WRAPUP 2-Defense cutbacks crimp Lockheed, Raytheon results

Thu Jan 24, 2013 5:06pm EST

* Both defense companies warn of sales pressure

* Lockheed assumes no 'sequestration'

* Shares fall as analysts unimpressed

By Andrea Shalal-Esa

WASHINGTON, Jan 24 (Reuters) - Lockheed Martin Corp and Raytheon Co warned on Thursday that U.S. defense budget cuts would eat into their sales this year, but they forecast very different effects on their bottom lines.

Lockheed, the Pentagon's biggest supplier, said it could cut enough costs that earnings would not only grow but also would exceed expectations. Raytheon, on the other hand, said its profit would shrink as the arms maker gets squeezed by the end of high-margin programs and the start of new, low-margin ones.

Their divergent fortunes illustrate the tough year ahead for defense contractors, which are uncertain about just how deeply the U.S. government plans to cut military spending to help rein in the soaring deficit.

Lockheed makes fighter jets, among other armaments, while Raytheon makes the Patriot missiles and other defense equipment.

Lockheed's forecast assumes Congress will avert $500 billion in additional Pentagon spending reductions known as "sequestration" that are due to take effect over the next decade, starting in March.

But Lockheed still expects sales to contract as much as 6 percent this year, an even steeper slide than the decline of as much as 3 percent that Raytheon forecast.

As spending challenges mount at home, Lockheed is pushing for growth in its international markets, and expects this to make up at least 20 percent of revenue in the "next few years."

"Certainly there's continued strong demand for air and missile defense in the Middle East and Asia-Pacific...," Chief Executive Marillyn Hewson said on a conference call with analysts.

Hewson said international orders and revenue in 2013 are expected to be in line with 2012 performance.

"Maybe a little bit higher in orders."

The business contributed about 17 percent to both orders and revenue in 2012.

Shares of Lockheed closed down 3 percent at $93.25 on the New York Stock Exchange. Raytheon shares also fell 3 percent to close at $56.54.

BEAT EXPECTATIONS

Lockheed said earnings per share dropped 19 percent to $1.73 in the fourth quarter from $2.14 a year earlier, reflecting a large non-cash pension adjustment, higher income tax expenses and a charge for job cuts in its aeronautics division.

Excluding those one-time items, the company earned $1.91 per share, beating the consensus view of analysts polled by Thomson Reuters I/B/E/S by 9 cents.

The company said it expected earnings per share to rise to between $8.80 and $9.10 in 2013, well above even the highest of the 22 analysts' estimates that make up this year's forecast.

Chief Executive Officer Marillyn Hewson, who took over on Jan. 1, told reporters that Lockheed remained focused on cutting costs and ensuring performance on key contracts.

Barclays analyst Carter Copeland, in a note to clients, said the size of Lockheed's backlog was "an encouraging sign given investor concerns around potential incremental cuts to the defense budget (including sequestration)."

Excluding one-time items such as early debt retirement and accounting adjustments, Raytheon earned $1.47 per share, beating the analysts' estimate of $1.31.

For this year, Raytheon forecast earnings of $5.65 to $5.80 a share before special items, down as much as 9 percent from 2012. Analysts had been expecting earnings to fall a more modest 2 percent or so this year.

"We see room for improvement over the course of the year (typical for (Raytheon)), but at first blush the guide is unimpressive," Citi analyst Jason Gursky said in a client note.

Raytheon Chief Financial Officer David Wajsgras told Reuters the company was "very confident" about its ability to generate strong earnings and cash flow over the next three years, despite its forecast for a lower profit in 2013.

Wajsgras said some new developmental programs in the classified arena were just kicking in, generating lower margins initially. At the same time, some higher-margin business, including a large international missile contract, will be ramping down this year.

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