Lockheed Martin‘s (NYSE:LMT) revenues fell by 5% annually to $11.5 billion in the fourth quarter due to the government’s defense spending cuts.  This decline was in line with the company’s earlier guidance. However, the defense contractor missed its earnings guidance due to a non-cash impairment charge of $0.54 per share. During its annual review of goodwill, Lockheed assessed its technical services business (part of its Missiles and Fire Control segment) to have a lower fair value than its book value resulting in this charge. The company’s fourth quarter earnings were also impacted by a severance charge of $0.34 per share resulting from employee layoffs. These one time charges more than offset Lockheed’s gains from its cost reduction measures to reduce its earnings by 13% annually to $1.50 per share in the fourth quarter. 
On the bright side, Lockheed received orders worth $15.4 billion during the quarter, which took its backlog to an all time high of $82.6 billion.  Importantly, around 25% of this backlog is constituted by international customers, which will help Lockheed reduce its dependence on the US government.  Currently, the company gets around 85% of its revenues from the US government, including around 61% from the Department of Defense (DoD). We figure in coming years, this high share of international orders in its backlog will help Lockheed raise the share of international revenues in its total revenues to its targeted 20%.
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We currently have a stock price estimate of $136 for Lockheed Martin, around 10% below its current market price.
Cost Reduction Measures Expanded Margins in 2013
During the fourth quarter, Lockheed continued with its cost reduction measures which include headcount reductions and plant consolidations. These measures, apart from their one-time costs in the form of employee severance packages, helped the company raise operating margins in three out its five business segments. For full year 2013, Lockheed through plant consolidations eliminated 2.1 million square feet of its facility space.  The company also reduced its overhead expenses and capital costs. These measures enabled Lockheed to expand its operating margin by 50 basis points annually to 9.9% in 2013. 
Looking ahead, the company plans to close down some more facilities in a bid to further clamp down on costs and maintain margins in a challenging government spending environment. Overall, through mid 2015, Lockheed anticipates to eliminate another 2.5 million square feet from its facility footprint.  Backed by gains from these ongoing cost reduction measures, Lockheed anticipates its 2014 earnings to rise by 13-17% annually to $10.25-10.55 per share. 
Fiscal 2014 Budget Replaces Across The Board Cuts With Discretionary Cuts
Separately, last week, Congress also approved the budget for fiscal 2014. This budget eliminates across the board spending cuts, called sequestration, which severely impacted Lockheed’s revenues in 2013. Instead, the budget mandates reduced spending targets for the DoD and other government agencies. Importantly, the new budget enables government agencies to discretely allocate funds to higher priority areas. We figure this move will help Lockheed as the company is present on many important defense programs like the F-35 fighter jet that are viewed in line with government priority. Moreover, this move will provide greater clarity and certainty over funding for individual government programs.Notes: