Lower sales, higher pension expenses and decreased tax credits led Lockheed Martin [LMT] to report lower profits in its fourth quarter.
The company expects sales to decline further in 2012 with earnings either down or flat compared to 2011.
Net income decreased 29 percent to $683 million, $2.09 earnings per share (EPS), from $961 million ($2.67 EPS). The 2010 results were bolstered by solid earnings from businesses that are now being recorded as discontinued operations whereas the 2011 results included a five cents EPS loss from discontinued operations.
Excluding the discontinued businesses, income from continued operations fell 15 percent to $698 million ($2.14 EPS) from $821 million ($2.28 EPS) a year ago. The results still beat consensus estimates by 19 cents EPS.
Higher pension expenses took a $66 million (20 cents EPS) bite out of fourth quarter earnings while lower research and development (R&D) tax credits further reduced earnings $36 million (11 cents EPS). Also contributing to the reduced income were premiums associated with early debt retirement and a facilities consolidation charge at the Electronic Systems segment.
The Aeronautics and Information Systems & Global Solutions (IS&GS) segments posted higher operating income which was essentially offset by declines at Electronic Systems and Space Systems. Segment operating margins improved 40 basis points to 11.4 percent on the strength of cost reduction efforts implemented in 2010 and improved program execution, Bruce Tanner, Lockheed Martin’s chief financial officer, said on yesterday’s earnings call.
Sales in the quarter fell 5 percent to $12.2 billion from $12.8 billion a year ago. Lower revenues in the Electronic Systems, IS&GS, and Space Systems segments more than offset a slight increase in sales at Aeronautics.
The higher sales at Aeronautics stem primarily from higher volume on the F-35 Joint Strike Fighter low-rate initial production (LRIP) contracts and more F-16 fighter aircraft deliveries.
Contract negotiations for the fifth F-35 LRIP award are ongoing, Bob Stevens, Lockheed Martin’s chairman and CEO, said. Lockheed Martin’s concerns that the government was trying to foist too much financial risk onto the company and its industry partners as part of the ongoing concurrent development and low-rate production of the aircraft, have been resolved, Stevens said.
Both the Defense Department and industry are “accountable” under the parameters of the arrangement, Stevens said. “I think that matter is resolved.”
Stevens also said the company continues to make progress on various technical issues that have troubled the F-35.
As for fiscal pressures on future DoD defense budgets, Stevens said it is clear that there will be near-term quantity reductions in the number of aircraft that are ordered but that longer-term he still sees over 2,400 aircraft needed for the U.S. military. He sees production quantities in the near-term at around 30 aircraft per year and then “accelerating” from that later.
Overall in 2011, net income declined 7 percent To $2.7 billion ($7.81 EPS) from $2.9 billion ($7.10 EPS). Per share earnings increased on a lower share count as the company repurchased 7 percent of its stock during the year. Income from continuing operations was essentially flat at just under $2.7 billion.
Sales in 2011 increased 2 percent to $46.5 billion from $45.7 billion.
In 2012 sales are expected to be between $45 billion and $46 billion with operating profits between $3.9 billion ($7.70 EPS) and $4 billion ($7.90 EPS). The outlook does not assume a return of the R&D tax credit, which would add about 10 cents EPS to the guidance, Tanner said.
Backlog stood at a record $80.7 billion at the end of 2011, up from $78.4 billion a year ago, while orders in the quarter were a strong $19.8 billion. Free cash flow for the year was $3.3 billion.