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Lockheed Profit Rises 3.9% on F-35; 2011 Outlook Raised

Lockheed Profit Rises 3.9% on F-35 Orders
Sales at two of Lockheed’s four units rose during the quarter, led by an 8.9 percent gain in Aeronautics. Photographer: Mike Fuentes/Bloomberg

Lockheed Martin Corp., the world’s largest defense company, boosted its full-year profit estimate as second-quarter profit rose 3.9 percent, aided by higher sales and profits from orders for the F-35 Joint Strike Fighter.

Lockheed rose as much as 3 percent in New York trading before closing $80.82, a 1.9 percent gain, after the company raised full-year profit estimates. For 2011, earnings per share will be in the range of $7.35 to $7.55 -- an increase from the earlier projection of $6.95 to $7.25 a share made in April, Lockheed said. Sales will be between $46 billion and $47 billion, it said. Analysts surveyed by Bloomberg forecast profit of $7.26 a share on sales of $46.7 billion.

Chief Executive Officer Robert Stevens has cut 3,850 jobs since last year to match the projected decline in U.S. defense spending. Last week, Lockheed offered voluntary retirement plans to an additional 6,500 employees.

Lockheed is “implementing difficult measures to right-size our business for an environment that remains challenging,” Stevens said today in a statement released by the Bethesda, Maryland-based company.

Profit from continuing operations increased to $742 million, or $2.14 a share, from $714 million, or $1.92, a year earlier, Lockheed said. That beat the $1.94 average estimate of 21 analysts surveyed by Bloomberg. Sales increased 2.4 percent to $11.6 billion.

‘Need to Right-Size’

“We always evaluate the need to right-size the business,” Bruce Tanner, Lockheed’s chief financial officer, said in a telephone interview when asked if the company may seek more reductions in the future. “That’s a function of the environment around us.”

President Barack Obama on April 13 announced $400 billion of cuts in national security spending through 2023, in addition to the $78 billion five-year reduction in the defense budget proposed in January. Budget negotiations between Obama and Congress may lead to deeper cuts.

Job cuts have helped Lockheed remain profitable in sectors where order volume is declining, Tanner said. For example, the Space Systems unit is a “cost-plus contract environment, so some of the reductions will make us more competitive and give us affordability benefits,” he said.

In June, Lockheed announced 1,200 job cuts at the Space unit, whose products include military satellites, rocket launchers and space exploration work for NASA.

Lockheed doesn’t have additional layoffs planned, he said.

Cuts ‘Possible’

“With the defense budget likely to decline for several years, job cuts are quite possible to help sustain profitability,” Joel Levington, a bond analyst at Brookfield Investment Management Inc. in New York, said in an e-mail.

If the Pentagon decides to reduce F-35 orders as a result of the budget review and the broader U.S. goal to cut deficits and debt, the airplanes’ price will rise, Stevens said on a conference call today.

“When you plan to build 200 Joint Strike Fighters a year and if you build fewer than that, the cost of those jets will be more,” he said when asked what would happen if the U.S. Navy reduces the size of its aircraft carrier fleet, thereby reducing the number of carrier variants of the F-35 plane.

It’s “hard to handicap” how the F-35 program will fare in the budget reviews, Stevens said.

Although the Navy plans to retain 11 aircraft carriers through 2040, it’s studying options for a smaller fleet, Marine General James Cartwright, the vice chairman of the Joint Chiefs of Staff, has said. The U.S. plans to buy 2,443 F-35 jets.

Unit Results

Quarterly earnings were reduced by $63 million stemming from a $97 million charge relating to job cuts at the Aeronautics unit that makes the F-35 jets, Lockheed said. The reduction was offset by a tax benefit for the company of $89 million, resulting in a net increase of $26 million, it said.

Sales at two of Lockheed’s four units rose during the quarter, led by an 8.9 percent gain in Aeronautics. The unit’s revenue gained from trial orders for the F-35 aircraft as well as work on the C-130J transport planes, the company said. Sales at the unit rose to $3.42 billion, and profit rose 8 percent to $400 million.

Electronic Systems, the unit that makes anti-missile systems including the Patriot Advanced Capability-3, or PAC-3, missile and the Terminal High Altitude Area Defense system, reported a 6.3 percent gain in sales to $3.76 billion. Unit profits increased 5.7 percent to $466 million, aided by a higher volume of PAC-3 work, the company said.

Information Systems

Sales at the Information Systems and Global Solutions unit fell 6.4 percent to $2.36 billion. Profit at the unit, which provides information technology services to U.S. agencies including the Pentagon, increased 1.4 percent to $214 million.

Space Systems sales declined 3.3 percent to $2.01 billion, Lockheed said. Unit profits rose 6.9 percent to $263 million.

The discontinued operations in the quarter refer to two businesses that were sold and whose earnings were adjusted in the second quarter of 2010. These include the Enterprise Integration Group, which was sold to Veritas Capital for $815 million, and the sale of the Pacific Architects & Engineers unit to private-equity firm Lindsay Goldberg completed April 4.

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