Defense giant halves payout

Lockheed freeing cash to help pare its debt

operating profit falls

January 29, 2000|By Sean Somerville | Sean Somerville,SUN STAFF

Moving to free up funds to help trim debt, Lockheed Martin Corp. slashed its quarterly dividend in half yesterday, to 11 cents.

The Bethesda-based defense contractor also reported fourth-quarter profit from operations of $227 million, or 59 cents a share, down 20 percent from $285 million, or 75 cents in the fourth quarter of 1998.

Those events occurred one day after Lockheed Martin said it would lay off 2,800 workers and streamline its aircraft and space systems businesses as part of an effort to restore investor confidence and reduce its approximately $12 billion of debt.

"Consistent with our previously announced focus on reducing debt, it is prudent to change the dividend at this time," said Vance Coffman, Lockheed Martin's chairman and chief executive officer.

The company said its Comsat Corp. acquisition and joint ventures had boosted its debt to capitalization ratio to 64 percent at the end of the year, up from 63 percent at the end of 1998.

Cai von Rumohr, a Boston-based analyst for SG Cowen Securities Corp., said the dividend reduction was no surprise. "My feeling was that if they were not going to have a big earnings increase in 2001, then the dividend was too high," von Rumohr said. "If this is what the level of earnings is, then 88 cents [a year] is not the right level of dividend."

Paul Nisbet, an analyst at JSA Research, said the move was necessary because dividends should generally be between 20 percent and 30 percent of earnings per share -- expected to be $1 this year. "It's still going to be at 44 percent for this coming year," he said.

Lockheed Martin also announced a few specific initiatives for 2000. Company officials said they would add Lockheed Martin IMS, which provides data processing and other services to cities and states, to a list of divisions being evaluated for possible sale.

They also said they would slow production of the C-130J transport aircraft from 16 to eight per year. Pointing to higher costs, the company said it would not book profits on the aircraft until orders increase and costs decrease.

The earnings report released yesterday was filled with projections intended to convince investors that Lockheed Martin is on a path to solid profit growth.

Sales in the fourth quarter were $7 billion, down 2.8 percent from $7.2 billion in the 1998 quarter. The company also said it had generated $540 million in free cash flow in the fourth quarter of 1999.

Lockheed Martin reported that fourth-quarter net earnings totaled $293 million, or 76 cents per diluted share -- a 130 percent increase from the $125 million, or 33 cents per diluted share, in the 1998 quarter.

Sales, net profit and quarter-to-quarter comparisons were boosted by a gain of $41 million from the sale of Lockheed Martin's interest in L3 Communications Holdings Inc., $33 million from the sale of surplus real estate and $28 million from the sales of noncore businesses and other investments. The fourth quarter of 1998 included a $233 million pretax charge for shutting Lockheed Martin's CalComp Inc. operations, easing quarter-to-quarter comparisons.

The company blamed the 20 percent decrease in quarterly operating profits on higher costs and lower production in its space and aeronautical businesses. Officials pointed to start-up costs associated with the Evolved Expandable Launch Vehicle. They also said the high costs and low production associated with the C-130J prevented the company from booking profits on the plane in the fourth quarter. Lockheed Martin also delivered few F-16 fighter planes in the fourth quarter.

For the year, Lockheed Martin reported net earnings of $382 million, or 99 cents per diluted share, down 62 percent, from $1 billion, or $2.63 per diluted share, in 1998. Sales for the year were $25.5 billion, down 3 percent from 1998. But the company said it generated free cash flow of $873 million and its backlog increased to $45.9 billion, from $45.3 billion at the end of 1998.

Coffman said the company must build on its 1999 results while it streamlines its aeronautical and space businesses. "The purpose of these actions is to drive down costs to improve earnings and cash flow and reduce debt while improving focus on these businesses and their mission success," he said.

The company also forecast earnings per share at $1 this year. It expects growth of 15 percent to 25 percent in following years, with 2001 results toward the low end of that range. This year "will be the low point for earnings and cash-generation for this corporation," said Robert Stevens, the company's chief financial officer.

The earnings met the expectations of analysts, who remain lukewarm about Lockheed Martin's prospects. Nisbet, the JSA analyst, said Lockheed is headed in the right direction. But he said the company is not going to get back to the $3-per-share earnings level for many years. "It's going to be a very slow process," he said.

Nisbet, who has a "hold" rating on Lockheed's stock, praised the company's management for being forthright about its position. "They have a more deliberate CFO who really does seem to have a stronger handle on what's going on and more authority than his predecessor," he said.

Von Rumohr has a "neutral" rating on the stock. Referring to Lockheed's prospects, he said: "You've got to basically see your way totally out of the woods. And usually this process can take longer than people think."

Lockheed Martin shares closed at $18.875, down 56.25 cents.

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