As the New Year starts the big 5 defense industrials are beginning to report their earnings for the last quarter of 2012 and making their predictions for 2013. So far Lockheed Martin (LMT), General Dynamics (GD) and Raytheon (RTN) have reported with Boeing (BA) and Northrop Grumman (NOC) to do so this coming week. These 3 have had mixed results due to a variety of reasons. 2013 is expected to be difficult with the combination of the U.S. winding down Afghanistan and the effects of sequestration and the proposed cut to defense spending over the next ten years of up to $1 trillion.

In the near term this will be reflected by about $60 billion in cuts this year if Congress does not act to prevent the automatic sequestration cuts. The Pentagon and the different services have been warning about the effects of these although as normal in this

In the United States people traditionally think of defense contractors as those corporations that build hardware such as tanks, ships and aircraft. While Lockheed Martin (LMT) with its advanced fighter, the F-35 Joint Strike Fighter, Boeing (BA) with aerial tankers and Huntington Ingalls Industries (HII) building aircraft carriers do exemplify this view there are many other defense contractors providing services to the Pentagon.

The U.S. defense budget is primarily spent on personnel, services, support and then hardware and research and development. This has meant that there are several medium-to-large contractors that make their money through selling software and services to the Armed Forces.

Computer Sciences Corporation (CSC)

CSC is a corporation employing over 90,000 persons worldwide. It has been in existence since the early 1950s. It focuses on custom software for governments and corporations to include supply chain management, applications and services. The company has struggled over the last

The big 5 U.S. defense and aerospace companies reported late last month. The current trends for Boeing (BA), Lockheed Martin (LMT), Northrop Grumman (NOC), Raytheon (RTN), and General Dynamics (GD) continued for the year. Lockheed, Boeing and Raytheon had solid earnings per share and either maintained or increased their full year estimates. The other two continued to show declines. In 2012, defense spending has remained consistent with past years, although the plans for 2013 remain cloudy. The budget will be dependent on the Presidential election, an attempt by Congress to solve sequestration and the overall U.S. budget situation.

The U.S. defense budget will decline in 2013, that much is clear. The big question is whether by only the planned $50 billion or more due to sesquestration. The ending of operations in Afghanistan will see cuts to that portion of the budget. The return of deployed forces and their entry

This week the five biggest U.S. defense contractors reported their most recent quarterly results. Boeing (BA), Raytheon (RTN), Lockheed Martin (LMT) and Northrop Grumman (NOC) all did better then predicted. General Dynamics (GD), unfortunately, missed analyst's estimates of their earnings. Over the week stock prices for the companies have also been mixed with Lockheed and GD holding on to small gains the other stocks dropping less then 2%.

As the chart below illustrates for the last 52 weeks all of their stock prices have tracked up with Raytheon having the best performance.

General Dynamics

The company announced that earnings were only $1.70 a share or $600 million compared to the prior year's $1.83 on $665 million. This was generated on revenues of just under $8 billion. Analysts had predicted $1.78 on just over $8 billion in revenue. Operating income fell 14%. As with all of the defense contractors the

At SAIC's (SAI) annual meeting of shareholders, one attendee raised the issue of the company being in a similar state to Rockwell -- offering a diverse product line that was hard to identify, and ultimately deciding to break itself up and sell its components -- and whether this figured into management's plans. A. Thomas Young, a member of the board, replied that "there's no question that the definition of the strategic direction for the future is important. And that's our responsibility, and that we are focusing on that."

That meeting was held on June 15 and less then three months later, along with the announcement of the company's results on Aug. 30, it was revealed that SAIC would break itself into two separate companies and sell off a small portion. The major reason provided for this move was to remove organizational conflicts of interest (OCI) and also

The Department of Defense is continuing, despite the upcoming budget issues, with planning for a new vehicle that will replace the ubiquitous HUMVEE. The HUMVEE in turn had replaced the Jeep in the eighties and has been built in the thousands since. AM General, a privately-owned company, is the prime contractor for the HUMVEE. In recent budgets, the amount being purchased each year has fallen off, mainly as the Army has built enough to meet its needs.

The new Joint Light Tactical Vehicle (JLTV) will be broadly similar to the HUMVEE, but will take into account the lessons from the last decade of fighting in Iraq and Afghanistan. This means it will be more maneuverable and armored with a focus on defeating Improvised Explosive Devices (IED) and mines. If the program goes forward, there will be a requirement to build thousands of trucks

Earlier this year Alliant Techsystems (ATK), a manufacturer primarily of ammunition and pyrotechnics, began to adjust to mitigate the expected changes in the U.S. defense market. While they also participate in the commercial ammunition and aerospace markets, their major customers remain the U.S. military and NASA. Both of these will see reduced budgets and spending in the years ahead as the U.S. moves to deal with its budget deficits.

The company also recently lost one of their major defense contracts, operating an ammunition manufacturing facility. They also face a challenge to keep another similar contract this year. In the past these two efforts represented a substantial portion of the company's revenues and earnings due mainly to the demands of the fighting in Iraq and Afghanistan.

The company reorganized this year into three distinct groups that reflect changes in their sales and markets. They hired a new CFO to help

The large defense contractors not only provide services and hardware to the Pentagon but also support many other parts of the Federal and State governments. Northrop Grumman Corporation (NOC), for example, has a large contract to manage all of the IT services for the State of Virginia. It is also always on the lookout for new business lines as the government changes requirements or needs.

As the pressure builds on the defense budget, this growth into other parts of government spending will continue and accelerate. While these are not the traditional market experience with writing, executing and managing government contracts will help win and execute the work.

One area that these companies have seen significant expansion into is Health IT. The Affordable Care Act and general trends in government healthcare programs like the Veterans Administration, TRICARE military health management, Medicare and Medicaid have been stressing the use of Electronic

Last week EADS announced that it will be building a plant in Mobile, AL to build Airbus airliners. The facility had originally been procured with the goal of building new aerial tankers for the U.S. Air Force but unfortunately for the European aerospace giant Boeing (BA) won that contract. Airbus had also discussed building civil aircraft on the same line as the tankers. Now they have gone ahead with a plan just to deliver their new medium, high efficiency airliner, the A320neo, from that plant.

For the same reason Airbus is building a plant in China the Mobile factory offers some advantages. It will reduce costs first by the use of a non-Union workforce whose overall salary and benefits will be quite a bit less then the heavily unionized French workforce. Alabama is a right-to-work state and already has several plants for Honda, Toyota, Hyundai and

One of the fallouts from the major declines in defense spending in the Nineties after the Eighties boom was a sharp increase in Merger & Acquisitions (M&A) among the defense industry. Companies large, like McDonnell Douglas, medium, like Logicon, and small, like TASC, combined with each other due mainly to the lack of contracts and new weapon programs. In some cases it was encouraged by the U.S. government despite industrial base worries.

Since 2001 with the large expansion of defense spending the market has diversified. This has primarily been with European defense contractors such as EADS and BAE Systems (BAESY.PK) entering the market to compete with the five large U.S. companies. Now with budget plans showing a cut of $100-200 billion a year in total defense spending such activity could be expected again. Recently the new CEO of Lockheed Martin (LMT) told The Wall Street Journal that consolidation

The Obama Administration as part of the budget deal last year submitted a 2013 defense spending plan that cuts about $100 billion over the next five years. This was primarily achieved through force structure reductions, changes in personnel benefits and decisions to end or delay some large acquisition programs. Those choices will obviously have a great effect on defense contractors' bottom line. The plans won't start showing an effect until late 2012 when next year's contracts are awarded, or in this case not awarded.

Congress, though, is the final decision maker on the budget. If it makes changes that the Administration does not like it is limited to trying to negotiation them out, or it can veto the final bill or accept them. Historically administrations tend to accept the final bills. Of course Congress is not following plans to reduce overall spending but it has been busy looking for other

Spirit AeroSystems Holdings, Inc. (SPR) continued its recent trend of good earnings with the first quarter of 2012 coming in at 2 cents over projections. The company that manufactures aircraft components and parts primarily for Boeing (BA) but also for EADS Airbus and military aircraft saw its stock price close Thursday flirting with its 52 week high of $26.00 set a year ago on volume that was two-thirds above average.

The stock price is now up almost eighty percent from its low in September and has provided a year to date performance of over twenty-three percent or slightly above the market as a whole. This now makes two straight quarters when the earnings have been five to six cents above predictions with the company blowing away the average earnings growth rate for the aerospace industry as a whole.

The Wichita, KS based company reported revenues of $1.27 billion or

This week Lockheed Martin (LMT) broke out from the pack of its competitors by reporting growth in both revenue and earnings (see earnings call transcript). Recent trends have seen defense contractors with declining revenue and some profit increases. The concern with Lockheed is this performance will continue despite the negative potential of defense spending reductions and a recent strike at their Fort Worth, Tex. aircraft production facility. Lockheed's stock closed Thursday at $91.70 just 54 cents below its 52 week high and $25.76 above its 52 week low.

Lockheed has over the last year had growth in earnings thanks to an emphasis on cutting costs primarily reducing the size of their workforce and paying back pension liabilities. The last quarter it saw a decline in net income of 58 cents and profit by 17 cents a share. At that time the prediction for 2012 was $45 billion in

Analysts are expecting flat results from defense contractors as they report their first quarter earnings over the next few weeks. Trepidation about potential reductions in defense spending starting with next year's budget is moderating predictions and enthusiasm for much growth in revenue and earnings. Over the last year, most of the large defense industrials have seen flat revenue, but some increase in earnings as cost cutting has moved to the fore.

Some of the companies reporting last week illustrate this trend.

Honeywell International (HON)

Honeywell provides both products and services to the Defense Department and many commercial businesses. It makes engines for military vehicles and aircraft as well as components. The company also does decent business through logistics management of its products and systems in combat theaters and the U.S. Similar to other companies the ups-and-downs of the commercial aviation manufacturing and air transport industries may have a serious

Northrop Grumman (NOC) is one of the largest defense contractors in the United States and the world. It is an integrated company that provides a variety of services and products to the United States military and foreign customers. Northrop and Grumman used to be two of the major manufacturers of combat aircraft for the U.S. but now their products are limited. The company has also recently exited the naval shipbuilding industry.

The stock, like most defense contractors, has seen a nice run up in the last six months increasing from a low of $49 in the September time frame to its current price of $60.85 closing Thursday. It is still below the 52 week high it set last July and currently shows no real signs of approaching that value in the near term.

This follows the trends of the whole industry where, despite a consistent increase for most

Boeing's (BA) military aircraft program continues to offer opportunities for the company. The Chicago-based defense contractor currently produces the C-17 strategic transport for use by the U.S. Air Force and the F/A-18 Super Hornet fighter and attack aircraft for the Navy and Marine Corps and is well over a year into the development of the new KC-46A aerial tanker.

Two years ago things looked bleaker for the company's military aircraft programs. F/A-18 production was ending as the U.S. military was planning a transition to Lockheed Martin's (LMT) F-35 Joint Strike Fighter (JSF). Congress had finally agreed to end the practice of buying a few C-17s each year beyond what the Air Force required. It agreed with the Obama Administration in order to save money and the line began planning to close. The KC-X tanker contest was still going on with Boeing competing against its European rival

The U.S. military will still need to invest in important upgrades and new equipment even as it winds down the fighting in Iraq and Afghanistan and reduces defense spending overall. Some new technology, such as unmanned aerial vehicles, will see increased spending while cuts are made to existing and planned weapon systems and the overall size of the military.

One program that has become a priority is the joint light tactical vehicle (JLTV), which is a fancy name for the replacement to the ubiquitous Humvee. That truck in turn replaced the famous Jeep of World War II fame. The JLTV is an important program to the winning bidder due to the sheer size of the fleet needing replacement.

The Humvee has been in service now for almost thirty years. It suffered on the battlefields of Southwest Asia because it did not offer enough protection against the biggest threats: mines and

Raytheon (RTN) is one of the largest defense contractors in the U.S. and the world. Like many of its associated companies - Boeing (BA), Lockheed Martin (LMT), General Dynamics (GD), and Northrop Grumman (NOC) - it is entering a period of uncertainty as the U.S. defense budget faces cuts. Raytheon has some advantages over other contractors as it has a focus on radars, electronic systems and some missiles. It does not make aircraft, ships, or armored vehicles.

With the U.S. restructuring its defense spending, it is presumed that ships, aircraft and Army helicopters, and ground vehicles will face the most reductions, as the U.S. continues to invest in some new equipment, including missile defense, but does not buy as may weapons. Those, along with personnel costs, are the beef of the defense budget and that is where the biggest hits will be taken.

For the last