Lockheed profit up, but outlook weakens

Defense slowdown leaves Bethesda firm cautious about 2010

Demand for military cargo jets helped boost Lockheed Martin's third-quarter earnings, but the company said yesterday that it is cautious about 2010 as the Obama administration shifts defense priorities away from some traditional weapons systems.

Bethesda-based Lockheed over the next year will probably feel the short-term effects of April's cancellations of the F-22 fighter jet and the presidential helicopter program, according to analysts. But new programs such as the F-35 fighter and missile-defense systems should more than make up for lost revenue over the long haul.

The F-35's 2010 revenues are expected to increase by 25 percent, or about $1.2 billion, over 2009, according to the company. And Lockheed should see similar growth in later years as the massive F-35 production takes hold.

"Prior to the administration making those changes in April, the company had a different look into 2010 than it does today," said Patrick McCarthy, an aerospace analyst at FBR Capital Markets. "So what you are seeing with the company is that when priorities shift, there are typically pros and cons. But from the revenue perspective, the cons hit first."

Lockheed reported third-quarter profit of $797 million ($2.07 a share) up from $782 million ($1.92) for the same period last year, beating analysts' expectations. Revenue increased to $11.1 billion for the quarter compared with $10.6 billion last year.

After the cautious outlook for 2010, though, Lockheed shares dropped $5, or 6.49 percent, to close at $71.99.

The defense giant's initial guidance for 2010 estimates earnings of $7.05 to $7.25 a share on revenue of $46.3 billion to $47.3 billion.

"We are facing a challenging business environment, with program cancellations and changing customer priorities," said Bruce L. Tanner, Lockheed's chief financial officer. "However, this is a transition period and . . . we are bullish on our corporation's long-term prospects."

The company has seen a slowdown in its fast-growing Information Systems and Global Services business, where earnings fell 8.6 percent. Lockheed is the largest information-technology provider to the Defense Department and federal government.

McCarthy said the issues in the government services business are due to a number of factors, including contracts rolling out at a slower pace and protests from competitors who lose business.

"The government programs have gotten bigger but there are fewer of them," McCarthy said. "So the competitors that lose have been protesting. That can put hundreds of millions of dollars in revenue on hold for a year or more."

As the first of the large defense contractors to report earnings, Lockheed's results are closely watched by the aerospace and defense industries, investors and lawmakers on Capitol Hill.