Lockheed Cuts Cost And Looks Abroad To Mitigate Sequestration Impact

by Trefis Team
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Lockheed Martin
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    Quick Take
  • Lockheed’s sales declined by 2% year-over-year in the first quarter but profits increased by 15% year-over-year on margin expansion driven by cost reduction.
  • The order backlog declined to slightly below $78 billion at the end of the first quarter from $82.3 billion at the end of 2012, due to lower order rates across segments.
  • The company anticipates an impact of $825 million on its top line in 2013 from sequestration, which came into effect on March 1, and has therefore lowered its sales outlook for 2013.

Lockheed Martin (NYSE:LMT) posted better than expected results in the first quarter. Revenues declined marginally due to fewer F-16 and C-130J military aircraft deliveries; however, earnings climbed 15% year-over-year to $2.33 per share driven by benefits from cost-cutting and helped in part by a lower pension charge. [1] The impact of sequestration, an across-the-board government spending cut that came into effect on March 1, was minimal during the quarter as several contracts of the company were funded from government fiscal year 2012 and prior year budgets.

However for the full year 2013, the sequestration is expected to weigh heavily on the company’s sales. Lockheed currently anticipates these across-the-board budget cuts will lower its top line by around $825 million in 2013. [1] It has therefore lowered its sales outlook for the year and now forecasts sales of $44.5 billion in 2013, down from its prior guidance range of $44.5-$46 billion. [1] This compares to its sales of $47.2 billion in 2012. [2]

Interestingly, Lockheed maintained its earnings guidance range for 2013 at $8.80-$9.10 per share. [1] The defense contractor expects to offset the negative impact from government austerity by cutting costs to maintain its profit growth momentum.

We currently have a stock price estimate of $95 for Lockheed, marginally below its current market price.

See our complete analysis of Lockheed here

Lower Costs Aiding Growth In Profits

Lockheed received around 82% of its sales from the U.S. government in 2012, including 61% from the Department of Defense (DoD). Thus, the budget decline caused by the sequester will impact Lockheed severely. [3]

The company on its part has been trying to mitigate the impact from these government budget cuts by increasing its international defense sales and reducing its cost structures through headcount reductions. In the first quarter, it incurred a one-time charge of $30 million related to workforce reductions at its information systems segment. Sales at this segment were hit by a decline in federal information technology budgets. In all, driven by gains from cost-cutting measures, Lockheed’s operating margin improved to 10.1% in the first quarter from 9.2% in the prior year period. [1]

Stock Re-purchases Help Address Investor Concerns

Lockheed also repurchased shares worth $500 million during the quarter. It is repurchasing stocks in an attempt to soothe investor concerns arising from lower government spending. At the end of the first quarter, Lockheed’s management authorized to repurchase additional shares worth $1.8 billion. [1]

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Notes:
  1. Lockheed’s first quarter earnings release, Form 8-K, April 23 2013, www.lockheedmartin.com [] [] [] [] [] []
  2. Q4 and full year 2012 earning results – Form 8-K, January 24 2013, www.lockheedmartin.com []
  3. Lockheed’s 2012 10-K, February 28 2013, www.lockheedmartin.com []
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