Does Lockheed’s Results Portend the Defense Market?

by: Matthew Potter
October 20, 2010

Category: Business Line, Companies, Countries, Department of Defense, development program, Earnings, England, Events, Federal Budget Process, IT, Lockheed Martin, logistics, Military Aviation, Northrop Grumman Corp., production program, Restructuring, Services, States | RSS 2.0

Lockheed Martin (LMT) announced their most recent quarterly earnings and they didn’t paint a pretty picture. The concern is whether this was a one off bad report or does it portend the future for the large defense contractors now that Iraq and Afghanistan may wind down and budgetary pressures will reduce U.S. defense spending.

Compared to the same quarter in 2009 profits fell twenty-eight percent. Profits totaled $517 million compared to last year’s $797 million. Lockheed also reduced its estimates for the year by 40 cents and its projected sales by $600 million.

One of the effects dragging down the company’s results was a charge of almost thirty-two cents a share to cover the costs of buying out executives and other over head employees. This was done by the company in September as part of cost cutting moves to meet the Defense Department’s desires for lower overall costs by their contractors. 600 executives accepted the buy out. This is a one time charge but reflects the changing market Lockheed is facing.

Lockheed also is expecting short term reductions in revenue due to the decision to sell its consulting engineering division, Enterprise Integration Group (EIG). This was done in response to Pentagon concerns about Organizational Conflicts of Interest (OCI) between companies that support weapon testing and buying and also provide hardware to the military. Last year Northrop Grumman (NOC) did the same thing with its TASC group.

With Britain announcing major defense spending restructuring including retiring and delaying major programs the United State’s is expected to follow in the near term. These considerations led Lockheed to predict that their 2011 is looking fairly flat as well.

While cuts are expected the issue will be how fast they come. If there is a downturn hopefully it will be spread across several quarters allowing the defense industry to reduce steadily. If there are major cuts done rapidly the industry will be driven to reduce capabilities and jobs without allowing consolidation or M&A to happen.

There are already reports of contractors laying off workers due to decline in demands due to the withdrawal of U.S. troops from Iraq. In the Seventies and Nineties the U.S. military saw major reductions in money for not only new weapons but also that used to maintain and operate their existing equipment and train their personnel. The coming draw down must avoid similar situations.

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