Lockheed Martin Corp. (LMT) said it will cut 4,000 jobs and close some operations in response to decreased federal spending, even after third-quarter profit rose 16 percent.
The cuts affect four of the company’s five business segments, sparing only aeronautics, which accounts for 30 percent of the largest U.S. government contractor’s sales and includes the F-35 jet, the Pentagon’s most expensive weapons program.
The move was necessary and reflects job cuts that may be ahead at every major defense vendor as the U.S. curtails military spending after years of wars in Iraq and Afghanistan, said Brian Ruttenbur, an analyst with CRT Capital Group LLC in Stamford, Connecticut.
“You’ve got to keep your cost structure under wraps,” Ruttenbur said in a phone interview. “They’re not evil. They have to be competitive going forward, and the way you stay competitive is by keeping costs under control.”
The Defense Department faces budget reductions of about $500 billion over a decade under the automatic cuts known as sequestration, including about $52 billion in the current fiscal year.
Lockheed shares rose less than 1 percent to close at $138.29 in New York after climbing 45 percent this year.
Operations will close by mid-2015 at a Newtown, Pennsylvania, space systems unit; an Akron, Ohio, mission systems and training site; a Goodyear, Arizona, information systems facility; and a Horizon City, Texas, missiles and fire control plant, Lockheed said in a statement today.
The Bethesda, Maryland-based company said it also will shut several buildings used for space systems work in Sunnyvale, California.
Of the units affected, the company’s two smallest, space systems and missile systems and training, brought in $11.3 billion of Lockheed’s $33.8 billion in net sales from January through September. By contrast, aeronautics accounted for $10.2 billion.
Pentagon officials have managed so far to protect major weapons systems from deep cuts under sequestration, including by locking in some contracts for Lockheed’s $391.2 billion F-35 program before the automatic reductions took effect in March.
They have said weapons procurement won’t be spared in coming years unless President Barack Obama and Congress agree on a plan to call off sequestration.
“You can’t hold the F-35 harmless” if the Pentagon must continue to live under declining budgets, said Robert Levinson, an analyst with Bloomberg Government. “The cuts in other programs would be way too dramatic.”
For now, the biggest U.S. defense contractors have squeezed expenses to maintain profits even as sales fell.
While Lockheed reported last month that sales declined 4.4 percent to $11.3 billion in the third quarter, it said profit from continuing operations rose 16 percent from a year earlier and it raised its full-year earnings forecast.
Since 2008, Lockheed said, it has trimmed capital expenses and cut its workforce to 116,000 employees from 146,000.
“Reducing our workforce of dedicated employees and closing facilities are among the most difficult decisions we make,” Chief Executive Officer Marillyn Hewson said today in a statement.
“In the face of government budget cuts and an increasingly complex global security landscape, these actions are necessary for the future of our business and will position Lockheed Martin to better serve our customers,” said Hewson, who left a U.S. Commerce Department event in Washington today without speaking to reporters.
Loren Thompson, a defense analyst who also consults for companies, said Lockheed didn’t anticipate that any new work would be coming for the plants it’s shutting.
“Anytime you close a facility, you foreclose opportunities,” said Thompson, an analyst with the Lexington Institute, an Arlington, Virginia-based research organization, “Lockheed expects the downturn to continue.”
Lockheed has been lobbying Congress to come up with alternatives to sequestration.
“I spend a lot of time on Capitol Hill talking to lawmakers about the uncertainty of our business,” Hewson told reporters Oct. 22 after the company’s earnings release.
The company’s political action committee boosted its contributions to $1.52 million during the first nine months of 2013, from $1.37 million during the same period two years earlier.
Its lobbyists on sequestration include former Deputy Federal Aviation Administrator Linda Daschle, the wife of former Senate Democratic leader Tom Daschle of South Dakota; and the firm of former House Republican Conference Chairman J.C. Watts of Oklahoma.
Even as contractors lobby against sequestration, they must continue to look for efficiencies in a new era of reduced defense spending, said Levinson, the Bloomberg Government analyst.
“They’ve been on a gravy train for a decade,” he said. “Now they’re living in a different world, and they’re adjusting just like any company would.”
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