25 Jul 12. The FT reported that three of the biggest US defence contractors have reported falling earnings and warned of more trouble ahead as a looming automatic $500bn defence budget cut early next year clouds their outlook.
Northrop Grumman, General Dynamics and the defence division of Boeing were all hit in the second quarter of this year. Like much of the industry, they are making deep cost and staff cuts.
The outlook is decidedly mixed, with General Dynamics cutting its full-year earnings per share estimates, while Northrop Grumman took a bullish approach, noting a “robust level of new business capture, the increase in total backlog and strong cash generation” as it increased its full-year forecast.
There is growing frustration in the US defence establishment over US lawmakers’ inability to hatch a new government budget, which means the threat of the $500bn automatic defence cut edges ever closer.
Unless lawmakers come up with a budget or agree to postpone the fall of the axe – which comes on top of approximately $490bn cuts already made – the additional reduction will take effect on January 2.
Worse, say executives, is the fact that the cut would be indiscriminate, meaning they have no guidance on which projects to curtail and which would remain important to the evolving US defence strategy.
Robert Stevens, chief executive of Lockheed Martin, the largest US defence contractor, which announced robust earnings earlier this week, said the company was adapting to the difficult climate by cutting costs, consolidating work, reducing its workforce and lobbying lawmakers.
“We’ve petitioned Congress and the administration to find an alternative method … to reduce costs and lower the debt, but if sequestration [automatic spending reduction] is going to occur, then we need more detailed information as to how to properly plan and execute our responsibilities,” he said.
Northrop Grumman’s profit fell to $480m in the second quarter, down $40m from a year earlier. Revenue dropped to $6.27bn from $6.56bn. But the company managed to boost earnings per share to $1.88 from $1.81 by reducing outstanding shares.
General Dynamics’ second-quarter net profit fell to $634m from $653m a year before, while sales edged up to $7.92bn from $7.88bn. Earnings per share were $1.79, compared to $1.77.
Boeing was helped by the fact that more than half its revenue comes from civil aerospace, where the market is far more favourable as high oil prices prompt airlines to order new, more fuel-efficient aircraft.
Revenues at Boeing’s defence, space and security division were $8.2bn, up 7 per cent, though earnings from operations slipped 6 per cent to $748m.
James McNerney, chief executive of Boeing, the second-largest US defence contractor by sales, said: “While the threat of budget sequestration and future US defence cuts continue to create uncertainty, international markets continue to offer a broad set of sales opportunities.”
25 Jul 12. “Increased revenues and strong operating performance across both our major businesses drove significantly improved first-half 2012 results for Boeing,” said Chairman, President and Chief Executive Officer Jim McNerney. “Commercial airplane deliveries increased 27 percent in the second quarter, and our defense, space and security business also produced higher revenues and strong margins in a difficult market environment. As a result of this solid first-half performance, we have strengthened our outlook for the year, and our people remain focused on disciplined execution, quality and productivity, and meeting customer commitments,” McNerney said.
Boeing Commercial Airplanes second-quarter revenue increased by 34 percent to $11.8 bn on higher delivery volume. Operating margin was 10.2 percent, reflecting higher period costs and the dilutive impact of 787 and 747-8 deliveries partially offset by the higher deliveries