With several big defense-company stocks trading at or near their historic highs, the top bosses of those companies are cashing in to the tune of millions of dollars.
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De-fense! Insiders at major companies have been unusually
active sellers of their companies' stocks.
Value of Stock Value of
Company Options Exercised Shares Sold
Lockheed Martin $23.87 million $34.17 million
Northrop Grumman 14.50 21.08
Raytheon 1.56 3.48
Note: Data reflect transactions between Jan 27
and Feb 22
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Executives at four top defense contractors — Lockheed Martin Corp., Northrop Grumman Corp., General Dynamics Corp. and Raytheon Co. — have sold more than $80 million worth of their stock since late January, according to filings with the Securities and Exchange Commission. This unusually heavy activity excludes stocks the executives gifted to charities, as well as their preset sales and stock options they surrendered to cover tax obligations. The total jumps millions higher when aerospace titan Boeing Co. and defense suppliers such as Rockwell Collins Inc. are added.
Much of the so-called insider activity stems from stock options that were exercised and sold at substantial profit after defense stocks soared on the back of strong earnings and higher-than-anticipated proposed Pentagon spending. Some of the biggest sales have been made by executives approaching retirement, while other officers have converted options that are about to expire. Still, millions of dollars have been reaped from options that wouldn't have perished for several years.
Investors often view insider selling as a harbinger of bad corporate news. But in this case, the early sellers may be leaving money on the table, Wall Street analysts suggest. George Shapiro, an aerospace and defense analyst at Citigroup Inc., predicted in a report Wednesday that contractor share prices still have room to grow as "better-than-expected earnings continue for 2006."
Lockheed, Northrop, General Dynamics and Raytheon declined to comment on particular transactions, but said that stock options are an important part of compensation and the recent insider sales don't reflect a loss of confidence. In several cases, they noted, executives didn't sell all the options they exercised, meaning that they boosted their overall stock holdings. (Stock options aren't reported as share holdings until exercised.)
And even if they wanted to, defense-industry insiders can't race for the exit: General Dynamics requires Chairman and Chief Executive Nicholas Chabraja to hold company shares — excluding options — worth 25 times his base salary. Northrop's guideline is seven times its CEO's salary, while the ceiling at Lockheed and Raytheon is five times the CEO's base pay.
Still, executives at these firms have been busier than usual with their company's stocks.
General Dynamics Chief Financial Officer Michael Mancuso, who plans to retire soon, on Jan. 30 exercised 102,800 stock options worth $6.5 million and then sold 99,637 shares for almost $11.7 million. He pocketed $5.2 million, yet his net General Dynamics holding rose 3,163 shares. Mr. Chabraja exercised 208,592 options due to expire in March, and sold shares to cover the $19.1 million cost of the options and related taxes. The result of this so-called cashless sale is that Mr. Chabraja's holding rose nearly 49,000 shares.
Recent insider sales at Lockheed have totaled some $21 million and included the chief financial officer and heads of four of the company's five business units. Three executives who exercised options and sold more than $1 million in stock each have announced or are said to be considering their retirements.
At Boeing, where the stock recently hit an all-time high, some executives have engaged in what a spokesman called "balancing their personal investment portfolios."
Boeing's commercial-airplanes chief, Alan Mulally, this month sold shares totaling $522,508, while Jim Jamieson, chief technology officer, sold shares totaling $813,000. Rudy De Leon, head of Boeing's office in Washington, D.C., sold shares totaling $712,910. A spokeswoman said he planned to use part of the money "for charitable contributions and to prepare for the tax season."
Many public-company executives have agreements with their brokers under which they automatically sell their company's stock at predetermined prices or periods in order to keep too much of their personal fortunes from being tied up in any one share. Rockwell Collins insiders largely used a program that allows them to set up a plan in advance to sell stock when it reaches certain thresholds, said a company spokeswoman. CEO Clay Jones sold $2.36 million in stock earlier this month, while board member Donald Beall exercised $5.5 million worth of options on two batches, one for a family trust, and sold them for about $8.4 million.
Another defense-industry CEO is about to release a deluge of stock: Frank Lanza of L-3 Communications Holdings Inc. announced this month plans to exercise and sell more than 1.5 million options over 14 months. At current prices, that would fetch Mr. Lanza about $125 million. L-3 said the proceeds will be used to pay taxes and fund a private charitable foundation.
The stock sales by defense-industry executives come just before many of the companies file their 2005 proxy statements. Because of the strong earnings and stock performances in recent months, those proxy statements are expected to reflect that many of these same executives reaped a bumper crop of bonuses and fresh stock awards as well.
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