Federal budget cuts are beginning to make an impact on aerospace and defense stocks and exchange traded funds, with Lockheed Martin Corp. (NYSE: LMT) revealing a 14% drop in fourth-quarter profits.

Lockheed, the U.S. government’s largest contractor, saw net income from continuing operations fall to $488 million in the fourth quarter, down from $569 million in 2012, reports Jonathan D. Salant for Bloomberg.

Bruce Tanner, Lockheed’s chief financial officer, hopes that this year would be a trough in U.S. defense spending.

“We’re hopeful 2014 is the bottoming out,” Tanner said.

Lockheed’s lower fourth quarter returns attributed to special charges, including $171 million for work force reductions, and a $195 million goodwill writedown due to defense budget reductions and “related competitive pressures.”

The federal contracting market has been shrinking. U.S. government prime contracts of at least $3,000 dipped 11% to $456 billion for the year ended Sept. 30, the largest annual decline since records began in 1984,

Military contracts have fallen due to a mixture of across-the-board “sequestration” spending cuts and the slow U.S. military withdrawal from Iraq and Afghanistan, reports Robert Wright for the Financial Times.

Marillyn Hewson, chief executive officer of Lockheed, points out that the new congressional budget deal shows a “level” budget for the defense department for the next two years.