Defense contractors’ earnings down as Pentagon makes cuts

January 29, 2012

Two of the largest defense contractors last week reported sharply lower quarterly profits, as well as smaller declines in profit for the year.

Falls Church-based General Dynamics reported Jan. 18 that its fourth-quarter profit declined about 17 percent, despite revenue growth, because of a $189 million charge at a Switzerland-based aviation unit.

The company reported profit of $603 million ($1.68 a share) in the three-month period, down from $729 million ($1.91) in the same period a year earlier. Quarterly revenue grew about 6.3 percent to $9.15 billion.

Jay L. Johnson, the company’s president, chairman and chief executive, said in a call with investors that the “very disappointing” charges assumed by its Jet Aviation business mainly stemmed from “cost growth caused by increased labor hours and late penalties on three ... aircraft” as well as a future outlook with far fewer business jets.

Still, the year was mostly flat for General Dynamics. Profit in 2011 hit $2.53 billion ($6.87), just behind the $2.62 billion ($6.81) posted in 2010, while revenue reached $32.7 billion, a hair over the nearly $32.5 billion the company saw in 2010.

Though Johnson said deep Pentagon cuts — at least as they are now planned under a process known as “sequestration’ — are unlikely to occur, he said General Dynamics is still bracing for significant change.

“Following a decade of growth, we are now in a new era where defense spending is clearly coming down,” Johnson told investors, adding that General Dynamics is making acquisitions, reducing staff and divesting businesses as needed.

Officials at Bethesda-based Lockheed Martin, too, said their company is adjusting to a more challenging environment.

The company said profit in the fourth quarter dropped nearly 29 percent to $683 million ($2.09 a share), down from $961 million ($2.67) in the same period a year earlier. Lockheed posted $12.21 billion in revenue, down from $12.76 billion a year ago.

In 2011, profit dropped nearly 8 percent to $2.66 billion ($7.81 a share), down from $2.88 ($7.81 a share) in 2010, while revenue grew less than 2 percent to $46.5 billion.

The company said it is well positioned for 2012 with the highest backlog — or orders yet to fulfill— in its history, hitting $80.7 billion.

“The changes have been here for us— not just now,” Lockheed chairman and chief executive Robert J. Stevens said last week in response to a reporter’s question about whether budget reductions are starting to hit home. “It’s been very real for us for a while.”

The contractors’ announcements came as the Pentagon released a preview of a much-trimmed five-year budget, which called for delaying or scaling back purchases of some weapons equipment.

“This is going to be tough,” Defense Secretary Leon E. Panetta said at a press conference last week. “This is a tough challenge and no one ought to underestimate just how difficult it will be.”

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