Did we dodge the sequestration bullet?

Quarterly reports for the major defense companies show signs of relief that the biggest companies in the market are weathering sequestration just fine. Is now the time to celebrate?

Is that a collective sigh of relief that the defense industry is breathing? The sequestration bully hasn’t taken their lunch money after all.

With Boeing, Lockheed Martin, Northrop Grumman and General Dynamics all reporting second quarter earnings, the news isn’t the doom and gloom many expected.

Lockheed had famously warned that sequestration would cost the company over $800 million in 2013, but so far so good.

“We’re seeing less impact,” Bruce Tanner, Lockheed’s CFO said during an investor call.

That’s pretty much the theme down the line. But that doesn’t mean the companies haven’t been making some hard choices. All are very focused on reducing costs and weathering a flat market.

A quick look at the top line for each company for the second quarter:

  • Lockheed – Revenue of $11.4 billion, down 4 percent.
  • GD – Revenue of 7.9 billion, down 0.1 percent.
  • Northrop – Revenue of $6.3 billion, flat compared to last year.
  • Boeing – Revenue of $8.2 billion for its Defense, Space and Security business, flat compared to last year.

With revenue growth so hard to come by, the companies have been focused on costs and profitability. Nearly all of them led with earnings instead of revenue growth:

  • Lockheed: 10 percent increase in net earnings
  • GD: 2.3 percent increase
  • Northrop Grumman – 2 percent increase
  • Boeing – 4 percent increase in earnings from operations for the Defense, Space and Security business.

Each of the companies has positives to point to, though all are challenged in their IT business, where growth has been anemic, if you are lucky to have it:

  • Lockheed: 7 percent decline
  • GD: 0.9 percent increase
  • Northrop Grumman: 9 percent decline
  • Boeing: 1 percent growth increase

While not stellar, things look stable now, at least for the rest of 2013. Companies are reporting that they have a good handle on the funding for the year, and that they see enough in the pipeline to meet their projected results.

Beyond that, though, there are still plenty of unknowns. The pipeline may indeed get very tight toward the end of the year and into 2014.

We have a study coming soon on the decline in the number of requests for proposals issued in the first half of 2013. The drop off doesn’t bode well for anyone in the market looking for awards in 2014.

The wave of uncertainty also will likely come back as Congress and the White House struggle to pass a budget, and meet the requirements needed to avoid more sequestration cuts in 2014.

Maybe we have dodged the bullet so far, but it could be that the shot won’t be delivered until next year.