WASHINGTON (Reuters) - Weapons makers reported higher quarterly earnings this week, with cost cutting helping them maintain solid profit margins, even as defense budget cuts began to drive down revenues in services and other areas.
Industry executives said they would continue to squeeze out waste as the sector braces for another $500 billion in defense cuts that will kick in next January if U.S. lawmakers cannot find other deficit-cutting measures to avert “sequestration.”
The shares of Lockheed Martin Corp (LMT.N), Boeing Co (BA.N), Northrop Grumman Corp (NOC.N) and Raytheon Co (RTN.N) closed higher across the board on Thursday as the companies maintained or slightly increased guidance for the full year.
The S&P aerospace and defense index .GSPAERO rose nearly one percent, with Lockheed shares peaking one percent higher at $92.24, its highest since September 2008, before slipping back to close at $91.70.
Executives said they would remain focused on cost-cutting, drumming up foreign orders, which tend to carry better profit margins, and expanding into adjacent markets.
Lockheed Chief Executive Bob Stevens, who announced on Thursday that he will retire at the end of the year, said his company had begun planning for how to deal with sequestration, but would continue working to ensure the measure was halted or “revised to a more sensible approach.”
Analysts welcomed the generally upbeat quarterly reports from defense companies, but said the companies would have to step up their efforts to maintain profit margins that ranged as high as 17.7 percent - the level reported by Raytheon at its integrated defense business.
“There are far more efficiency savings that they can get,” said Rob Stallard with RBC Capital.
After 15 years of growth in the defense budget, there was 15 years of fat built up in the Department of Defense and the defense industry.
He noted the companies were also lobbying hard to convince lawmakers to reinstate funding for programs cut by top Pentagon officials, such as ground vehicles built by General Dynamics Corp (GD.N) and BAE Systems (BAES.L), submarines built by General Dynamics and Huntington Ingalls Industries Inc (HII.N), or Global Hawk unmanned spy planes built by Northrop Grumman Corp.
Those efforts were already paying off this week as House Armed Services Committee subcommittees reversed some of the cuts recommended by the Pentagon’s fiscal 2013 budget.
The changes must still be approved by the full committee, the full House and the Senate, as well as the appropriating committees, but they showed the determination of many Republican lawmakers to block cuts that could cause layoffs in their home districts, especially in an election year.
Representative Buck McKeon, who heads the House Armed Services Committee, told a Washington audience on Wednesday that his committee planned to restore funding for several key programs as part of the annual defense authorization bill,
“We must resolve sequestration, restore defense resources and rebuild a stressed military that has endured a decade of war,” he told the Hamilton Society.
Lockheed reported on Thursday that its profit from continuing operations rose 29 percent to $2.02 per share in the first quarter, while revenues rose six percent to $11.3 billion. Analysts expected profit of $1.70 a share, according to Thomson Reuters I/B/E/S. [nL2E8FQ1OR]
Lockheed said President and Chief Operating Officer Chris Kubasik would succeed Stevens as CEO in January and announced that it would pay a second quarter dividend of $1 per share.
Raytheon shares rose more than two percent to reach a year-high of $54.62 after the company reported a 25 percent increase in earnings per share to $1.33 from $1.06 a year earlier, far exceeding analysts’ forecasts of $1.16 a share, according to Thomson Reuters I/B/E/S. Its shares closed up $1.02 at $53.93.
Revenues were lower at most companies, especially in shorter-cyle service-oriented businesses, including Raytheon, which reported a 2 percent drop in total net sales to $5.94 billion from $6.05 billion.
L-3 Communications Holdings Inc (LLL.N) posted lower quarterly profit on Thursday as sales fell in its government services segment.
Still, the company raised its profit forecast for the year as it cited several international business wins and earlier-than-expected orders for some contracts.
Northrop Grumman and Boeing, which reported earnings on Wednesday, also did better than expected in the first quarter, with both raising their full-year profit forecasts.
General Dynamics Corp (GD.N), the other big U.S. defense company to report results on Wednesday, had a 9 percent drop in first-quarter earnings, mainly due to a $67 million charge from its European combat systems operations. General Dynamics shares closed 51 cents, or 0.75 percent, lower at $67.05.
Editing by Andre Grenon