Lockheed Martin [LMT] on Tuesday reported a drop in first quarter net income due to troubles with an international program and an international investment although sales increased due to gains in each of its operating segments.
Net income fell 15 percent to $763 million, $2.61 earnings per share (EPS), from $898 million ($2.91 EPS) a year ago, missing consensus estimates by 18 cents per share. One reason for the tumble was that earnings from the now divested Information Systems and Global Solutions business were $92 million (30 cents EPS) a year ago. Leidos [LDOS] acquired that business last summer.
Excluding the IS&GS earnings from a year ago, net income from continuing operations was down 5 percent from $806 million ($2.61 EPS). The results took a hit from a $74 million (25 cents EPS) charge related to revised estimates to complete an air missile defense C4I system called EADGE-T for an international customer, and a non-cash $40 million (14 cents EPS) charge due to reduced business prospects related to an international joint venture that the company is a junior partner in.
Company executives on Tuesday’s earnings call said they believe the EADGE-T charge bounds remaining program risk, with delivery expected to be completed in two years. Marillyn Hewson, Lockheed Martin’s chairman, president and CEO, said that once the program is completed, the capabilities found in the system have the potential to be sold to other customers.
The EADGE-T development is being done under a fixed-price contract, which puts the development risks on the contractor. Hewson said that the design is currently “less mature” than is required, calling it the “world’s first end-to-end integrated air and missile defense system.”
Lockheed Martin was able to hold its per share results even from a year ago at $2.61 EPS due to a lower share count stemming from stock buybacks.
The tax rate in the first quarter was also higher, which further trimmed the bottom line results.
Sales increased 7 percent to $11.1 billion from $10.4 billion a year ago, driven by strong gains at the Space Systems and Aeronautics segments and more modest increases at Missiles and Fire Control (M&FC), and Rotary and Mission Systems (R&MS).
At Space Systems, sales increased due to Lockheed Martin taking a controlling interest last year in the United Kingdom Atomic Weapons Establishment. Aeronautics benefited from increased production of F-35 fighters and modernization work on F-16 fighters. The company delivered 15 F-35s in the quarter versus six a year ago.
Sales at M&FC were up on higher deliveries of Patriot Advanced Capability and fire control programs while R&MS sales increased due to an accounting adjustment related to the acquisition of Sikorsky in Nov. 2015.
Operating profit at the segment level fell due to the charge on the EADGE-T program, which is performed by R&MS, and 1 percent decline at M&FC. Profit was higher at Space Systems related to the United Launch Alliance joint venture with partner Boeing [BA] while profit was up modestly at Aeronautics on deliveries, sustainment and risk retirement for the F-35 program.
The charges led Lockheed Martin to reduce its earnings guidance somewhat for 2017, with operating profit now expected to range between $5.5 billion and $5.6 billion, down $80 million from the prior outlook. Per share earnings are now expected to range between $12.15 and $12.45, down a dime from earlier guidance.
Bruce Tanner, Lockheed Martin’s chief financial officer, said the EADGE-T charge is being partially offset by performance improvements across the company.
The outlook for sales was increased by $100 million to be between $49.5 billion and $50.7 billion driven by higher expectations at Space Systems. Projections for cash flow from operations this year were increased by $300 million to around $6 billion based on the bundling of the company’s contracts with the Pentagon for the low rate initial production lots nine, 10 and 11 of the F-35.
Hewson said with the bundling, Lockheed Martin decided against suing the government for unilaterally forcing contract pricing terms for the lot nine award. She said the bundling agreement established cash terms that “were improvements over previous positions” by the government, adding that the economic considerations and cash terms drove the higher outlook for cash flow this year.
Free cash flow in the quarter was $1.5 billion and backlog stood at $93.5 billion, down from $96.2 billion at the end of 2016.
Regarding federal budget prospects, Hewson suggested that a long-term continuation of the continuing resolution that the government is operating under will result in a “lack of budget clarity that will have longer-term consequences for our armed forces and industry.” A continuing resolution limits federal funding to the previous fiscal year’s levels and prevents the start of new programs.
She’s hopeful that Congress will pass a defense appropriations bill for the ongoing FY ’17, adding that there are specific benefits to Lockheed Martin programs in the legislation. She noted that appropriations bill includes funding for Black Hawk helicopters and additional F-35s.