WRAPUP 2-U.S. arms makers boost profits despite Pentagon budget headwinds
WASHINGTON, July 24 (Reuters) - Shares of some U.S. arms makers hit all-time highs on Wednesday after they reported higher quarterly earnings and raised their full-year forecasts despite Pentagon budget cuts and weakening order backlogs.
The Pentagon began implementing $37 billion in mandated budget cuts for fiscal 2013 in March, and it faces additional cuts of $50 billion annually over the next nine years unless Congress acts to avert a process known as "sequestration."
Defense Secretary Chuck Hagel warned lawmakers this month that additional cuts in fiscal 2014, which begins in October, would hit the Pentagon's procurement and research and development budgets disproportionately hard.
Northrop Grumman Corp, which builds unmanned planes and high-end electronic equipment, and Boeing Co, maker of F/A-18 fighter jets and aerial refueling planes, on Wednesday joined industry leader Lockheed Martin Corp in boosting earnings and raising their earnings forecasts.
General Dynamics Corp, which builds tanks, ships and Gulfstream business jets, also reported higher-than-expected earnings and raised its full-year forecast.
Each of the companies also pledged to return cash to shareholders through share buybacks and rising dividends.
The news drove shares of Northrop to an intraday record high of $92.99, although they fell back to close at $90.30, up 1.7 percent from Tuesday. Lockheed shares hit a record intraday high of $120.35, although they slipped back to close at $119.12, up 1 percent. General Dynamics stock also closed higher.
Analysts said share prices were probably nearing peaks given the fiscal uncertainty, although they said any move by Congress to avert further budget cuts could give stocks a further boost.
Backlogs of orders weakened at Lockheed, General Dynamics and Northrop Grumman, while Boeing's defense division increased its backlog due to huge multiyear orders for its CH-47 Chinook helicopters and V-22 Osprey tilt-rotor aircraft. It builds the Osprey with Bell Helicopter, a unit of Textron Inc.
"Companies clearly believe there will be further sequestration cuts in 2014 and they are shedding costs faster than revenues could potentially fall," said Virginia-based defense consultant Jim McAleese.
McAleese said the companies could maintain strong earnings in 2014 if they continue to lay off workers and close plants.
Weapons makers have been cutting costs and consolidating facilities for several years, and vowed this week to continue to look for ways to save money and beef up performance.
"The best antidote to a budget cut is performance," General Dynamics Chief Executive Phebe Novakovic told analysts. "Bears eat the sick and the young first, so we are very focused on maintaining our good execution on each of our programs, because without that execution, you become more vulnerable."
Lockheed, for its part, has cut 30,000 employees over the past five years, and said further cuts might be on the horizon.
"Certainly, if we have a significant impact on our programs from sequestration, we'll see additional reductions," Lockheed Chief Executive Marillyn Hewson told analysts on Tuesday.
Asked how long Northrop Grumman could continue to improve its margins in a worsening budget climate, the company's chief financial officer, Jim Palmer, likened the challenge to running on a treadmill: "You have got to continually run as fast as the treadmill is going."
He said the company was reaping the benefits of cost cutting now, but government officials would base future contracts on the lower cost structure, which would eventually squeeze the company's current high margins.
William Loomis, defense analyst at Stifel Nicolaus, said results were so positive this quarter in part because companies had cut costs to get ahead of defense spending cuts that had not yet hit big platforms such as fighter jets, ships and spacecraft. However, companies with short-cycle businesses including services were starting to feel the pinch.
He said the longer-term outlook was dimmer, given fiscal pressures and historical trends that showed only wars and major policy changes tended to cause big shifts in the defense cycle.
"If fiscal 2014 sequestration happens, we're going to see much more budget pressure over the next couple of years, and valuations will come down," he said.
Northrop's profit rose to $488 million, or $2.05 per share, from $480 million, or $1.88 a share, a year earlier. Revenue edged up to $6.29 billion from $6.27 billion.
Northrop raised its earnings guidance for the full year to a range of $7.60 to $7.80 per share from an earlier forecast of $6.85 to $7.15. It said revenue would likely reach $24.3 billion, up from an earlier forecast of $24 billion.
General Dynamics reported higher-than-expected earnings but said its backlog was down more than 5 percent from a year earlier, falling to $49.4 billion.
The company reported net earnings of $640 million, or $1.81 per share, up from $634 million, or $1.77 per share, a year earlier. Revenue was little changed at $7.91 billion.
Boeing reported a 13 percent jump in quarterly profit, driven mainly by commercial airplane sales. Its defense division reported a 5.6 percent increase in earnings from operations, but revenue was flat at $8.2 billion.
Boeing raised its full-year revenue guidance by $1 billion, to a range of $83 billion to $86 billion, based entirely on foreign defense orders rather than commercial airplane sales.
Operating margins ranged from 12.1 percent at General Dynamics to 13.4 percent at Lockheed. Boeing's defense division had an operating margin of just 9.5 percent, although that marked an increase from 9.1 percent a year earlier.
Lockheed, maker of F-35 fighter jets and Aegis missiles, kicked off the earnings reports on Tuesday with a surprising 10 percent spike in profit, saying the Pentagon budget cuts had not hit its sales as much as expected.
Lockheed reported net profit of $859 million, up from $781 million a year earlier. Earnings per share rose to $2.64 from $2.38. It now projects earnings per share of $9.20 to $9.50 for the full year, up 4 percent from guidance issued in April.