Defense contractors' earnings exceed expectations

Thursday , October 23, 2014 - 7:10 AM

Amrita Jayakumar, The Washington Post

WASHINGTON — Three of the nation’s largest defense contractors released their financial results this week and offered hints of improvement despite a slowdown in federal spending.

General Dynamics, Northrop Grumman and Lockheed Martin all performed much better in the quarter than Wall Street expected, said Michael Lewis, managing director of McLean, Virginia-based Silverline Group.

“Their businesses appear to be stable, and their backlog [of orders] continues to grow,” he said. “The only weak link across the board is the services and information technology business.”

The sluggishness in information technology and professional services is particularly important for the Washington area, where much of that work is based.

At Falls Church, Virginia-based General Dynamics, the company’s aerospace, combat systems and marine systems units all recorded increases in business during the quarter. The performances offset a drop in information systems, which resulted in revenue overall remaining roughly flat at $7.75 billion. The company recently announced that it will consolidate two units within its information technology segment to create a new business unit in Fairfax County, Virginia.

Overall, General Dynamics posted a profit of $696 million, or $2.06 per share, compared with $651 million, or $1.84 per share, from the same period last year, an increase of 7 percent.

“We experienced the highest revenues so far this year, had the highest operating earnings in four years, the highest margins in six years and the highest earnings from continuing operations on my watch,” Phebe Novakovic, the company’s chief executive, said in a conference call with investors Tuesday.

The company has leaned heavily on its Gulfstream business-jet unit to offset federal cuts. General Dynamics reported improved sales of its G650 and G280 aircraft and released two new models this month, the G500 and the G600.

At Northrop Grumman, also based in Falls Church, sales and profits dipped because of costs related to changes in a new federal pension law that affect most contractors, the company said.

Northrop’s aerospace division was the only unit to record higher sales in the quarter, mainly because of a $75 million settlement with the government related to “intellectual property and a terminated program,” the company said in a statement.

Northrop posted a profit of $473 million in the third quarter, or $2.26 per share, down from $497 million, or $2.14 per share, a year ago. Sales were $5.98 billion, down 2 percent from $6.1 billion a year ago. The company repurchased 6 million shares of its stock in the third quarter, for a total of $753 million.

Northrop’s international business continues to grow, which helps offset the drop in domestic business, chief executive Wes Bush said in a call with investors Tuesday. In particular, he said, Northrop’s unmanned aerial vehicles, the Global Hawk and Triton, were attracting interest from foreign buyers.

The company’s pension liability costs increased in the third quarter because of a change in federal law. But that is a near-term expense, since the change ultimately reduces the amount of pension liability a company has to pay in the long run.

The same rule boosted defense giant Lockheed Martin’s third-quarter earnings. Sales were down 2 percent from a year ago, while profits rose by 1.7 percent because of the pension-law revisions. The Bethesda, Maryland company recorded a $55 million reduction in pension costs for the quarter.

Lockheed’s chief financial officer, Bruce Tanner, said the company will make all its required pension plan contributions in the fourth quarter, creating a “pension funding holiday” for the next three years.

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