US Primes Continue “Earning Massagement” to Counter Declining Sales

• Northrop Grumman reported Q1 2014 sales down 4.2% to $5.85B, with all business segments losing between 3% and 6% of their revenue vs. same time last year. This looks relatively close to Lockheed Martin’s revenue outlook for the quarter. Total backlog slipped by $800M to $36.2B.

• Boeing on the other hand is still growing strongly, with Q1 revenue up 8% to $20.5B, thanks to commercial airplanes deliveries up 18% in volume. Boeing Defense, Space & Security sales lost 6% to $7.6B because of fewer P-8 deliveries (and that aircraft will continue to see lower volumes than earlier expected).

• Raytheon’s Q1 sales dropped by 6% to $5.88B, with all segments posting lower sales than last year. Total backlog lost $1.5B to $32.2B (70.7% funded).

• General Dynamics saw its Q1 revenue shed 1.1% to $7.3B, with aerospace sales booming by almost 20% while combat systems lost more than 15%. Total backlog grew by more than 20% to $84.7B, led by a $10B order from Saudi Arabia via Canada.

• Overall, US primes have continued to shed staff and buy back shares to smooth their earnings. Such earning management / massaging is common at large public companies to meet investor expectations. However the likes of Reuters should know better than lead with misleading headlines such as “strong U.S. defense firm profits defy regular gloomy warnings.” Sure, there is always room for further operational efficiency in any large organization. But the fact of the matter is that defense services sales have been facing several years of sequential decreases, while armament sales abroad are so far not meeting expectations set for booming exports. Watch the top line, not just bottom line artificial metrics such as earnings per share. Even large primes can’t avoid the reality of US defense budgets being past their two-war peak.