WASHINGTON (Reuters) - Lockheed Martin Corp (LMT.N), the No. 1 supplier to the Pentagon, reported on Tuesday higher third-quarter profit despite a 4 percent decline in sales, and lifted its forecast for full-year earnings, even as U.S. military spending shrinks.
Lockheed said mandatory budget cuts that took effect in fiscal 2013 would knock about $400 million to $450 million from its full-year revenue, just over half of what it initially projected. It said the nearly two-week government shutdown had shaved sales by another $15 million to $20 million a week.
Lockheed is the first big U.S. arms maker to report third-quarter financial results. General Dynamics Corp (GD.N), Boeing Co (BA.N), Raytheon Co (RTN.N) and Northrop Grumman Corp (NOC.N) are due to report earnings later this week.
Analysts expect most of the companies to post declining revenue and slightly higher or flat profit.
Lockheed forecast a further slight decline in sales in 2014 and an operating margin of above 11.5 percent. Its operating margin hit a record level of 12.8 percent in the third quarter.
Joe Nadol, an analyst at JP Morgan, said Lockheed’s results were solid and slightly better than expected.
“Profitability, orders, and cash flow were all highlights,” Nadol wrote in a note. “The key question for earnings next year is margin, and while segment margin guidance of (more than) 11.5 percent is a marker, it does leave a lot of room for a decline from the 12.8 percent posted year to date.”
Lockheed, which builds F-35 fighter jets, satellites, missile defense equipment and coastal warships, said uncertainty about future U.S. budget levels was limiting its ability to make needed investments. Lockheed, also the largest information technology (IT) provider for the U.S. government, said the downturn in government spending continued to weigh on IT sales.
Chief Executive Marillyn Hewson urged lawmakers to find a better solution to U.S. fiscal challenges than across-the-board cuts required under sequestration.
She told reporters that cutting planned military spending by an additional $50 billion a year over the coming years would make it difficult for the U.S. government to meet its national security needs, and could jeopardize thousands of smaller suppliers in the United States that employ tens of thousands of workers.
Lockheed’s earnings from continuing operations rose 15 percent to $842 million from $727 million a year earlier. Earnings per share rose 16.3 percent to $2.57 and beat the $2.26 expected by analysts in a poll by Thomson Reuters I/B/E/S.
The company forecast consolidated operating profit ranging from $4.625 billion to $4.775 billion for the full year, up from an earlier forecast of $4.55 billion to $4.7 billion. It expects earnings per share of $9.40 to $9.70, up from $9.20 to $9.50.
Chief Financial Officer Bruce Tanner said Lockheed had maintained strong earnings in the quarter by such measures as consolidating facilities and layoffs.
Hewson said the company expected continued growth in international sales.
Revenues were projected to reach about $45 billion in the full year, just over the low end of the earlier forecast range of $44.5 billion to $46 billion, he told reporters.
Tanner said the company had a backlog of $79 billion, giving it “a real strong footing” for the future. By the end of the year, the backlog was expected to rise to over $80 billion, Tanner told analysts on the company’s earnings call.
Hewson told analysts she expected international sales to reach 20 percent of revenues in the near future, buoyed by demand for missile defense equipment and growing F-35 orders. She said Japan and Israel were expected to finalize additional orders in 2014, and Lockheed remained optimistic about the F-35’s prospects in a South Korean tender.
Revenue fell at four of the company’s five divisions in the third quarter, reflecting what Tanner described as a “softening business environment.”
However, its missiles and fire control business boosted sales and profit, helped by sales of its Patriot Advanced Capability-3 missiles and the Terminal High Altitude Area Defense missile defense system.
In the aeronautics division, increased sales of F-35 fighter jets and C-130 and C-5 transport planes helped offset a decline in F-16 revenue caused by a drop in deliveries.
Tanner said Lockheed was not affected by the U.S. government’s decision to restrict shipments of F-16s and other military aid to Egypt, since such sales occurred on a government-to-government basis, and the U.S. government continued to buy and accept the F-16 warplanes from Lockheed.
Its F-35 fighter jet program accounts for about 15 percent to 16 percent of total revenues, and was slated to rise by about 15 percent from 2013 to 2014, Tanner said. “It’s an incredibly large program. It’s only going to get bigger,” he said.
Hewson and Tanner said they had not been briefed on a Pentagon review of the F-35 program on Monday, but were confident officials would approve a production increase in coming years.
U.S. defense officials met for five hours, said Joe DellaVedova, a spokesman for the Pentagon’s F-35 program office.
Maureen Schumann, spokeswoman for Pentagon acquisition chief Frank Kendall, said the meeting reviewed development, production, and maintenance of the F-35, and operational and support issues, but no decisions were made.
She offered no details on when a decision on increasing production would be made.
Tanner said Lockheed was ready to double production to about 60 planes a year, but needed certainty about future production rates before it could invest in more assembly stations at its Fort Worth, Texas, plant.
Lockheed spokeswoman Laura Siebert said each station would cost about $5 million.
The Pentagon’s current plans call for production to increase from 36 planes each in the sixth and seventh contracts signed this year to about 110 jets in the 10th batch, which is due to be negotiated and signed in fiscal 2016.
Lockheed shares closed up 3.8 percent at $130.05 on Tuesday.
Reporting by Andrea Shalal-Esa; Editing by Jeffrey Benkoe