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Lower U.S. Defense Spending Sinks Lockheed Martin's Earnings
Lockheed Martin's ( LMT ) fourth quarter profits declined on lower contract volume. Lower US defense spending particularly in the information technology domain impacted the company severely. Earnings declined 19% year-over-year to $1.73 per share and revenues declined 1% year-over-year to $12.1 billion in the fourth quarter. Earnings were also negatively impacted by a large non-cash pension adjustment, higher income taxes and a charge related to job cuts at the aeronautics division.
For full year 2012 though, revenues increased 1% year-over-over to $47.2 billion and earnings increased 6% year-over-year to $8.36 per share due to a strong performance in the first three quarters. For 2013, Lockheed forecasts a decline of around 5% in revenues due to lower U.S. defense spending, but continued growth in its earnings due to cost-cutting measures that will offset the impact of spending cuts.
Lower contract volume in information technology
In the fourth quarter of 2012, Lockheed's earnings were impacted the most in its Information Systems division due to a continuous decline in U.S. federal information technology ( IT ) budgets. Contract volume on several IT programs, including Warfighter Information Network-Tactical (WIN-T); Information Technology Agency Enterprise Transport Management; Command, Control, Battle Management and Communications (C2BMC); and Hanford Mission Support, declined in Q4. Some other programs like the Outsourcing Desktop Initiative for NASA (ODIN), Airborne Maritime Fixed Station Joint Tactical Radio System (JTRS), and U.K. Census, that had ended in previous quarters were not replaced by contracts of equivalent value. In all, profits at Information Systems division of Lockheed declined 20% year-over-year in Q4.
Lower F-22 deliveries offset by higher F-35 deliveries
Further, earnings were also impacted by zero F-22 deliveries in Q4 of 2012 compared to 6 in the year-ago period. Final deliveries under the F-22 program were completed in Q2 of 2012 and production was halted citing high unit costs and delays in Russian and Chinese fifth-generation fighter jet programs. However, the impact from zero F-22 deliveries was offset by increased deliveries of F-35, F-16, C-130J Hercules and C-5M aircraft.
In Q4 of 2012, Lockheed delivered 13 F-35s to U.S. defense forces (up from 2 in Q4 of 2011), 8 F-16s to international governments (up from 5 in Q4 of 2011), 9 C-130J Hercules airlifters (up from 7 in Q4 of 2011) and 2 C-5M airlifters (compared to zero in the year-ago period).
Pension contributions impact cash
Additionally, Lockheed made a discretionary cash contribution of $2.5 billion in the fourth quarter to its under funded pension liabilities. As a result, cash with the company declined to $1.9 billion at the end of 2012, down from $3.6 billion at the end of 2011. Lockheed has had to make significant cash contributions to its pension funds as historically low interest rates have lowered returns on pension plan assets of the company. Lockheed contributed $3.6 billion in 2012, $2.3 billion in 2011, $2.2 billion in 2010 and $1.9 billion in 2009 to its pension plans.
Outlook for 2013
For 2013, Lockheed forecasts revenues in the range of $44.5-$46 billion, down from $47.2 billion in 2012. The company anticipates that declining U.S. defense spending to impact its revenues. Currently, U.S. defense spending is set to decline by $487 billion over a 10-year period starting from government fiscal year 2012.
However, the company also anticipates that spending cuts and cost controls will offset some of this decline, and the company forecasts earnings in the range of $8.80-$9.10 per share in 2013, up from $8.36 per share in 2012.
We currently have a stock price estimate of $93.21 for Lockheed , marginally above its current market price. We are in the process of incorporating fourth quarter earnings and the new division structure at Lockheed and will update our analysis shortly.