By Doug Cameron
A senior Lockheed Martin Corp. executive said that a reversal
big in pension expenses will continue over the next three years,
helping balance the impact of U.S. defense cuts and lingering
uncertainty over funding for some big programs in future Pentagon
budgets.
The comments Tuesday from Bruce Tanner, Lockheed's chief
financial officer, came after the world's largest defense
contractor by sales reported a 23% rise in first-quarter profit
from a year earlier, beating analysts' expectations. Lockheed also
increased its guidance for full-year earnings as cost cutting
helped boost margins and a surge in buybacks reduced its share
count. But it reported a decline in its orders backlog, which sent
its stock down.
The Pentagon repays defense contractors a portion of their
workers' pension costs for work incurred on military programs,
though accounting rules meant that companies didn't receive the
funds for several years. New rules that came into force last year
will accelerate billions of dollars in Pentagon reimbursements,
boosting companies' cash and driving earnings at a time when sales
are flat or in decline.
More than half of Lockheed's earnings' growth over the next five
years is expected to come from the turnaround in pensions, analysts
estimate, reversing the industrywide drag on profit in recent years
from defense contractors' big legacy defined contribution
plans.
Mr. Tanner told analysts that the net impact of pension
disbursements for Lockheed this year would reach $435 million if
interest rates remain stable. He said they would likely double in
2015 and rise further through 2017 as the accounting changes
continue.
Lockheed and other large defense contractors have signaled they
expect 2014 to be a trough for the drop in U.S. investment in
weapons and research that started in 2010, though lawmakers
continue to wrangle with the proposed budgets for fiscal year 2015
and beyond.
Lockheed on Tuesday forecast that its Pentagon revenue would
fall 6% this year after a 4% decline in 2013. It said it expects
overall sales to be flat this year, but it boosted the midpoint of
its 2014 profit guidance by 2.4% from the outlook provided in
January, with per-share earnings forecast at $10.50 to $10.80. It
also raised guidance for operating profit and operating cash flow,
but left the outlook for sales and orders unchanged.
In the latest quarter, Lockheed's profit rose to $933 million
from $761 million a year earlier, with per-share earnings climbing
to $2.87 from $2.33. Sales declined almost 4% to $10.65 billion.
Profit margins improved at four of its five divisions.
Lockheed's order backlog--a key gauge of its future
business--has risen in recent years from demand for products such
as its F-35 fighter jets and missile-defense systems that has
helped insulate it from some of the weakness in U.S. and European
military budgets.
The backlog slipped 4% from the prior quarter to $79.6 billion.
Though Lockheed expects to secure more overseas orders for the
F-35, Mr. Tanner said the company was unlikely to book them during
2014. South Korea has agreed to buy 40 of the jets, with Israel and
Australia expected to add to their purchases and Singapore among
others said to be considering an order.
The overseas sales would counter the impact of further cuts in
Pentagon F-35 orders, and international business is this year
expected to come close to Lockheed's target of 20% of total sales,
in part because of lower Pentagon revenue.
Lockheed's shares closed down 3% at $156.66, with analysts
citing concern over the drop in the backlog.
Lockheed has responded to limited organic growth opportunities
and a still-sluggish deal environment with an aggressive
shareholder return policy. The repurchase of seven million shares
for $1.1 billion in the March quarter was just shy of its prior
guidance for the whole year, much of it stemming from the settling
of employee options' plans after a 60% surge in its share price in
2013.
Write to Doug Cameron at doug.cameron@wsj.com
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