Lockheed Martin [LMT] on Tuesday posted higher net profits in the third quarter due to a swing to pension income although sales fell slightly.
Net income increased nearly 2 percent to $888 million, $2.76 earnings per share (EPS), from $873 million ($2.66 EPS) a year ago, beating analysts’ estimates by 4 cents per share. The increase was driven by $84 million in pension income versus a $121 million expense a year ago. Net income would have been $35 million higher but for new pension legislation approved this summer that lowers pension recovery expenses.
Sales fell 2 percent to $11.1 billion from $11.3 billion a year ago.
The top and bottom line results were similar to the second quarter when the company’s earnings benefited from a swing to pension income and sales dipped a percent.
The nation’s largest defense contractor tightened its financial guidance for the year toward the high end for earnings and sales and introduced general expectations for 2015 based on trends.
Sales for 2014 are expected to be about $45 billion, just below the high end of the previous guidance range of $44 billion to $45.5 billion provided three months ago.
The company this year will achieve a target it set several years ago of achieving 20 percent of its sales from international business, Marillyn Hewson, Lockheed Martin’s chairman, president and CEO, said on an analyst call. Hewson is “increasingly confident” that international sales could account for at least 25 percent of the company’s business in the next few years, driven by demand for the F-35 fighter and missile defense systems.
Net income is expected to be around $11.15 EPS, right at the top of the earlier guidance that had a $10.85 floor. Cash from operations is expected to be at least $3.8 billion, $1 billion less than prior guidance due to a previously unexpected $1 billion payment to the company’s pension plan in the fourth quarter.
The $1 billion contribution to the company’s pension plans in the fourth quarter, which stems from the pension legislation, means the Lockheed Martin won’t have to make contributions to its plans between 2015 and 2017, a “pension holiday” that will result in generating at least $15 billion of cash from operations in that period, Bruce Tanner, the company’s chief financial officer, said on the earnings call. This means more opportunities to return cash to shareholders, he said.
Hewson said that with the strong cash position in the coming years the company plans to reduce its overall stock share count to below 300 million shares through buybacks that combined with dividend payments will mean most of its free cash flow will be returned to shareholders. The company expects to end this year with about 316 million shares outstanding.
For 2015, Lockheed Martin offered “financial trends,” which include sales declining at a low-single digit rate versus 2014, which is “a little lower than we previously expected,” Tanner said. The company had thought that the impacts of sequestration would bottom out in 2014 but that will now happen in 2015 as “we continue to see downward pressure, primarily in our services businesses,” he said.
Total business segment operating margin of between 11.5 and 12 percent is expected in 2015 with upside potential, Tanner said. Pension income is supposed to rise next year, he also said. For now, margin erosion that is forecast for 2015 is due to lower equity earnings from the company’s
United Launch Alliance joint venture with Boeing [BA], lower profit rates early on in international multi-year contracts, costs associated with recent acquisitions, and higher research and development expenses in energy businesses.
At the operating level, the decline in third quarter sales was driven by lower revenues in four of the company’s five segments, Aeronautics, Information Systems & Global Solutions, Missiles and Fire Control, and Mission Systems and Training. Only Space Systems posted an increase, up 4 percent to just over $2 billion due to launch related activities on commercial space programs, higher volume on NASA’s Orion spacecraft, and recent acquisitions.
As for operating income, Space Systems basically held level while the other segments all declined. Some of the drivers for the lower operating profits include the C-130 airlifter program, completion of command and control programs and the drawdown of in-theater forces, technical services programs, and lower risk retirements on radar surveillance programs and the F-35 Joint Strike Fighter.
Backlog at the end of the third quarter stood at $76.5 billion, down 7 percent from $82.6 billion at the end of 2013.