Lockheed lifts outlook as profit rises, but revenue falls

WASHINGTON Tue Apr 22, 2014 2:22pm EDT

A Lockheed Martin F-35B Lightning II joint strike fighter flies toward its new home at Eglin Air Force Base, Florida in this U.S. Air Force picture taken on January 11, 2011. REUTERS/U.S. Air Force/Staff Sgt. Joely Santiago/Handout

A Lockheed Martin F-35B Lightning II joint strike fighter flies toward its new home at Eglin Air Force Base, Florida in this U.S. Air Force picture taken on January 11, 2011.

Credit: Reuters/U.S. Air Force/Staff Sgt. Joely Santiago/Handout

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WASHINGTON (Reuters) - Lockheed Martin Corp (LMT.N), the Pentagon's largest supplier, on Tuesday reported a 23 percent jump in net profit in the first quarter and raised its earnings per share outlook for the full year by 25 cents.

But Lockheed, maker of the F-35 fighter jet, satellites and coastal warships, said U.S. government budget cuts continued to depress revenue this year, with sales to the U.S. military likely to drop by 6.0 percent in 2014 after a 4.0 percent drop in 2013.

Chief Financial Officer Bruce Tanner told reporters on Tuesday that the lost revenue amounted to "a pretty significant" 10 percent drop over two years, which has reversed the company's expectation that 2014 would be a growth year.

Earnings and cash flow from operations remained strong, and foreign sales offset the drop in U.S. orders, he said.

The company reported net earnings of $933 million for the quarter, or $2.87 per share, up from $761 million, or $2.33 per share, in the first quarter of 2013.

Operating margins reached 13.4 percent in the first quarter, well above the 12.1 percent rate seen a year earlier and matching an earlier record, but Tanner said it would be challenging to maintain that level in coming years.

"That's a hard hurdle for us to maintain and especially in the near term," Tanner told analysts during a separate call. "With the significant growth coming on the F-35 program at lower than the overall margin rate, that's clearly going to put pressure on our ability to achieve that."

Lockheed shares were down 1.7 percent at $158.69 in afternoon trading on the New York Stock Exchange.

Rob Stallard, with RBC Capital Markets, said Lockheed's earnings and operating margins beat expectations, but investors were beginning to wonder how much longer the company could maintain that performance given declining revenues.

Lockheed forecast earnings per share of $10.50 to $10.80 for the full year, up 25 cents from its guidance in January, and affirmed its sales forecast of $41.5 billion to $43 billion.

Revenues fell 4.0 percent compared to the first quarter of 2013, with only one of five business segments - aeronautics - reporting higher sales, as deficit-reducing measures began to take a toll on military spending.

The aeronautics sector, which includes F-35 and C-130 cargo planes, reported revenues of $3.39 billion for the quarter, a 6.0 percent increase from a year earlier.

Tanner said international sales helped offset the decline in U.S. orders in the first quarter and would account for about 20 percent of full year revenues in 2014, up from 17 percent the previous two years.

He said Lockheed expected more orders for the F-35 fighter jet, the company's single biggest program, from Australia, South Korea, Israel and Singapore, but not this year.

"I think we're on the cusp of closing some fairly good-sized orders in the not-too-distant future, but I don't think they're necessarily going to close in 2014," Tanner said. "These things are going to take some time to manifest themselves in terms of translating into an actual contract award."

He said the F-35 would account for 25 percent of overall revenues by 2018 or 2019, when the program reaches full rate production.

Tanner said Lockheed was also in talks with potential customers in the Middle East about a variant of the small warship it builds for the U.S. Navy, but did not expect any of those talks to result in a firm contract in 2014 either.

Bookings would likely total about $10 billion each in the next two quarters and $16 billion in the fourth quarter, reaching just over $80 billion in the full year.

Higher pension income of $86 million in the first quarter also helped boost earnings, a big swing from the $121 million pension expense seen a year earlier, Lockheed said.

Tanner attributed the difference to an increase in interest rates that changed the discount rate used to calculate Lockheed's pension liabilities at the end of last year, and resulted in a significant reduction that would continue throughout the year.

(Reporting by Andrea Shalal; Editing by Stephen Coates and Leslie Adler)

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