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War Contracts Buoy Defense Companies

By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, October 25, 2007

General Dynamics of Falls Church yesterday said profit jumped 24 percent in the third quarter as spending on the wars in Iraq and Afghanistan continued to boost the bottom lines of many defense companies.

Contractors Northrop Grumman, which has a large presence in Northern Virginia, and Boeing also reported higher profits, following similar results posted Tuesday by Bethesda's Lockheed Martin.

General Dynamics attributed its profit growth over the past year to government efforts to replace war-worn armored fighting vehicles and other combat gear, as well as sales in its commercial aviation unit.

But the company warned that it is difficult to predict how operations will do in the future. The Democratic Congress is wrangling over a number of programs, and the country is entering a presidential election year in which the Bush administration is under pressure to wind down the war in Iraq.

"I've got a lot of moving parts here, and to predict how all of that is going to come out . . . is foolhardy," Nicholas D. Chabraja, General Dynamics chairman and chief executive, told analysts. "I don't think I've ever seen a time when there's been more money in play."

Steven M. Koziak, vice president for budget studies at the Center for Strategic and Budgetary Assessments, said growth in defense spending is probably going to decline in coming years. "Since 2000, the defense budget has grown by about $200 billion, exclusive of the war," he said. "There's a reasonable expectation that it's going to be much flatter than that."

For now, the companies are reaping the financial benefits of war.

General Dynamics said profit rose to $544 million ($1.34 per share) for the three months ended Sept. 30, up from $438 million ($1.08) in the comparable period last year. Sales increased 12.6 percent, to $6.8 billion. The company also raised earnings estimates for the full 2007 fiscal year.

Northrop's profit rose 62 percent, to $490 million ($1.41), on strength in the company's shipbuilding. Boeing said profit rose to $1.11 billion ($1.44), but the company lowered sales forecasts for next year because of delays in delivering the 787 Dreamliner. Lockheed said Tuesday that its profit rose 22 percent in the third quarter.

Myles Walton, an industry analyst at CIBC World Markets, said the fat defense budgets of recent years would continue to enrich the industry, as companies carry out the huge contracts they've already received.

The industry's "continued performance drives home the point there's a long tail to the uptick we've seen in defense budgets," Walton said.

Analysts said General Dynamics is best poised to handle volatility in defense spending because its programs are closely aligned with the Army, which has the greatest demand for new equipment.

General Dynamics said sales of combat systems jumped 37 percent in the most recent quarter and profit margins grew. "We're going to have a good year next year in combat systems," Chabraja said. "But the question is how good?"

General Dynamics makes three kinds of vehicles in heavy use in Iraq: the Abrams tank, the Stryker fighting vehicle and the mine-resistant ambush protected vehicles used to counter roadside bombs.

"There are thousands of them in the Army that are subject to upgrade and rebuilding," said Paul Nisbet, an analyst at JSA Research.

The commercial aviation unit, which builds Gulfstream jets, also did well. However, General Dynamics experienced little to no growth in its shipbuilding and information systems units.

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