Research and development spending
Most defense majors—like Lockheed Martin (LMT), Boeing Company (BA), General Dynamics Corp. (GD), and Raytheon Company (RTN)—have tried to reduce the impact of the government budget cuts by reducing costs. Some of these companies are part of the iShares U.S. Industrials ETF (IYJ).
LMT had a few cost reduction activities. It reduced its workforce and factory space. It also shifted its employees from defined benefit pension plans to defined contribution plans. This reduced the company’s pension costs. LMT reduced its research and development (or R&D) expenses.
Companies are reducing their R&D spends despite the U.S. government urging the defense contractors to spend more on innovation and production of advanced arms. Other countries—like China and Russia—continue to spend more on producing advanced arms.
LMT spends ~2.2% of its revenues on research and development. Its R&D expenses increased by 13% in 2013. For 2014, the company intends to increase this by ~5%. Considering the uncertainties in government budgets for defense and fewer growth opportunities in the near term, the R&D cut seems to be justified.
However, LMT can’t continue on this path for long. Investing in R&D will only help the company grow when the tide turns.
During industrial slowdowns, LMT developed innovative methods to save its costs and generate more cash flows. The huge cash flows are being used to increase dividend payouts. The cash flows are also used to repurchase a large amount of the company’s outstanding shares. This helped increase the company’s stock price, despite the subdued financials.
In the next part of the series, we’ll gauge LMT’s future outlook.