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Lockheed Earnings Increase 2 Percent

By Dana Hedgpeth
Washington Post Staff Writer
Wednesday, October 22, 2008

Lockheed Martin, the world's largest defense company, reported yesterday that its third-quarter profit was up slightly but warned that it may miss analysts' estimates for 2009 in part because of declining performance in its pension fund.

The Bethesda-based company reported profit of $782 million, or $1.92 per share, up 2 percent from $766 million ($1.80) for the same period a year earlier. Sales were down 5 percent to $10.58 billion from $11.10 billion in the third quarter of 2007.

Lockheed's chief financial officer, Bruce L. Tanner, called the quarter a "rock-solid performance."

But sales of some of its biggest aircraft were down, and Lockheed now estimates that its 2009 profit will be cut by about 30 cents a share as it goes from a projected $125 million gain on its pension this year to a $60 million expense next year.

"They have a mature workforce and a lot of retirees and a defined-benefit plan for them," said Robert Stallard, a director at Macquarie Research in New York. "The equity market goes down and the pension becomes more underfunded. As a result of pension accounting, they have to increase the expense they report.

"Going from a $125 million gain to a $60 million expense is quite a big switch and obviously that flows through to earnings," Stallard said.

The company's shares fell $9.03, or 10 percent, to close at $84.19.

Profits in Lockheed's aeronautics division fell 9 percent in the third quarter to $375 million, from $414 million in the year-ago period, as revenue decreased 13 percent to $2.92 billion in part from lower sales volume of its C-130J, from four aircraft deliveries to three. It also had lower sales of its F-16 fighter jets to international customers and it hasn't fully ramped up its production of the F-35 Joint Strike Fighter.

In its electronic systems division, which makes missiles, radar systems and other equipment, earnings were up 5 percent to $364 million, from $346 million, and its revenue was virtually unchanged at $2.80 billion.

Lockheed, which is the biggest suppler of information technology services to the federal government, posted a 9 percent rise in earnings in its information systems and global services unit, to $267 million from $245 million. Revenue rose 8.7 percent to $2.95 billion.

Earnings at the company's space systems division, which makes satellites and missiles for submarines, were up 10 percent to $244 million, from $221 million in the year-ago period, though revenue fell 14 percent to $1.91 billion because of a decrease in its satellite volume.

In a conference call yesterday, analysts said Lockheed's space program could be affected as the Pentagon is expected to announce today that it is shelving a competition between Lockheed and Boeing to build a roughly $6 billion satellite communications system known as TSAT, the Transformational Satellite Communications System. The satellite system is a crucial part of some of the Pentagon's biggest future weapons programs, including the Army's Future Combat Systems, a new generation of weapons, combat vehicles, robots and sensors whose systems can communicate with one another through a wireless network.

"It's clear this program is slipping away," Loren B. Thompson, a defense consultant at the Lexington Institute, said of TSAT. "It is obvious this program is gradually dying."

Many big-dollar weapons programs are expected to be under close review in a new administration, as the defense budget is expected to shrink after eight years of steady increases.

Looking forward, Lockheed boosted its expectations for 2008 earnings by 10 cents to $7.55 to $7.70 a share. It reiterated its revenue target of $41.9 billion to $42.9 billion.

Lockheed is one of the first major defense contractors to report earnings. General Dynamics of Falls Church is expected to report its earnings today.

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