Last updated: January 23, 2013 7:58 pm

Defence cuts cause General Dynamics loss

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General Dynamics on Wednesday became the first big US military contractor to take a significant writedown for declining US defence spending when it announced a $2.13bn fourth-quarter loss at the start of its “reset year”.

The loss stemmed from $2.3bn in impairment charges, mostly a $1.99bn writedown of goodwill associated with past acquisitions in the company’s Information Systems and Technology Group. The company also wrote down $191m in intangible assets in its aerospace group and $110m in intangible assets in IS&T.

The IS&T division provides services to the military on shorter lead times, where budget cuts are likely to be felt more quickly. The write-offs in the aerospace group reflect softening European demand for the company’s Gulfstream corporate jets.

Lockheed Martin, the Pentagon’s biggest single supplier, and Raytheon, another significant supplier, both report results on Thursday.

General Dynamics’ results were the first since Phebe Novakovic took over from Jay Johnson as chief executive on January 1.

US military contractors had been facing across-the-board cuts of around 10 per cent to all military programmes under the “fiscal cliff” mixture of tax rises and spending cuts, which was temporarily averted at the start of the year. However, Ms Novakovic told investors on a conference call that 2013 would still be General Dynamics’ “reset year”.

“I’m going be pretty conservative here,” she said. “I think that’s prudent. We’ve got potential budget cuts coming our way.”

Loren Thompson, a defence analyst at the Virginia-based Lexington Institute, said the charges reflected Ms Novakovic’s determination to put the company’s finances on a “more realistic footing”.

“This is Phebe Novakovic’s first earnings call and she’s offering a conservative, even sombre, assessment,” Mr Thompson said.

The fourth-quarter loss compared with $603m net profit in 2011’s last quarter, and was struck on net sales down 12 per cent to $8.08bn.

As well as expected declines in the US, General Dynamics warned about the potential effects of slowing European defence spending. It took a $292m charge relating to contract disputes in its European land vehicles business.

General Dynamics’ net loss for 2012 was $332m, against $2.55bn net profit for 2011, on revenue down 3.6 per cent to $31.5bn. The company lost 94 cents per diluted share, against $6.87 profit per share for 2011. The company forecast earnings of $6.60 to $6.70 per share for 2013.

General Dynamics’ shares fell 4.84 per cent to $67.29.

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