Lockheed Martin (NYSE:LMT) will announce its fourth quarter and full year 2012 earnings on Thursday, January 24. The defense contractor will likely post lower revenues in Q4 due to reduced contract volume and its winding down of certain defense programs like the F-22. However, the fourth quarter earnings will benefit from increased F-35 production and the absence of cash contributions towards pension costs.
For full year 2012, Lockheed has forecast revenues in the range of $45.5-$46.5 billion compared to $46.5 billion in 2011, and earnings in the range of $8.20-$8.40 per share compared to $7.90 per share in 2011.   We currently have a stock price estimate of $93.21 for the company, approximately in-line with the current market price.
Winding down the F-22 program
Final deliveries of the F-22 were completed in the second quarter of 2012, and thereafter the production was halted citing high unit costs for F-22 and delays in Russian and Chinese fifth-generation fighter jets. A total of 187 F-22s were built for the U.S. defense forces. Currently, support activities are continuing under the program. We expect Lockheed’s Q4 top-line will be impacted by the winding down of F-22 production.
Declining U.S. defense spending
Due to a constrained fiscal environment in the U.S., overall contract volume for Lockheed has declined as well. The company receives a majority of its contracts from the U.S. government. In 2011, around 82% of Lockheed’s revenues came from the U.S. government, including around 61% from the Department of Defense (DoD).  U.S. defense spending is set to decline by $487 billion over a 10-year period starting from government fiscal year 2012, as required by the Budget Controls Act. Further, spending cuts will likely be applicable across all U.S. defense programs. This will exert a significant negative impact on Lockheed as the company is highly dependent on U.S. defense spending.
Increased F-35 production
However, the impact from the winding down of F-22 program and lower contract volume will partially be offset by increased production activity under low rate initial production (LRIP) contracts for F-35. At present, the company has received production orders for 95 F-35s and delivered only 26 through the end of the third quarter of 2012.  Deliveries against the remaining production orders will drive earnings growth in the fourth quarter and near term.
Lockheed anticipates to produce a total of 3,100 F-35s for the defense forces of the U.S. and 10 other partner countries.
Zero pension contributions
Earnings in the fourth quarter will also receive a boost from zero cash contribution towards under funded pension liabilities. Lockheed contributed $1.1 billion towards pension costs in the first three quarters of 2012, which fulfilled its funding obligation for 2012,  compared to approximately $1 billion and $2.3 billion in Q4 2011 and full year 2011, respectively.  Notes: