Defense contractors forecast 2014 as low point for some units


Above, the littoral combat ship USS Independence, which was built by a team led by General Dynamics. Left, Lockheed Martin’s F-35 Joint Strike Fighter. Both contractors reported had relatively stable sales in 2013. (HANDOUT/REUTERS)
January 26

For two of the largest defense contractors, 2013 proved to be a relatively stable year. Though sales declined, both General Dynamics and Lockheed Martin were able to preserve profits.

Still, executives from the contractors said they’re not out of the woods, indicating they expect 2014 could represent a low for sales in some of their businesses.

Phebe N. Novakovic, Falls Church-based General Dynamics’s chief executive, said last week that she expects the company’s information technology unit to see revenue drop close to 20 percent, making 2014 “the low water mark for revenue.”

Its combat systems unit, she said, is projecting a sales decline of about 4 percent, even though executives are counting on international sales to offset declining U.S. spending.

In that business unit, “we believe we’re almost there, and that the major slide is behind us,” Novakovic said. “I think we’re getting close to the bottom.”

Bruce L. Tanner, chief financial officer at Bethesda-based Lockheed Martin, said the contractor’s executives are optimistic “that 2014 is kind of the bottoming out,” he told reporters last week.

Roman Schweizer, an aerospace and defense policy analyst at Guggenheim Securities, agreed that the coming years will likely be a plateau for defense spending — but said not every company will fare the same. The Pentagon will likely make choices about whether to retain some of its key programs and which to prioritize, he added.

“There will be winners and losers,” Schweizer said. “There will still be meaningful events on a company-by-company basis that will alter the trajectory of some of these guys.”

In 2013, Lockheed saw sales decline about 3.9 percent to hit $45.4 billion. Profit grew 8.6 percent, reaching nearly $3 billion, or $9.13 a share, up from $2.7 billion, or $8.36 a share, the previous year.

Lockheed has been rapidly cutting costs to adapt to tightened government spending. In last week’s report, the company said it has recorded $171 million in severance charges in connection with recent job reductions, announced in November, to consolidate facilities and trim its workforce. The company also paid $30 million in severance to cut employees in its information systems and global solutions unit in 2013.

“We continue to have a mind-set toward sizing the business, getting our cost structure in line with the environment that we see in front of us,” Tanner said last week. “That is surely contributing to our ability to maintain our profitability.”

At General Dynamics, revenue hit $31.2 billion in 2013, a decline of less than 1 percent from the previous year. Profit for the year grew to $2.4 billion, or $6.67 per share, up from a $332 million loss, or 94 cents a share, in 2012 — mostly related to the company’s decision that year to devalue its information technology business by $2 billion amid falling government demand.

Novakovic said last week that only the combat systems unit — which specializes in military vehicles — was materially affected by sequestration and the shutdown. She said those events cut about $500 million in sales.

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