Mid-tier Defense Contractors Report Poorer Results for Most Recent Quarter

by: Matthew Potter
November 4, 2011

Category: Alliant Techsystems, BAE Systems, Business Line, Companies, development program, IT, logistics, production program | RSS 2.0

The larger defense contractors all reported their most recent quarterly earnings a few weeks ago. Most maintained their profits or saw an increase although revenue did decline in some cases. They remained mainly positive for the year stating that they would meet or exceed their full year estimates indicating that despite all of the talks and plans of cuts there has not yet been a significant slowdown in U.S. defense spending.

This week two of the mid-tier defense contractors, Kratos (KTOS) and Alliant Techsystems (ATK), also reported for the third quarter and somewhat surprisingly they both saw worst performance with Kratos even suffering a loss.

Kratos Defense & Security Systems is a supplier of IT, safety and security, engineering and technical support for a variety of defense, FMS and civil customers. They saw a loss of about $7 million on sales of $211 million. This was a significant increase in sales from the previous year which saw only $120 million. The primary reason given for the swing to the negative was the completion of the acquisition of Integral Systems. Kratos has over the last few years been fairly aggressive in M&A to expand its business base and customers.

ATK which makes rocket motors, ammunition and explosives primarily saw a decline in revenue of of about $100 million and income fall $17 million. The company is exposed not only to cut backs at the Defense Department but also NASA. ATK is also suffering due to a decline in demand for civil ammunition.

ATK is also waiting on a new competition for one of its major contracts with the U.S. Army. The company had run the Radford, VA plant for the Army but lost a re-compete to BAE Systems (BAE:LSE) which they then protested. The Army decided to have a new contest due to ATK’s protest. That is a $200 million a year contract.

What these results illustrate is that the defense contracting industry is already adjusting to a different market. Results may be uneven for several quarters as this adjustment takes place. The companies that have not diversified or have a wide customer base will be the first to see changes in their revenues and earnings as decisions on individual programs or demand for some supplies begin to dry up. Both Kratos and ATK remain confident for the year but there is starting to be pressure on the sector.

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