent to $7.85 billion from $8.01 billion.

Analysts were expecting profit of $1.77 per share $8.34 billion in revenue, according to a FactSet poll.

And aircraft maker and defense contractor Boeing Co. said Wednesday that its third-quarter net income rose 31 percent from last year, to $1.1 billion.

Roughly half of Boeing's business is in defense, which generated much of the company's profit growth last quarter. The company's defense division had operating earnings of $824 million, up 20 percent.

Beoing said its revenue was flat at $8.2 billion.

Shares of Northrop Grumman fell 97 cents, or 1.7 percent, to close at $55.60. Lockheed Martin dropped $2.54, or 3.2 percent, to $76.35. General Dynamics shares fell $1.37, or 2 percent, to $63.89.


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Associated Press writer Tali Arbel in New York contributed to this report.