Mixed Results Posted for Defense Contractors

by: Matthew Potter
July 28, 2011

Category: Business Line, Companies, Congress, development program, Events, General Dynamics, Lockheed Martin, Military Aviation, missile defense, Northrop Grumman Corp., production program | RSS 2.0

Several of the largest U.S. defense contractors posted their second quarter results for 2011 recently and they were definitely a mixed bag. Perhaps reflecting the current uncertainty around the U.S. defense spending as well as the Federal budget overall many of the companies reported declines in revenue and earnings though overall they are confident that the year will end similar to their earlier predictions. 2012 though may be a different matter as some troubling trends arose in the reports.

Northrop Grumman (NOC) was probably the most disappointing of the group. The company has restructured itself considerably over the last few years first jettisoning its engineering service business, TASC, and then in the last few months its entire shipbuilding arm to form (HII). The maker of aircraft, unmanned aerial vehicles as well as providing a variety of services to defense agencies reported a decline of 27% when compared to last year’s quarter. Earnings were only about $520 million down from $711 million or over 50 cents a share. Sales too declined almost ten percent or 700 million. The company is predicting that its guidance for the year will be met. Management blamed delayed awards for aircraft as a principal contribution to the decline. If the U.S. defense budget does begin a serious reduction as predicted then these programs may see further cut backs. If the F-35 Joint Strike Fighter overcomes its struggles Northrop will also see the end of F/A-18E/F Super Hornet production for the Navy as they transition to Lockheed’s aircraft.

General Dynamics (GD) was able to post an increase but it was only $5 million or 9 cents a share. The company feels that for the year they will see an increase in their annual Earnings Per Share (EPS) to $7.15 – 7.20. Increased sales of aircraft and defense equipment allowed the company to stay fairly constant although revenue fell almost 3 percent to $7.88 billion.

Lockheed Martin (LMT) the lead contractor for the largest defense program in history, the F-35, posted increases over last year. They said that revenue from the advanced aircraft as well as PATRIOT PAC-3 air and missile defense missiles spurred the improvement. On paper the company saw a decline compared to last year but that takes into account two divisions that the company has since sold. The company is now predicting the full year earnings to be between $7.35 – $7.55 up from an earlier $6.95 to $7.25.

Of course the news for the overall F-35 program has not been good as recent cost increases have had some question the further investment in the program. Cuts or slowing the F-35 will hurt Lockheed in the short term. As the program continues and gets sorted out it will become a major portion of their revenue as production increases from the 15-30 a year right now to 70 or more in 2015 and out. The U.S. Air Force projects spending over $6 billion a year on F-35 production in 2015. Much of that will go to Lockheed as the prime contractor. Lockheed is adjusting to the current spending environment by cutting several thousand personnel mainly in the support areas to reduce their overhead and help their ability to offer lower prices.

The whole industry is entering a time of uncertainty as the cut backs in funding for fighting in Iraq and Afghanistan along with the overall U.S. budget pressures will see less defense spending. They will need to adjust their business lines as well as their workforces to meet the changing needs of the U.S. military. The fallout may be worse for the smaller and mid-sized defense contractors many of which rely on single contracts or business areas that may see major contractions. All-in-all it is time for investors to evaluate companies and their holdings.

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