Lockheed’s 3Q results survive defense cuts

The nation’s largest defense contractor had a better third quarter than expected, as federal budget cuts brought less severe consequences than were forecasted.

Bethesda-based Lockheed Martin Corp. reported third-quarter net sales of $11.3 billion Tuesday, representing a 4 percent drop since one year ago. However, net earnings from continuing operations came out at $2.57 per diluted share, which is 30 cents above the analysts’ consensus.

“The company operated as though they would come in much worse,” said Neal Dihora, an analyst at Morningstar Inc. who covers Lockheed Martin. “They’ve been doing a really good job and it looks like the programs that they’re on seem to be somewhat sheltered from the sequestration cuts.”

The company had expected worse from the sequester, said CFO Bruce Tanner in a conference call Tuesday. All but one of its five business segments experienced a decrease in net income from the third quarter of 2012, but the 2013 financial outlook improved overall.

“The Department of Defense budgets haven’t really been cut yet,” said Bill Loomis, analyst for Stifel Nicolaus. “Despite all the shutdown and continuing resolution, the DOD continues to award contracts.”

The aeronautics segment brought in strong sales for the quarter, as did missiles and fire control, which actually saw growth since the third quarter of 2012.

One area that showed the kind of decreases that analysts expected was the information systems and global solutions segment. The government is more immediately able to cut back on this spending, said Dihora, because these projects are shorter term.

Lockheed Martin emphasized growth in international activity as a mitigating force against the impact of domestic cutbacks. However, analysts cautioned that international activity will not be able to completely cushion the blow of sequestration.

“International has always been a big component. The only reason you’re hearing about it now is domestic spending has been slowing,” said Loomis. “The much bigger part is shrinking. International is important, but it’s still only 17 percent of the business.”

Lockheed’s goal is to increase that percentage to 20. As a part of that strategy, it acquired Amor Group, a privately held information technology company based in the United Kingdom.

That will make for a useful supplement to domestic services, said Dihora, but it can only do so much to insulate the company.

The United States remains the biggest spender in the defense industry, and Lockheed cannot sell to second place China and third place Russia. So even raising the company’s international activity by three percentage points will be a task, said Dihora, requiring outreach to countries with much smaller defense budgets.

While cuts landed softer than expected, Loomis predicted that revenue from domestic projects will be down for the next five years or so. In 2014, he expects a revenue decrease of 2 or 3 percent.

With sequestration in mind, Lockheed Martin expects a slight drop in 2014 annual net sales from this year, which are expected to be about $45 billion.

Dihora expects a drop of $500 million in revenue, but admits his perspective has changed given the recent report.

“That’s much better than I guess I would have thought if you asked me three days ago. I would have thought the sequestration would have had much more of an impact,” he said. “Most of us are in the dark about what’s happening with sequester.”