Pension Costs Hurt Lockheed Profit

Increased Sales Not Enough to Offset Retirement Plan Hit

Lockheed Martin, one of the largest defense contractors in the world, said yesterday its first-quarter profit fell because growing pension costs outweighed increased sales in its weapons systems, information technology and other business units.

The company's earnings for the first quarter were down 8.7 percent to $666 million ($1.68 a share), compared with earnings of $730 million ($1.75) in the period a year earlier. The Bethesda company's pension plan, like other major companies, has been hit hard in the recession. Lockheed said it had higher pension expenses, which included costs of $114 million for 2009.

Bruce Tanner, the company's chief financial officer, said Lockheed was able to offset some of the pension hit with "overall increases in sales levels and better margins, but we weren't able to offset all of it."

Company executives said in a conference call with Wall Street analysts that the Pentagon's latest proposals to scale back or cut some major weapons programs in next year's budget represents "opportunities and risks" for the company.

The Pentagon may not order more of the company's F-22 fighter jet. But with 187 planes on order, Tanner said the company's plant in Marietta, Ga., should be able to keep assembling jets until 2012. He said the plant would also be helped by a recent uptick in orders for C-130J and upgrades to the C-5 cargo aircraft. In addition, the company could benefit if the Pentagon pushes for more money on the Joint Strike Fighter, also known as the F-35 Lightning II.

But if the Pentagon retreats on its search and rescue helicopter program and the presidential helicopter, as Defense Secretary Robert M. Gates has suggested, Tanner said the cancellations could "have some near-term reductions" on Lockheed's workforce in Owego, N.Y., where those aircraft would be made.

Tanner said the company is making efforts to broaden its business in several areas, including energy, cybersecurity and maintaining computerized health care records.

Defense industry analyst Peter J. Arment of Broadpoint AmTech said contractors would not see reductions right away should the cuts be approved.

"Defense companies are going to have several more quarters of solid operating results," he said. "The fundamentals will remain quite healthy through the end of the decade."

Troy J. Lahr, a defense analyst at Stifel Nicolaus, agreed, saying Lockheed's earnings show that "things are fine in the near term" for the financial performance of defense companies. He expects that Lockheed and others will see the impact of any cutbacks in 2011 and 2012.

"Cash generation is strong, and for the next year and a half they'll be working through their backlog," Lahr said. "But there are questions of how less outsourcing of the government and any changes in weapons programs will impact them. There could be pressures down the line."

Overall, revenue for the quarter was up slightly to $10.4 billion, compared with $9.9 billion in the same time period in 2008.

Lockheed's electronic systems division reported revenue of $2.91 billion, up from $2.79 billion a year earlier because of higher sales in its air-defense and missile systems. Its information system had revenue of $2.76 billion, up from $2.5 billion. Aeronautics for the company were down slightly to $2.78 billion from $2.8 billion, as it switches from making the older F-16 to newer fighter jets such as the F-35. Lockheed's space systems unit was up to $1.91 billion from $1.88 billion.

Lockheed's stock closed up 31 cents at $76.04 per share.