U.S. arms makers boost earnings, shares surge

U.S. weapons makers reported higher-than-expected profit and improved margins for the first quarter, even as revenue began to taper off after more than a decade of sharp growth in U.S. military spending.

Boeing Co's defense division, Northrop Grumman Corp and General Dynamics Corp on Wednesday followed the lead of Pentagon supplier Lockheed Martin Corp in reporting higher earnings and lower revenue.

Shares of the companies rose sharply on their financial results, with General Dynamics shares closing nearly 7 percent higher at $71.73 in what analysts said amounted to a strong vote of confidence in the firm's new chief executive, Phebe Novakovic.

Boeing shares closed 3 percent higher at $90.83, while Northrop shares gained 3.2 percent to close at $73.77. Lockheed shares, which saw big gains on Tuesday, edged up another 0.65 percent higher to close at $97.69.

Operating margins remained steady or improved across the sector, ranging from 10.3 percent to 12.4 percent, but executives warned that uncertainty about future military spending levels could weigh on revenue this year and next.

"Weaker revenues and strong earnings are typical of this point in the defense spending cycle. However, the erosion in revenues is probably a leading indicator of where earnings are headed," said defense analyst Loren Thompson of the Virginia-based Lexington Institute.

"Earnings eventually will erode as the impact of sequestration is fully felt," he said, referring to across-the-board federal spending cuts.

Northrop Grumman, which builds unmanned planes and other military equipment, said it was focused on executing programs, cash deployment and tweaking its portfolio as mandatory spending cuts known as sequestration start to take effect.

The company reported net earnings of $489 million, or $2.03 a share, compared with $506 million, or $1.96 a share a year earlier. Revenue dipped to $6.1 billion from $6.2 billion.

"Looking ahead, we recognize that we are operating in an uncertain and constrained budget environment," said Northrop Chief Executive Wes Bush.

Bush told analysts that he did not expect cancellation of any significant Northrop programs as a result of sequestration in fiscal 2013, but continuing uncertainty about future budget cuts could weigh on bookings this year.

Sales and bookings in the third and fourth quarters would help clarify the outlook for 2014, Bush said. "It is very likely this is going to negatively impact sales in 2014," he said. "To think that the sequester somehow dissipates and goes away and doesn't impact the future is putting your head in the sand."

Bush said a broader strategic review initiated by U.S. Defense Secretary Chuck Hagel and due to be completed next month would also help inform future budgets. He cited double-digit growth on programs in the cyber security arena.

Pentagon acquisition chief Frank Kendall said his office was closely involved in Hagel's department-wide review.

Kendall on Wednesday unveiled plans to further improve the way the Defense Department buys arms, including new guidelines on profits on fixed-price contracts, but he insisted the Pentagon did not aim to cut into companies' margins.

"We're not after people's profits as a way to reduce costs," Kendall told reporters at the Pentagon. "We want to tie profit and performance together."

General Dynamics, which builds ships, tanks and Gulfstream business jets, reported slightly higher first-quarter earnings, far exceeding analysts' forecasts, but revenue fell short of expectations.

General Dynamics said net earnings rose to $571 million, or $1.62 per share, from $564 million or $1.57 per share, a year earlier. Revenue dipped to $7.4 billion from $7.58 billion.

Novakovic, who has carried out a series of management changes since taking over on January 1, said the company was focused on operations, cost improvement and cash generation.

"Going after overhead is critical to margin expansion in the down environment," she told analysts. She said General Dynamics would continue to reduce its workforce as needed in the current budget environment but declined to forecast any specific areas targeted for layoffs.

Boeing, the second-largest U.S. weapons maker, said its defense earnings rose 12 percent to $832 million, while revenue slipped 1 percent to $8.1 billion.

Boeing's operating margin remained the lowest among the companies that reported earnings this week, although it rose to 10.3 percent from 9 percent a year earlier.

Boeing Chief Executive Jim McNerney said Boeing expected growth in key areas such as space, unmanned systems, intelligent surveillance and reconnaissance, and cyber security. He said the company also expected expanding sales of its smaller commercial satellites.

(Editing by John Wallace and Matthew Lewis)