Lockheed Martin combats the impact of sequestration

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Impact of sequestration

The impact of sequestration is different for Lockheed Martin’s (LMT) different business segments. For segments with longer product cycles, like Aeronautics and Space Systems, the impact will be muted. For segments will shorter cycles, like Information Systems & Global Solutions (or IS&GS), Missiles and Fire controls (or MFC), and Mission Systems and Training (or MST), the impact is likely to be severe in the near term. This is because segments with longer cycles have already received funding in previous years. Most of them already have order backlogs for two to three years.

LMT Segment revenue

Cost reduction

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The company has been trying to offset the setback in revenues with measures to improve profits. One such key measure has been cost reduction through layoffs and factory closures. Since 2008, the company has reduced its workforce from 146,000 to 116,000 and removed 1.5 million square feet of factory land. It has also managed to reduce its overhead costs and thus improve its profit margins. The company has further announced plans to shut down its Goodyear factory and reduce 600 jobs by early 2015.

Growing international business

Another key measure of the company is its greater focus on international military sales. The company currently boasts international customers for its F-35, F-16, and C-150J Hercules aircraft. The maintenance and development work on these aircraft will provide added revenue. To further its objective, Lockheed Martin has also made acquisitions in the recent past. These efforts have increased its international business from 14% in 2010 to 17% in 2013.

Trying to diversify

Lockheed has recently also started to venture into unconventional areas. A recent example of this approach is LMT’s contract with Concord Blue Energy, which involves building a new facility that will convert waste to energy. Concord will provide manufacturing support and technology to Lockheed Martin.

Other defense contractors include The Boeing Company (BA), Raytheon Company (RTN), and General Dynamics (GD), which are part of the Dow Jones U.S. Select Aerospace Index (ITA).

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