* Revenue weakening after decade of growth
* CEOs focus on cost-cutting amid budget uncertainty
* Pentagon says it not targeting arms makers' profit
(Adds comments from CEOs, Pentagon official, closing share
By Andrea Shalal-Esa
WASHINGTON, April 24 U.S. weapons makers
reported higher-than-expected profit and improved margins for
the first quarter, even as revenue began to taper off after more
than a decade of sharp growth in U.S. military spending.
Boeing Co's defense division, Northrop Grumman Corp
and General Dynamics Corp on Wednesday followed
the lead of Pentagon supplier Lockheed Martin Corp in
reporting higher earnings and lower revenue.
Shares of the companies rose sharply on their financial
results, with General Dynamics shares closing nearly 7 percent
higher at $71.73 in what analysts said amounted to a strong vote
of confidence in the firm's new chief executive, Phebe
Boeing shares closed 3 percent higher at $90.83, while
Northrop shares gained 3.2 percent to close at $73.77. Lockheed
shares, which saw big gains on Tuesday, edged up another 0.65
percent higher to close at $97.69.
Operating margins remained steady or improved across the
sector, ranging from 10.3 percent to 12.4 percent, but
executives warned that uncertainty about future military
spending levels could weigh on revenue this year and next.
"Weaker revenues and strong earnings are typical of this
point in the defense spending cycle. However, the erosion in
revenues is probably a leading indicator of where earnings are
headed," said defense analyst Loren Thompson of the
Virginia-based Lexington Institute.
"Earnings eventually will erode as the impact of
sequestration is fully felt," he said, referring to
across-the-board federal spending cuts.
Northrop Grumman, which builds unmanned planes and other
military equipment, said it was focused on executing programs,
cash deployment and tweaking its portfolio as mandatory spending
cuts known as sequestration start to take effect.
The company reported net earnings of $489 million, or $2.03
a share, compared with $506 million, or $1.96 a share a year
earlier. Revenue dipped to $6.1 billion from $6.2 billion.
"Looking ahead, we recognize that we are operating in an
uncertain and constrained budget environment," said Northrop
Chief Executive Wes Bush.
Bush told analysts that he did not expect cancellation of
any significant Northrop programs as a result of sequestration
in fiscal 2013, but continuing uncertainty about future budget
cuts could weigh on bookings this year.
Sales and bookings in the third and fourth quarters would
help clarify the outlook for 2014, Bush said. "It is very likely
this is going to negatively impact sales in 2014," he said. "To
think that the sequester somehow dissipates and goes away and
doesn't impact the future is putting your head in the sand."
Bush said a broader strategic review initiated by U.S.
Defense Secretary Chuck Hagel and due to be completed next month
would also help inform future budgets. He cited double-digit
growth on programs in the cyber security arena.
Pentagon acquisition chief Frank Kendall said his office was
closely involved in Hagel's department-wide review.
Kendall on Wednesday unveiled plans to further improve the
way the Defense Department buys arms, including new guidelines
on profits on fixed-price contracts, but he insisted the
Pentagon did not aim to cut into companies' margins.
"We're not after people's profits as a way to reduce costs,"
Kendall told reporters at the Pentagon. "We want to tie profit
and performance together."
General Dynamics, which builds ships, tanks and Gulfstream
business jets, reported slightly higher first-quarter earnings,
far exceeding analysts' forecasts, but revenue fell short of
General Dynamics said net earnings rose to $571 million, or
$1.62 per share, from $564 million or $1.57 per share, a year
earlier. Revenue dipped to $7.4 billion from $7.58 billion.
Novakovic, who has carried out a series of management
changes since taking over on Jan. 1, said the company was
focused on operations, cost improvement and cash generation.
"Going after overhead is critical to margin expansion in the
down environment," she told analysts. She said General Dynamics
would continue to reduce its workforce as needed in the current
budget environment but declined to forecast any specific areas
targeted for layoffs.
Boeing, the second-largest U.S. weapons maker, said its
defense earnings rose 12 percent to $832 million, while revenue
slipped 1 percent to $8.1 billion.
Boeing's operating margin remained the lowest among the
companies that reported earnings this week, although it rose to
10.3 percent from 9 percent a year earlier.
Boeing Chief Executive Jim McNerney said Boeing expected
growth in key areas such as space, unmanned systems, intelligent
surveillance and reconnaissance, and cyber security. He said the
company also expected expanding sales of its smaller commercial
(Editing by John Wallace and Matthew Lewis)