Lockheed Martin Fears $825 Million Hit From Sequestration

Government contractor Lockheed Martin Corp. announced Tuesday that across-the-board budget cuts from sequestration could potentially cut its 2013 sales forecast by $825 million.

The company is the first large contractor to outline the impact of sequestration on its business. In January, Lockheed Martin, like other major contractors, published its 2013 sales guidance with the assumption that sequestration would not occur.  A statement published in March said that the company was waiting for further guidance from its “government customers” before making specific business decisions.

Lockheed Martin said in its earning report Tuesday that the primary costs from sequestration-related budget cuts would result from rescheduling and “terminating activity” with its supplier base, severance payments made to employees, cost of closing facilities, and possible impairment costs.  The company’s “high level” estimate of sequestration impact also assumes many of the federal reductions will be “achieved through delaying and deferring new program starts,” rather than modifying existing programs with “contractually obligated schedule and delivery requirements.”

The company’s new 2013 forecast also assumes that net sales in 2013 will be at the “low end” of the range presented in January, which was between $44.5 billion and $46 billion. There were no changes in the projected net earnings, or other financial metrics in Tuesday’s release.

“While the impact of sequestration on our business has been limited to date, we continue to work closely with our customers to better understand the future impact sequestration may have on our programs,” Lockheed Martin Corp.’s Chief Executive Officer and President Marillyn Hewson said in a statement.

Still, the company reported higher net earnings this quarter: It made $761 million on $11.1 billion in 2013 first quarter revenue, compared with $668 million on $11.3 billion in the first quarter of 2012. Lockheed Martin said it had taken a $30 million special charge “related to the workforce reductions” at the Information Systems & Global Solutions business unit, which recently released 250 employees.

“Despite the challenging budget environment, we will continue to innovate and deliver value to our customers and shareholders,” Hewson said.