Defense Earnings Continue To Soar
War, Technology Drive Up Spending

By Renae Merle
Washington Post Staff Writer
Monday, July 30, 2007

Several of Washington's largest defense contractors said last week that they continue to benefit from a boom in spending on the wars in Iraq and Afghanistan as well as sustained government demand for information technology, defying predictions that the sector's expansion would begin to slow.

Profit reports from Northrop Grumman, General Dynamics and Lockheed Martin showed particularly strong results in operations in the region. Though the wars have started to reduce the Pentagon's appetite for large, futuristic weapons that traditionally drive these companies' bottom lines, the shift in defense spending hasn't hurt profits.

"These are companies that don't turn on a dime," said Jon B. Kutler, founder of Admiralty Partners, an investment firm. "Even if you turned off the spending spigot tomorrow, defense companies would still have great cash flows for many years to come."

Northrop said its information and services, and electronics divisions reported revenue increases of 15 percent and 7 percent, respectively, for the second quarter over the comparable period a year earlier. Both units are headquartered in Northern Virginia and include intelligence programs and a contract to revamp Virginia government's information technology system. The results came as Northrop's shipbuilding and airplane units reported declining revenue for the quarter.

"Where this time last year [those contracts were] not generating much in revenue, revenue is flowing now," said Patrick McCarthy, industry analyst for Friedman, Billings, Ramsey Group.

The strongest segment for Falls Church-based General Dynamics was its combat systems unit, which recorded 19 percent sales growth on continued demand for tanks and armored vehicles. That helped fuel the company's 23 percent increase in profit from continuing operations.

Based on those results, General Dynamics last week raised its earnings forecast for the full year, projecting a profit of $4.85 to $4.90 per share, up from the previous forecast of $4.60. Revenue from the combat systems unit, which will get additional work from a mine-resistant vehicle contract, is now predicted to increase 20 percent for the full year, up from a previous estimate of 12 to 14 percent.

The higher earnings forecast "illustrates how GD is benefiting from booming demand for Army and [Marine Corps] equipment," Joseph B. Nadol III, a J.P. Morgan industry analyst, said in a research note last week. He predicted 24 percent growth for the combat systems unit, including $300 million to $400 million in revenue from the mine-resistant vehicle work.

Bethesda-based Lockheed Martin said its profit rose 34 percent, to $778 million, far exceeding most forecasts. The strongest sales growth came from its information systems and global services division, which recorded a 17 percent revenue increase. Lockheed said the unit's expansion came mainly on acquisitions of an information technology company and another that provides government services.

"The outperforming of the Wall Street analysts' expectations was pretty much across the board, both in revenues and profits," Paul Nisbet, defense industry analyst for JSA Research, said of the sector overall.

Lockheed raised its revenue projection for the full year to as much as $41.75 billion, compared with its previous estimate of $41.35 billion, despite recent problems with one of its high-profile projects -- a $24 billion modernization of the Coast Guard fleet.

At Chicago-based Boeing, which has 2,400 employees in the Washington region, the defense business reported a 3 percent increase in revenue. Much of the increase came from the company's work on missile defense and intelligence projects, as well as from a contract with the Department of Homeland Security to build a virtual fence along the border with Mexico.

Not every defense contractor counted on its Washington-area operations to fuel its earnings. For Raytheon, which reported results on Thursday, its Reston-based technical services unit trailed other company segments, recording a 2 percent revenue increase for the quarter. Overall, the company's revenue grew 9 percent, with the strongest growth coming from its Texas-based network systems unit, which reported a 20 percent revenue increase.

Raytheon, based in Waltham, Mass., raised its forecast for the contracts it expects to receive through the end of the year and upped its per-share profit projection to $3.05 to $3.20, compared with the earlier guidance of $2.85 to $3.00.

But even as defense contractors raise their profit outlooks for the year, some on Wall Street have doubts about how long that growth can be sustained.

The industry's future trajectory is unclear, Robert Stallard, a Bank of America analyst, said in a research note last week. Stallard said he remained neutral on the industry "given the likely slowdown in defense spending as the U.S. withdraws from Iraq and uncertainty concerning the presidential elections next year."

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