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Little Trace of Slowdown For Defense Contractors

By Stephen Manning
Associated Press
Sunday, January 27, 2008

Global markets may be writhing and the U.S. economy teetering at the brink of recession, but for many of the nation's largest defense firms, the good times keep going.

Most have posted big earnings gains in recent years, largely because of record Pentagon spending on weapons programs and the wars in Iraq and Afghanistan. And with the government, not consumers, as their biggest customers, defense contractors appear poised to weather any economic downturn that may lie ahead.

"We are about as far removed from the credit risk and those sorts of matters as you can imagine," said Bruce L. Tanner, chief financial officer at Lockheed Martin of Bethesda. "We feel sort of insulated."

The benefits of that relative safety are also showing up on their balance sheets.

Lockheed, which makes fighter jets and is the world's largest defense contractor, reported a 10 percent increase in fourth-quarter profit Thursday and boosted its 2008 per share outlook by 10 cents. Ship builder Northrop Grumman's net fourth-quarter earnings were flat Thursday, but the Los Angeles company had record quarterly revenue and forecast earnings growth in 2008.

On Wednesday, General Dynamics of Falls Church, which makes a range of military products, including bullets and armored vehicles, reported a 42 percent increase in fourth-quarter earnings. The company said it has not seen any shortfalls in orders in its private jet unit, the one segment of its business that could be vulnerable to any reductions in corporate spending during a downturn.

Analyst Paul Nisbet of JSA Research of Newport, R.I., said defense firms are meeting or exceeding Wall Street earnings predictions, and said the sector will likely continue to be strong as long as defense spending remains high.

"It is a pillar of stability compared to the turbulent markets in other industries," he said.

Shares were up last week at Lockheed, by 3.3 percent, and General Dynamics, 0.4 percent, but were down at Northrop by 0.6 percent.

Lockheed said it raised its outlook for 2008 earnings because of better performance in its aeronautics division. It had earlier forecast a sales drop of about $1 billion this year as it shifts between making older F-16 jets to the new F-35 fighter plane. But Tanner said costs savings will trim that drop in plane sales to about $850 million.

The level of defense spending in coming years is unclear. The Senate passed a $696 billion budget Tuesday, including $189 billion for the wars in Iraq and Afghanistan, that will go to President Bush for his expected signature. Some analysts have warned, however, that a new president and possible troop reductions in the future could end up hurting defense suppliers in the long run.

Northrop chief executive Ronald D. Sugar said he expects defense spending in the 2009 budget, while still in early stages, should also grow. He said Northrop, with its multiyear weapons programs, is largely shielded from changes in the supplemental budgets the White House has relied on in recent years to fund the wars.

"Every indication we have is that there will be a continued growth of reasonable proportions in the basic budget," he said.

Alex Veiga in Los Angeles contributed to this report.

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