(Adds comments from Northrop, General Dynamics CEOs, updates
By Andrea Shalal
WASHINGTON, April 23 U.S. arms makers complain
regularly that lower Pentagon spending on ships, jets and other
hardware will hit their earnings, but a string of
better-than-expected results this week show that layoffs and
cost-cutting have kept profits flowing, and growing.
Defense majors Lockheed Martin Corp, General
Dynamics Corp, and Northrop Grumman Corp have all
reported higher profits this week and raised their full-year
forecasts. In response, the Dow Jones index that tracks the 10
biggest aerospace and defense companies rose 2.2
percent on Wednesday.
Weapons makers turned to workforce cuts and other efficiency
efforts as early as 2007 to shore up their profits, and have
also concentrated on stock buybacks and strong dividends, said
defense consultant Loren Thompson.
"The gradual decline in military spending has given the
companies fewer opportunities to invest in new programs, so they
are returning their cash flow to shareholders," said Thompson,
who runs the Virginia-based Lexington Institute.
He said the crisis in Ukraine and other emerging threats
could strengthen demand for military equipment in the United
States and overseas, and help stave off an expected decline in
defense shares as spending cuts further erode revenues.
Company executives say the budget environment remains tough,
since mandatory federal cuts are due to resume in 2016. Still,
work on big-ticket items like ships, planes and satellites would
shore up revenues since those orders are either already on the
books or part of multi-year agreements being negotiated now.
Lockheed shares were up 3.3 percent at $161.94 after
Australia announced plans to buy 58 more of the company's F-35
fighter jets in coming years.
Lockheed, the Pentagon's No. 1 supplier, had on Tuesday
reported a 23 percent jump in first-quarter net profit and
raised its 2014 earnings-per-share outlook by 2.5 percent.
Lockheed, General Dynamics and Northrop all reported higher
operating margins in the latest quarter, and said they would
continue efforts to reduce costs and improve efficiency.
Northrop, which makes unmanned planes, the B-2 bomber and
electronic equipment, on Wednesday reported higher-than-expected
quarterly profit and raised its full-year outlook by about 2
percent, to a range of $8.90 to $9.15 per share.
Northrop shares rose 1.8 percent to $121.96.
CEO Wes Bush attributed the rise in Northrop's EPS in part
to share repurchases; the company had about 9 percent fewer
shares outstanding during the latest quarter.
"While the U.S. budget environment continues to be
challenging, particularly for our short-cycle businesses, we
have a good long-term set of opportunities that includes ...
potential for continued growth in international sales," Bush
told analysts on an earnings call.
He said the sale of Global Hawk unmanned planes now being
negotiated with South Korea could lead to additional foreign
sales of unmanned systems for the company.
General Dynamics, which makes Gulfstream business jets,
tanks and U.S. warships, raised its guidance for 2014 earnings
per share by nearly 4 percent after posting higher-than-expected
earnings and revenues in the first quarter. Its
shares were up 3.6 percent at $111.90 in late trading.
Chief Executive Phebe Novakovic told analysts that U.S.
weapons spending had "troughed," or hit a low point, and that a
big rise in backlog showed the company is well-positioned. She
said the firm planned to return "most, if not all" of its free
cash flow to investors via stock repurchases or dividends.
Novakovic described "blocking and tackling" to lower costs.
"I don't think you can ever get away from the absolute
requirement to improve your operating performance quarter over
quarter," she said. "You are never done."
General Dynamics' combat systems division, which posted a
quarterly operating loss, would show improved sales, earnings
and margins over the course of the year, Novakovic said.
The marine division also has "considerable upside" given
that it expects to get a multi-year contract for more
Virginia-class attack submarines from the U.S. Navy, and is
working on a new submarine to replace the current Ohio-class
submarines that carry nuclear weapons, she said.
(Reporting by Andrea Shalal; Editing by Ros Krasny and Nick