Lockheed Martin Corporation (LMT) has teamed up with DRS Technologies Inc. to focus on the development of the U.S. Army’s Common Infrared Countermeasure (CIRCM) Technical Development requirement. The CIRCM program will provide laser defeat capability to rotary-wing aircraft operating on close terrain flying missions where man portable air defense systems represent a significant threat.
Lockheed Martin’s CIRCM solution is adaptable to a wide range of rotary-wing platforms like The Boeing Company’s (BA) AH-64 Apache and CH-47 Chinook Helicopters, along with United Technologies Corporation’s (UTX) UH-60 Black Hawk Helicopter.
Lockheed Martin’s focus is coming at an opportune moment with defense cuts looming on the horizon. In the recently reported third quarter of 2010, Global Training & Logistics business comprising the above program witnessed growth on readiness and stability programs, which was partially offset by lower volume on simulation & training programs.
Going forward, the ongoing trend of governmental delays in program decisions coupled with program cancellations has affected the fortunes of the defense industry in general and Lockheed Martin in particular. Recently, the National Commission on Fiscal Responsibility and Reform has proposed approximately $100 billion in defense cuts by fiscal 2015 to reduce the U.S. budget deficit.
The tepid recovery rate of the U.S. economy raises fears of another axe on defense expenditure. GDP growth averaged 2.7% in the first half of 2010, but decelerated sharply to 2.4% over the second quarter of 2010. The Zacks forecast of GDP growth for the second half of 2010 is now just around 1.7%. We now see greater downside risks to our GDP forecast for the second half of 2010, which may affect government spending on defense.
Lockheed also carries a sizeable pension liability. The company’s operating earnings can be affected by high pension costs in lower interest rate environments. Faced with a bearish market, a drop in the value of securities and a reduction in discount rates, the company has recognized non-cash and after-tax reduction of stockholders’ equity of approximately $7.25 billion due to the re-measurement of pension plans as of December 31, 2008.
The company bucked the trend in fiscal 2009, helped by higher returns on pension plan assets with an after-tax increase in stockholders’ equity of approximately $495 million. However, the company expects higher pension expenses to the tune of $2.2 billion in fiscal 2010 due to the continued amortization of losses incurred in 2008.
Lockheed Martin’s recently reported third quarter results of 2010 were affected by a one-time charge of $178 million related to the VESP (Voluntary Executive Separation Program). Through VESP the company retrenched approximately 600 executives, or about 25% of its total executive headcount.
The company expects that a substantial amount of the costs of the VESP will be recovered in future through pricing of its products and services for U.S. Government contracts. However, there exists an element of risk till the amount is actually recovered.
The near-term outlook does not look promising due to the looming defense budget cuts, a receding order backlog, headwinds in margins, execution risk of major programs, cost over-runs, higher pension liability and risk of retrenchment cost recovery.
We do no expect the situation to improve significantly in the near future. We would advise investors to keep away from the Zacks #4 Rank (Sell) Lockheed Martin stock. Over the longer term, we maintain our Underperform recommendation on the stock.
BOEING CO (BA): Free Stock Analysis Report
LOCKHEED MARTIN (LMT): Free Stock Analysis Report
UTD TECHS CORP (UTX): Free Stock Analysis Report
Zacks Investment Research
