Lockheed Martin profits rise despite sequester cuts to defense

Lockheed Martin’s earnings rose 10 percent in the second quarter, and the company projected increased profits this year despite the threat of automatic budget cuts at the Pentagon.

The defense contractor reported on Tuesday that its second-quarter net earnings increased 10 percent to $859 million, up from $781 million in 2012. It raised its projections of earnings per share in 2013 by 40 cents to $9.20-$9.50.

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Lockheed’s latest earning report highlights a significant problem for the defense industry: how to fight off further spending cuts under sequestration when its predictions of fire pain have not materialized — at least so far.

“Industry has an optics problem — plain and simple,” said Mackenzie Eaglen, a defense analyst at the American Enterprise Institute.  

“Members feel misled that industry execs tell one thing to Wall Street and another [sob] story to Washington. No amount of telling Congress that ‘bad things are eventually coming because of budget cuts’ … will change that perception now,” he said.

Defense analysts say that the sequester cuts will eventually hurt large defense firms’ bottom lines, but it may take several years before the impact materializes within the industry’s biggest players.

The Pentagon’s 2013 budget is being cut by $37 billion under sequestration, and the Defense Department faces a 

$52 billion reduction under its proposed 2014 budget of $526.6 billion.

“They set the expectation that the effects would be immediate, and so I think that hurts their credibility,” said Todd Harrison, a defense analyst at the Center for Strategic and Budgetary Assessments.

Lockheed’s shares were up more than 2 percent to $118 on Tuesday on the heels of the earnings report. The company’s stock price has increased 25 percent this year.

Other major defense firms have also seen their share prices rise since the sequester cuts began.

United Technologies Corp., for example, reported increased earnings in its second quarter report on Tuesday. Other major contractors will release their earnings later this week.

Lockheed Martin executives said on the company’s earnings conference call Tuesday that sequestration has had less of an impact on the budget than they initially expected.

The firm estimated in April that sequestration would reduce sales by $825 million in 2013, but that hasn’t materialized as quickly as expected, said Bruce Tanner, Lockheed’s chief financial officer.

“We’ve seen less of an impact from sequestration writ large than we expected to through this part of the year,” Tanner said.

Despite the increased earnings, Lockheed’s overall sales still declined in the second quarter by 4 percent to $11.4 billion.

While the largest defense firms have thus far protected their bottom line, the industry says that smaller contractors are already feeling the pinch.

The Aerospace Industries Association released a survey of its members last week that found nearly half had laid off workers or instituted a hiring freeze over the last two years.

Loren Thompson, a defense analyst at the Lexington Institute who consults with several defense firms, said that the impact of sequestration would be felt in the 2014 budget, even if companies have managed to keep their profits up this year.

“The bottom line on Lockheed’s second quarter earnings is strong because the impact of sequestration is just beginning to be felt,” Thompson said. “But with sales already headed down, the company will have to do a lot of cost cutting just to stay where it is in terms of profitability. After all, sequestration will probably trim weapons spending 14 percent next year.”

This story was first posted July 23 at 9:40 a.m. and has been updated.