Troubles deepening at Lockheed Martin

Costs, rocket failures cause loss in quarter, poor earnings seen

June 10, 1999|By Greg Schneider | Greg Schneider,SUN STAFF

Just when it seemed Lockheed Martin Corp. had hit bottom, troubles deepened yesterday as the nation's top defense contractor warned that it will post a loss for the second quarter and bleaker-than-expected numbers for 1999 and 2000.

"These guys are surprising in their ability to disappoint," said financial analyst Tom Burnett, founder of Merger Insight in New York.

Stock in the Bethesda-based aerospace giant fell $5.5625, to $34.875, on the news that Lockheed Martin expects a loss of 10 cents to 15 cents per diluted share for the second quarter of 1999, instead of the 70-cent gain that many analysts had expected.

A year ago, the company was trading at $64 per share.

Lockheed Martin officials revealed yesterday that three problems have worsened since beginning to retard the bottom line last fall.

The C-130J military transport plane suffers from rising costs, delayed deliveries and slow sales to the Air Force and other countries.

Recent launch failures of Titan rockets have cost the company, to correct the problems and in Air Force penalties. Mechanical problems are causing delays in Atlas rocket launches, and poor governmental relations with Russia could cut back on Proton launches.

Swollen costs and anemic sales plague the company's commercial satellite business.

Because the problems are continuing, the company said earnings for 1999 will likely amount to $1.50 per diluted share, instead of the $3.27 that was widely expected. Earnings for 2000 will probably be close to $2.15 per share, instead of the consensus $3.58.

Yesterday marked the fourth time since November that Lockheed Martin had warned investors.

"I am acutely aware of the severity of the problem and the damage that it does both to our credibility and our reputation," a somber-sounding Vance D. Coffman, the firm's chairman and chief executive, told investors and reporters yesterday in New York.

Coffman said nine top executives have been replaced at the company's missiles and space operations in California, five at astronautics in Colorado, and the president and other leaders at Lockheed Martin Aeronautical Systems in Georgia, and that such changes would be continued as needed.

"I am instilling a culture of accountability that is very much different than it has been in the past in this corporation," Coffman said. "We owe it to our shareholders and ourselves to be accountable for our performance and to meet our commitments quarter after quarter, year after year. Anything else is simply unacceptable, and I am accountable to you to make that happen."

Lockheed Martin also has announced job cuts in recent weeks -- 1,200 in Colorado and 2,000 in Georgia -- and many employees greeted yesterday's news with concern.

"The mood today was almost a quizzical nature, as far as what this means in terms of personnel changes," said a source who listened in on a half-hour teleconference that Coffman and company President Peter Teets held late in the day with employees from across the corporation.

"Vance and Pete made it very clear that both are taking this very personally," the source said. "And you could read between the lines that if they don't perform well by the end of the year, they're putting their necks on the line."

Some experts greeted the executive mea culpas with skepticism. Even after the nearly 14 percent hit that Lockheed Martin stock took yesterday, Robert Friedman of Standard & Poor's Equity Group said the numbers could get worse.

"I think the stock is still overpriced," he said, arguing that the company is too far-flung and dependent on unstable defense and space markets. "I think it's worth in the mid- to high-$20 range."

But Brett Lambert of the DFI International defense consulting firm in Washington gave Lockheed Martin credit for taking some "hard medicine" by owning up to short-term financial difficulties.

"I think it will put them on more stable footing with Wall Street," Lambert said, adding that Lockheed Martin executives he spoke with yesterday believe that the company has hit bottom and can only go upward.

"Now that they have set these lowered expectations, they have to meet them. There's no choice," he said.

While there are bright spots that suggest that 1999 could turn around for Lockheed Martin -- the company could close big F-16 fighter plane contracts with Israel and the United Arab Emirates -- there are also more potential pitfalls.

Today, for instance, is a scheduled test of the THAAD Army missile system that has missed its target in six attempts and could cost Lockheed Martin up to $75 million in Pentagon penalties if it continues to fail.

Pub Date: 6/10/99

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