By Andrea Shalal-Esa
WASHINGTON (Reuters) - Three of the biggest U.S. weapons makers beat third-quarter earnings forecasts on Wednesday and raised their guidance for the full year, although the specter of additional U.S. defense budget cuts continued to cloud the industry's outlook for 2013.
Lockheed Martin Corp
General Dynamics Corp
Each of the companies underscored its efforts to drive down cost and improve affordability given continued pressure on military budgets, and underscored the growing importance of international sales to help offset declining U.S. demand. Share buybacks and strong dividends were another key theme.
"Because of defense budget constraints and the risk of sequestration, investors were setting the bar pretty low for the sector," said Edward Jones analyst Matt Collins, referring to the budget cuts.
He said third-quarter results had changed that equation somewhat, although uncertainty remained. "As a group they were able to step over the bar and restore some confidence in these stocks today."
Lockheed, which has led the industry's campaign to stave off across-the-board cuts required under so-called sequestration, said its preliminary 2013 forecast assumed that Congress and the White House would avert the $500 billion in additional defense cuts that are due to start taking effect in January. If the cuts did happen, it predicted a material effect on its results.
Chief Executive Bob Stevens, who retires at the end of the year, said the company had no secret information about a possible compromise to stave off the sequestration cuts, but said he fully expected Congress to address the issue when lawmakers return after the November elections.
General Dynamics Chief Executive Jay Johnson told analysts there was "no one on earth" who could predict what would happen, and said his company was planning for how to deal with the budget cuts if they took effect as planned.
He said uncertainty about future U.S. defense budgets was depressing government orders in its shorter-cycle businesses, especially in information systems and technology, and the trend was likely to continue in the fourth quarter.
"We are also extremely concerned about the profound disruption and paralysis that implementing these cuts will likely have on our customer and thus our entire industry," Johnson, a former Navy Secretary, told analysts.
Marion Blakey, president of the Aerospace Industries Association, on Tuesday called on President Barack Obama and Congress to appoint a small committee to hammer out a compromise even before lawmakers return to Washington.
Rob Stallard at RBC Capital Markets said the results were a "mixed bag," with companies doing a good job managing costs to preserve margins in long cycle equipment programs, but facing tougher challenges in services and other short cycle areas.
Jason Gursky of Citibank noted that many weapons programs were transitioning into production, where margins are generally higher than in development, and industry leaders were committed to paying solid dividends and buying back shares.
But a declining discount rate meant many of the companies faced headwinds around pension expenses next year, even as revenue remained under pressure.
"The sky is not falling ... but there are challenges," Gursky said.
Boeing posted stronger-than-expected results for the third quarter as its defense business improved and commercial aircraft deliveries surged, and the company raised its full-year forecast for the third time this year.
Defense revenue fell slightly from a year earlier but margins in that business improved. This showed Boeing's ability to be "very aggressive" in cutting costs at a time when defense spending is contracting in the United States and Europe, said Ken Herbert, an analyst at Imperial Capital LLC.
Boeing shares were down 0.3 percent at $72.62 on Wednesday afternoon.
Lockheed, the largest U.S. arms maker, boosted third-quarter earnings by 11 percent, beating expectations by a wide margin, and once again raised its full-year forecast.
Rob Stallard at RBC Capital Markets said the results surpassed his already-upbeat expectations.
"The upside to revenues is particularly notable in this tough defense environment, with continued progress on the margins," he wrote in a note to clients.
"Given the company's track record, it looks like it should be able to weather a tough defense market next year relatively well, assuming that sequestration does not occur."
Lockheed shares were trading 2.2 percent higher at $93.93 on Wednesday afternoon.
Northrop Grumman also beat earnings forecasts on margin strength, although quarterly profit fell below year-earlier levels due to a $66 million fall in net pension income.
Northrop, which builds Global Hawk unmanned surveillance planes, radars and electronic systems, said it now expects full-year earnings of between $7.35 and $7.40 per share, up from its prior view of between $7.05 and $7.25 per share.
Joe Nadol at JP Morgan said the results were good, but that Northrop shares were not getting as much of a boost since they have been the best performer in the industry so far this year.
"We still question the sustainability of the margin strength that drove the quarter's beat," he wrote in a note to clients.
Northrop shares were down 1 percent at $68.95 on Wednesday afternoon on the New York Stock Exchange.
General Dynamics, which builds warships, ground combat vehicles and business jets, said third-quarter earnings slid 8 percent as margins fell, but it still expected earnings of between $7.00 and $7.05 for the full year, versus its previous view of $7.00 to $7.10 per share.
It said demand in the quarter was particularly strong for aerospace products, including every type of Gulfstream aircraft, and said recent orders for military communications equipment were good news for its defense division.
Johnson said the company made "notable progress" on several core programs, including certification of the Gulfstream G650 and G280 aircraft, but analysts were disappointed about lower-than-expected margins in that business.
General Dynamics shares were up 2.3 percent at $67.75 in afternoon trading.
(Additional reporting by Alwyn Scott in New York, Bijoy Koyitty and A. Ananthalakshmi in Bangalore; editing by Matthew Lewis)