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Arms makers boost profits despite Pentagon budget headwinds

By Andrea Shalal-Esa

WASHINGTON (Reuters) - U.S. arms makers reported higher quarterly earnings on Wednesday despite Pentagon budget cuts, with many raising their full-year forecasts, but the companies' order books showed an increasingly tough market.

The Pentagon began implementing $37 billion in mandated budget cuts for fiscal 2013 in March, and it faces additional cuts of $50 billion annually over the next nine years unless Congress acts to avert a process known as "sequestration."

Northrop Grumman Corp , which builds unmanned planes and high-end electronic equipment, and Boeing Co , maker of F/A-18 fighter jets and aerial refueling planes, on Wednesday joined industry leader Lockheed Martin Corp in boosting earnings and raising their earnings forecasts.

General Dynamics Corp , which builds tanks, ships and Gulfstream business jets, reported higher-than-expected earnings but left its full-year forecast unchanged.

Backlogs weakened at Lockheed, General Dynamics and Northrop Grumman, while Boeing's defense division increased its backlog due to huge multiyear orders for its CH-47 Chinook helicopters and V-22 Osprey tilt-rotor aircraft. It builds the Osprey with Bell Helicopter, a unit of Textron Inc .

"Companies clearly believe there will be further sequestration cuts in 2014 and they are shedding costs faster than revenues could potentially fall," said Virginia-based defense consultant Jim McAleese.

McAleese said the companies could maintain strong earnings in 2014 if they continue to cut management, lay off workers and consolidate facilities.

Defense contractors have been cutting costs and consolidating facilities for several years, and continue to look for ways to save money. Lockheed, for instance, has cut 30,000 employees over the past five years.

Most of the companies are also buying back shares to keep earnings per share high. Defense contractors' shares rose in morning trading on Wednesday, led by a 3.6 percent rise for Northrop.

Northrop's profit rose to $488 million, or $2.05 per share, from $480 million, or $1.88 a share, a year earlier. Revenue edged up to $6.29 billion from $6.27 billion.

Northrop raised its earnings guidance for the full year to a range of $7.60 to $7.80 per share from an earlier forecast of $6.85 to $7.15. It said revenue would likely reach $24.3 billion, up from an earlier forecast of $24 billion.

General Dynamics reported higher-than-expected earnings but said its backlog was down more than 5 percent from a year earlier, falling to $49.4 billion.

The company reported net earnings of $640 million, or $1.81 per share, up from $634 million, or $1.77 per share, a year earlier. Revenue was little changed at $7.91 billion.

Boeing reported a 13 percent jump in quarterly profit, driven mainly by commercial airplane sales. Its Boeing Defense, Space and Security division reported a 5.6 percent increase in earnings from operations, but revenue was flat at $8.2 billion.

Boeing raised its full-year revenue guidance by $1 billion, to a range of $83 billion to $86 billion, based entirely on foreign defense orders rather than commercial airplane sales.

Operating margins ranged from 12.1 percent at General Dynamics to 13.4 percent at Lockheed. Boeing's defense division had an operating margin of just 9.5 percent, although that marked an increase from 9.1 percent a year earlier.

Lockheed, maker of F-35 fighter jets and Aegis missiles, kicked off the earnings reports on Tuesday with a surprising 10 percent spike in profit, saying the Pentagon budget cuts had not hit its sales as much as expected.

Lockheed reported net profit of $859 million, up from $781 million a year earlier. Earnings per share rose to $2.64 from $2.38. It now projects earnings per share of $9.20 to $9.50 for the full year, up 4 percent from guidance issued in April.

(Reporting by Andrea Shalal-Esa; Editing by John Wallace)

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