Lockheed Boosts 2014 Profit Guidance, Posts Gains in1st Quarter -- Update

By Doug Cameron 

A senior Lockheed Martin Corp. executive said that a reversal big in pension expenses will continue over the next three years, helping balance the impact of U.S. defense cuts and lingering uncertainty over funding for some big programs in future Pentagon budgets.

The comments Tuesday from Bruce Tanner, Lockheed's chief financial officer, came after the world's largest defense contractor by sales reported a 23% rise in first-quarter profit from a year earlier, beating analysts' expectations. Lockheed also increased its guidance for full-year earnings as cost cutting helped boost margins and a surge in buybacks reduced its share count. But it reported a decline in its orders backlog, which sent its stock down.

The Pentagon repays defense contractors a portion of their workers' pension costs for work incurred on military programs, though accounting rules meant that companies didn't receive the funds for several years. New rules that came into force last year will accelerate billions of dollars in Pentagon reimbursements, boosting companies' cash and driving earnings at a time when sales are flat or in decline.

More than half of Lockheed's earnings' growth over the next five years is expected to come from the turnaround in pensions, analysts estimate, reversing the industrywide drag on profit in recent years from defense contractors' big legacy defined contribution plans.

Mr. Tanner told analysts that the net impact of pension disbursements for Lockheed this year would reach $435 million if interest rates remain stable. He said they would likely double in 2015 and rise further through 2017 as the accounting changes continue.

Lockheed and other large defense contractors have signaled they expect 2014 to be a trough for the drop in U.S. investment in weapons and research that started in 2010, though lawmakers continue to wrangle with the proposed budgets for fiscal year 2015 and beyond.

Lockheed on Tuesday forecast that its Pentagon revenue would fall 6% this year after a 4% decline in 2013. It said it expects overall sales to be flat this year, but it boosted the midpoint of its 2014 profit guidance by 2.4% from the outlook provided in January, with per-share earnings forecast at $10.50 to $10.80. It also raised guidance for operating profit and operating cash flow, but left the outlook for sales and orders unchanged.

In the latest quarter, Lockheed's profit rose to $933 million from $761 million a year earlier, with per-share earnings climbing to $2.87 from $2.33. Sales declined almost 4% to $10.65 billion. Profit margins improved at four of its five divisions.

Lockheed's order backlog--a key gauge of its future business--has risen in recent years from demand for products such as its F-35 fighter jets and missile-defense systems that has helped insulate it from some of the weakness in U.S. and European military budgets.

The backlog slipped 4% from the prior quarter to $79.6 billion. Though Lockheed expects to secure more overseas orders for the F-35, Mr. Tanner said the company was unlikely to book them during 2014. South Korea has agreed to buy 40 of the jets, with Israel and Australia expected to add to their purchases and Singapore among others said to be considering an order.

The overseas sales would counter the impact of further cuts in Pentagon F-35 orders, and international business is this year expected to come close to Lockheed's target of 20% of total sales, in part because of lower Pentagon revenue.

Lockheed's shares closed down 3% at $156.66, with analysts citing concern over the drop in the backlog.

Lockheed has responded to limited organic growth opportunities and a still-sluggish deal environment with an aggressive shareholder return policy. The repurchase of seven million shares for $1.1 billion in the March quarter was just shy of its prior guidance for the whole year, much of it stemming from the settling of employee options' plans after a 60% surge in its share price in 2013.

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