Lockheed Plummets After Drastically Reducing Its 2000 Forecast

The giant military contractor also posted sharply lower third-quarter earnings and announced the departure of its president and chief operating officer.
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Stunning Wall Street,

Lockheed Martin

today drastically reduced its forecast for its earnings and cash-flow numbers for next year.

The giant military contractor also posted sharply lower third-quarter earnings and announced the departure of its president and chief operating officer, the latest top executive to leave in a string of management changes.

Investors pummeled Lockheed's stock, sending it to new 52-week lows. By midday, the

(LMT) - Get Report

company's shares were down 3 5/16, or 15%, at 19 5/8.

Lockheed said it expects to earn approximately $1 a diluted share in the year 2000, excluding extraordinary items. It said its free cash flow estimates for 2000 are under review but expected to be less than $500 million. Back in June, the company had estimated more optimistic figures: 2000 earnings per diluted share of at least $2.15 and free cash flow of $900 million.

Next year's earnings will be substantially less than the $1.50 a diluted shares that the company is projecting for this year, Lockheed said.

Lockheed attributed its problems to "changes in market conditions, timing of events, new business losses and program performance issues." One area of particular weakness has been the commercial satellite business.

These problems also weighed on the company's third-quarter results, which managed to slightly exceed the lowered expectations of analysts. For the quarter ended Sept. 30, pro forma earnings fell to $182 million, or 48 cents a diluted share, from $318 million, or 83 cents a share, a year earlier. Analysts polled by

First Call/Thomson Financial

expected Lockheed to earn 47 cents a share.

Including some one-time tax gains, Lockheed posted net income of $217 million, or 57 cents a diluted share. Sales fell to $6.15 billion from $6.34 billion a year ago.

"We are deeply disappointed with this reduced outlook for our company,'' chairman and chief executive Vance Coffman said in a statement. "This level of earnings and cash generation is unacceptable for Lockheed Martin."

The company also said Peter Teets, its president and chief operating officer, was retiring. Coffman will immediately take on Teets' duties as chief operating officer on an interim basis. "The difficult times we have seen are not indicative of the company's real potential and I feel I must step up to being accountable for our disappointing financial outlook for 2000," Teets said in a statement. Even so, some observers surmised the erstwhile COO was merely a scapegoat.

His departure may do little to improve Lockheed's mounting difficulties. "The company's suffering from very poor business economics in their main business lines," said Robert Friedman of

Standard & Poor's Equity

, who rates the company "an avoid."

It also doesn't help that the company's biggest customer, the U.S. government, "can exact enormous amounts of pressure over pricing," Friedman said. "And, increasingly, foreign government, even smaller countries, can exact steep price discounts."

James Kawai of

Neuberger & Berman

, a money-management firm, had a similar assessment. "Their core business is still trending downwards, with their bread-and-butter programs in a downward spiral," he said. That core aeronautical systems business, which includes the manufacture and delivery of the F-16, F-22 and C-130J aircraft, recorded a 19% drop in net sales, to $1.50 billion to $1.21 billion, and a 36% drop in earnings before interest and taxes of 36%, to $105 million from $164 million.

Friedman is also skeptical of the company's rocket-launching business. "It's prone to explosions, delays and an increasing overcapacity of launch spots, which may lead to pricing wars," he said. "After all, anything they can't launch can't book revenues."

Net sales for that business posted a 13% drop in net sales, to $1.40 billion from $1.61 billion, and a 70% drop in ebit of 70%, to $77 million from $256 million.

Kawai further predicted a billion-dollar write-off in its

LM Global Telecommunications

business, terming it "the next shoe to drop."

"We've seen a lot of failures in that space lately," he said. "The

Comsat

(CQ)

financials continue to deteriorate before the merger." In September 1998, Lockheed Martin announced that it would merge with Comsat, an international satellite communications services and digital networking services and technology firm. That merger is not fully completed.

Comsat's shares were also pummeled on the news of Lockheed's travails. In afternoon trade, Comsat was down 2 7/8 to 18 1/8, a fall of 14%.

"There's been no bad news about Comsat, but now it's tied up with Lockheed," said Steven Hanson, an analyst with

Merger Insight

. He added, "At the time of the deal, the terms were very good for Comsat. However, the merger agreement doesn't allow for a way out based on Lockheed Martin's price." Analysts at Merger Insight do not rate the companies they cover. _

The company's high management turnover will probably have little upside for the company. "It's not the magic pill," Friedman explained. "Investors realize that no matter how bad or good the management is, as long as Lockheed's in these lines of business, it's going to be an uphill battle."