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UPDATE 3-What budget cuts? Lockheed boosts profit, raises forecast
July 23, 2013 / 12:10 PM / 4 years ago

UPDATE 3-What budget cuts? Lockheed boosts profit, raises forecast

* Pentagon budget cuts not as bad as feared

* CFO sees deal in third quarter for next F-35 orders

* Company uncertain about budget outlook for 2014

By Andrea Shalal-Esa

WASHINGTON, July 23 (Reuters) - The Pentagon’s top supplier, Lockheed Martin Corp, on Tuesday boosted second-quarter earnings by 10 percent and raised its full-year profit forecast, saying that long-dreaded U.S. budget cuts failed to hurt its sales as much as expected.

The news sent the shares of Lockheed, maker of F-35 fighter jets and Aegis missiles, up 3.4 percent to a new year high of $119.59, although the share price later fell to around $117.70.

Other big arms makers, including Boeing Co, Northrop Grumman Corp and General Dynamics Corp, are expected to report results on Wednesday.

“Overall, we had strong operational performance and program execution across all business areas this quarter, enabling us to increase 2013 financial guidance for operating profit, earnings per share and cash from operations,” Chief Executive Marillyn Hewson said in a news release.

Hewson said the company had let go nearly 30,000 workers since 2008 and consolidated facilities as it braced for up to $500 billion in defense cuts over the next decade.

Chief Financial Officer Bruce Tanner told reporters that $37 billion in budget cuts imposed on the Pentagon earlier this year were having less impact on the company than initially expected. The cuts were part of across-the-board government spending reductions mandated by Congress under “budget sequestration.”

“Frankly, it’s not affecting us as deeply as we thought it would at the start of the year when sequestration was first implemented,” he said.

Tanner said Lockheed was seeing some effect on revenue, but did not expect the impact to rise to his earlier view that revenue could be reduced by $825 million.

He lauded what he called the Pentagon’s “masterful” management of the fiscal 2013 cuts and said the military was “taking the lion’s share of that hit” as funding declined for operations, maintenance and keeping troops ready for conflict.

Todd Harrison with the Center for Strategic and Budgetary Assessments, said Lockheed’s results showed the effects of the budget cuts would be cumulative, not instantaneous. The cuts also gave companies the cover to cut jobs, close plants and make management changes, he added.

“This is a snowballing effect,” he said. “It will gradually build with time, but by the time people see the impact on industry and national security, it’ll be too late to do anything about it.”

Lockheed is keeping a close eye on the 2014 budget deliberations on Capitol Hill, but Tanner said the company still was not sure whether - and to what extent - sequestration cuts would be imposed again in fiscal 2014, which begins Oct. 1.

“We’re back in the same situation where we’re not certain whether sequestration will take place or not,” he said.

Loren Thompson, a defense analyst with the Lexington Institute, said Lockheed faced more challenges ahead, given the likelihood of further cuts in fiscal 2014, and there was a limit to how much it could cut costs.

“It’s inevitable that results will deteriorate over the next year because of sequestration,” Thompson said.

Hewson said the company’s biggest program, the F-35 fighter jet, enjoyed strong support from the Pentagon and international buyers, despite mounting pressure on the budget.

Tanner told analysts that Lockheed expected to wrap up talks with the Pentagon about the next two batches of F-35 fighter jets in the third quarter that would add $4.5 billion to $5 billion to the company’s order books. He said the F-35 program accounted for about 15 percent of Lockheed’s revenues and that percentage would grow in coming years.

Lockheed is building three models of the F-35 for the U.S. military and eight international partner countries: Britain, Australia, Canada, Norway, Turkey, Italy, Denmark and the Netherlands. Israel and Japan have also ordered the jet.

Lockheed said it now expects earnings per share of $9.20 to $9.50 for the full year, up 4 percent from its April guidance. It left its revenue forecast unchanged at $44.5 billion to $46 billion, although Tanner told analysts the full-year result would likely be above the bottom end of the range.

Lockheed reported second-quarter net earnings of $859 million, up from $781 million a year earlier. Earnings per share rose to $2.64 from $2.38.

Revenues fell 4 percent to $11.4 billion.

Analysts polled by Thomson Reuters I/B/E/S expected earnings of $2.20 per share on revenue of $11.1 billion.

Revenue was down or flat in four of Lockheed’s five operating units. The exception was missiles and fire control, where sales rose 11 percent.

Operating profit was lower in aeronautics, information systems and space business units, but grew significantly in missiles and fire control and mission systems.

Lockheed said its Missions Systems and Training division lifted its operating profit by $80 million, or 41 percent.

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