Lockheed Martin [LMT] on Tuesday posted higher sales and lower net income in its second quarter although the bottom line improved from a year ago after excluding profits from a business segment that was divested last summer.
Net income fell 7 percent to $942 million, $3.23 earnings per share (EPS), from just over $1 billion ($3.32 EPS) a year ago, topping consensus estimates by 12 cents per share. Net income a year ago benefited from a $122 contribution (39 cents EPS) from the former Information Systems & Global Solutions business, which Leidos [LDOS] acquired in August.
Sales in the quarter increased 10 percent to $12.7 billion from $11.6 billion.
The top line growth was driven primarily by strong sales gains in the Aeronautics segment, which was mainly led by higher deliveries and sustainment activities on the F-35 fighter program, and to a lesser degree the mix of C-130 configurations that were delivered, and higher deliveries and sustainment activities for the C-5 transport.
The company remains on track to deliver 66 F-35s this year, 61 of which are being built at the Fort Worth, Texas, plant, and the remainder at international locations, Bruce Tanner, Lockheed Martin’s chief financial officer, said on an earnings call.
Sustainment activities for the F-35 are growing in the high-teen percentages, a pace that will continue for the next several years, as the aircraft make their way to more bases in the United States and overseas, Tanner said. Overall, the F-35 sustainment business is about 20 to 25 percent of the production volume, he said.
Sales also benefited from the company taking a majority stake last August in the AWE atomic weapons management joint venture for the United Kingdom Ministry of Defence, a business that is reported in the Space Systems segment. Sales at the Rotary and Mission Systems segment were due to adjustments related to the acquisition of Sikorsky in 2015, work on C4ISR and undersea systems and sensors programs, and higher commercial aircraft deliveries.
Operating profit was up at Aeronautics, Missiles and Fire Control, and Rotary Mission Systems, due to the F-35 and C-5 programs, milestone achievements on an international air and missile defense program, higher risk retirements on Sikorsky helicopter programs, and improved performance on the international EADGE-T contract, which recorded a charge in the first quarter.
Lockheed Martin increased its sales and earnings guidance for 2017 due to stronger than expected results in the second quarter. Sales are now expected to be between $49.8 billion and $51.1 billion, up $300 million on the low end and $400 million on the high end of earlier projects, driven by an improved outlook in the Space Systems segment, some of it due to classified programs, Tanner said.
The forecast for operating profit by $60 million to between $5.6 billion and $5.7 billion due to improved performance at the Aeronautics segment and higher volume at Space Systems, and a decrease in previously recorded reserves. The outlook for per share earnings is 15 cents EPS higher at between $12.30 EPS and $12.60 EPS.
Free cash flow in the quarter was nearly $1.3 billion. Backlog at the end of June stood at $92.1 billion, down from $96.2 billion in the first quarter. In early July, Lockheed Martin received two large orders totaling more than $9 billion, which would have put backlog above $100 billion. The company received a $5.6 billion contract from the Pentagon for74 F-35 aircraft under lot 11 of low-rate initial production (LRIP), and a $3.8 billion multi-year contract from the Army for Black Hawk helicopters.
So far under LRIP 11, 91 aircraft have been authorized, Marillyn Hewson, Lockheed Martin’s chairman, president and CEO, said on the earnings call. That is 36 more aircraft than under the LRIP 10 order, she said. An additional F-35 order for international customers is expected later in the third quarter, she said.