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Northrop Earnings Increase Solidly

Defense: Results of Pentagon contractors reflect rising spending for weapons since terrorist attacks.

July 18, 2002|PETER PAE | TIMES STAFF WRITER

Defense contractors, led by Northrop Grumman Corp., posted strong second-quarter earnings Wednesday as the industry continued to benefit from an uptick in spending for weapons and homeland security since the Sept. 11 terrorist attacks.

Northrop, Boeing Co. and General Dynamics Corp., the nation's top defense contractors, reported better-than-anticipated earnings, fueled mainly by new contracts and increases in sales of certain arms such as smart bombs, missiles and unmanned spy planes used in military operations in Afghanistan.

But defense analysts and company executives said Wednesday that increases in defense spending so far have been gradual and moderate, with the biggest gains yet to come. Congress is mulling over a 14% increase in the nation's defense budget for fiscal 2003, the biggest jump in two decades.

"There have been spending increases in emergency bills [to fund military operations] and for homeland security, but it's been in drips and drabs," said Paul H. Nisbet, a defense analyst for JSA Research Inc. "We haven't seen the real acceleration yet."

Still, second-quarter earnings for most defense contractors were better than what most analysts were expecting, fueling a surge in defense stocks after steadily declining for nearly a week amid a general slump in the stock market. Northrop shares rose $1.53 to $110.03, Boeing climbed $2.07 to $42.94, and Lockheed Martin Corp. rose $2 to $60, all on the New York Stock Exchange.

One exception was General Dynamics, whose shares fell to $90.16, down $7.61, on the NYSE despite posting a 16% increase in earnings and beating analysts' estimates. The maker of submarines and armored vehicles posted net income of $263 million, or $1.29 a share, compared with $227 million, or $1.12 a share, a year earlier. Analysts said investors were worried about a large drop in backlog of orders resulting from the company losing some key defense contracts to competitors. A shrinking backlog could signal earnings problems later, they said.

Meanwhile, Century City-based Northrop, maker of unmanned spy planes, stealth bombers and aircraft carriers, said net income rose 4% to $182 million from $175 million a year earlier.

Excluding pension income and other items, operating income rose 60%, bolstered by a sharp increase in sales of military ships. The results included Newport News Shipbuilding Inc., which Northrop acquired last year to become the world's largest military shipbuilder. Earnings per share was $1.53, compared with $1.28 a year earlier. Sales rose 20% to $4.4 billion, compared with $3.7 billion a year earlier.

The rise in defense spending also helped bolster Boeing, which has been hammered by a slump in air travel since Sept. 11. Boeing delivered 112 airplanes in the quarter, compared with 141 a year earlier. Although Boeing reported a 7% drop in second-quarter earnings, mainly because it delivered 29 fewer commercial aircraft, the decline was less than anticipated thanks to a surge in earnings from its defense and space businesses.

Combined operating earnings from its military aircraft and space and communications units surged 18% to $639 million from $540 million a year earlier, offsetting a 17% drop at its commercial airplane business.

Boeing won two major multibillion-dollar contracts from the Army in the quarter: designing a network of new lightweight vehicles and weapons and developing a digital communications system.

Boeing Chairman Phil Condit said Wednesday that he didn't expect the commercial aircraft market to recover soon, although he expected the slump to bottom out by next year.

"This decline is significantly bigger than anything we've ever experienced," Condit said.

A slump in the telecommunications industry also hurt Boeing's commercial satellite making operations in El Segundo, where the company has been laying off employees. In a teleconference call with analysts, Boeing executives acknowledged Wednesday that the unit's operating profit dropped by $15 million in the quarter, though the company would not disclose its overall profit. The results could have been far worse had the company not significantly cut costs, they said.

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