Defense Profits Up as Spending Falls : Earnings: Northrop and General Dynamics are the latest to report higher net incomes as cost-cutting begins to pay off.

The nation’s shrinking defense budget--and consequent massive defense-industry layoffs--are producing a paradoxical result: higher short-term profits for some big U.S. defense contractors.

Northrop reported Wednesday that its second-quarter earnings jumped 71%, while rival General Dynamics posted an increase of 97% on continuing operations. Theirs are the latest and strongest reports in an upsurge in defense industry profits generally.

Despite layoffs affecting tens of thousands of defense workers and the idling of defense plants across the nation, rising profitability is providing a respite for an industry facing a dismal future.

“Clearly, the industry is in an Indian summer,” said Wolfgang Demisch, aerospace analyst for UBS Securities. “The industry is facing a prospect of very substantial contraction, and so they are getting lean even before that downturn occurs.”

As a result of such cost-cutting in corporate staffs, research and production capacity, the firms are cash-rich and profits are up smartly, Demisch said. The Pentagon pipeline is still full of programs enacted in the late 1980s and funded as recently as 1990.

It can take two or three years before a congressional appropriation results in the production of a weapon and Pentagon payment check, noted Don Scales, director of the aerospace practice at Arthur D. Little Inc., a consulting firm.

“They are eating into their backlog, but there is a cliff out there and it is coming,” Scales said. “These guys are not in good times.”

Without the current painful downsizing, there might not be an industry able to bounce back in the future.

In fact, analysts agree, the end of the Cold War poses a severe long-term challenge to the profitability of U.S. defense contractors. But Scales and Demisch say the industry is performing capably in slimming down to meet the future austerity.

Strong profits may be little consolation for defense industry workers facing a jobless future, though. The industry is down from a peak of 1.3 million workers nationally to the current mid-point of 1 million.

At the current rate of defense-spending cuts, the industry will be left with an estimated 750,000 jobs nationwide by 1994. What happens after that depends on the next step in the national defense debate and on the future of commercial aircraft orders.

Meanwhile, Northrop and General Dynamics, among other players, are preparing for the tougher times ahead by cutting debt, reducing expenses and shoring up their operations for the leaner times.

Northrop posted net income of $51 million, or $1.08 per share, on $1.4 billion in sales in the second quarter, citing higher revenue on its B-2 bomber program that offset fewer deliveries of fuselages for the Boeing 747 program. Year-ago earnings were $29.7 million, or 63 cents a share, on revenue of $1.3 billion.

The firm said it cut debt by $20 million, to $450 million, by the end of the 1992 second quarter, and it expects debt to continue declining. Interest expense was down, and it booked an increase in pension income.

The Century City-based firm also said it took a $6-million charge on a previously undisclosed and still secret unmanned jet program. The firm’s wording suggested that the program’s production has been completed.

General Dynamics said it earned $173 million in the second quarter, excluding its missile operations, which it intends to sell to Hughes Aircraft. Net income was $65 million, or $1.48 a share. Sales were flat compared to the year before at $1.6 billion.

A year ago, the company reported earnings of $173 million, or $4.06 a share, on sales of $1.57 billion. But that included a $140-million tax gain.

The Fall Church, Va.-based defense firm posted higher operating earnings in its aircraft, submarine and armored vehicles segments. It narrowed its loss on its space launch systems to $7 million, from $25 million a year earlier.

TRW, meanwhile, had a 150% increase in second-quarter earnings, but operating profit in its space and defense business, headquartered in Redondo Beach, fell to $55 million from $62 million because of lower sales of spacecraft and electronics systems. For the quarter, sales for the sector were down 3%, to $742 million from $764 million.