Lockheed Martin [LMT] on Tuesday reported strong second quarter financial results driven by higher sales, lower taxes, a pension benefit and improved operating performance.
Net income increased 26 percent to $1.2 billion, $4.05 earnings per share (EPS), from $955 million ($3.28 EPS) a year ago, topping consensus estimates by 13 cents per share. Earnings were higher despite a $76 million (26 cents EPS) after-tax charge related to severance expenses and restructuring activities.
Sales increased nearly 7 percent to $13.4 billion from $12.6 billion a year ago.
The Aeronautics, Missiles and Fire Control, and Rotary and Mission systems segments drove the top line growth, with F-35 production, F-22 sustainment, THAAD and PAC-3 missile defense programs, LANTIRN and SNIPER targeting pods, radar surveillance systems, Aegis radar, and C6ISR programs all contributing to the gain.
Bruce Tanner, Lockheed Martin’s chief financial officer, on the company’s earnings call cited three “factors” that drove the sales growth in the quarter. First, he said, is higher than planned win rates, noting, that the company typically wins around 65 to 70 percent of the competitions it enters but achieved higher, particularly in the Missiles and Fire Control segment.
The second factor is awards coming sooner than planned, and third, is unplanned awards related to the fiscal year 2018 Omnibus spending bill that was approved in March. Tanner said it has been a “surprise” how quickly FY ’18 funds have been put under contract.
There hasn’t been a pull forward in contract awards, Tanner said, adding that the work is a benefit for the company this year and in the future. He also said that there have been fewer post-award delays, such as protests, to contract wins, leading to sales sooner.
All four of the company’s business segments generated better operating profits on a variety of programs, including F-35 production and sustainment, LANTIRN and SNIPER, THAAD and PAC-3, radar surveillance and Aegis, and C6ISR activities. Total segment operating margin improved 20 basis points to 10.9 percent.
Tanner said the company continues to forecast improvements in operating margin on its F-35 production program, which currently is set to peak in 2023 under the planned program of record. Tanner said the program of record beyond 2023 isn’t known yet, but that the company has production capacity to produce above the 2023 planned levels.
In the quarter, Lockheed Martin delivered 25 F-35s and is on track to deliver 91 this year, Marillyn Hewson, the company’s chairman, president and CEO, said on the call. Overall, the company has delivered 305 F-35s to various customers, she said.
Tanner said the company and Defense Department are in the “final throes” of negotiations on the definitized Lot 11 contract for low-rate initial production of the F-35. The contract will contain improved profit margin on the program, he said, although the impact in 2018 won’t be “consequential,” he said.
Once the Lot 11 award is completed, Lockheed Martin and DoD will turn to a block buy for Lots 12 through 14, which will generate cost savings throughout the supply chain, Tanner said.
Better than expected results through the first half of the year combined with an improved outlook for the second half led Lockheed Martin to raised its sales and earnings guidance for 2018. Sales are now expected to range between $51.6 billion and $53.1 billion, about $1.2 billion higher than the prior outlook.
Net earnings for the year are forecast to range between $16.75 EPS and $17.05 EPS, 95 cents EPS higher than previous guidance. The company said most of the increase in profit outlook is due to improved operational performance, followed by a lower tax rate. The outlook for cash from operations was also raised by $300 million to at least $3.3 billion.
Free cash flow for the quarter was a $336 million outflow. Total backlog at the end of the second quarter stood at $105 billion, down nearly $500 million since the end of 2017.