Lockheed Martin [LMT] on Tuesday reported higher earnings in the second quarter due to a swing to pension income and the company increased its profit guidance for the year as a result of stronger than expected operating performance in the first half of 2014 and because of better than expected pension income in the second half of the year stemming from a recent decision to alter its retirement plans.
Net income rose 3 percent to $889 million, $2.76 earnings per share (EPS), from $859 million ($2.64 EPS), topping consensus estimates by a dime. The increase was driven by $85 million of pension income in the quarter versus $120 million in pension expense a year ago and because operating profits in the Space Systems segment and, to a lesser extent, the Aeronautics segment, were better than anticipated.
At the segment level, overall operating profits fell 8 percent to $1.4 billion as an increase in the Aeronautics segment was more than offset by declines in the other four segments. Segment margins fell a percent to 12.4 percent.
The Aeronautics business benefited higher operating profits in the F-35 and F-22 fighter programs and the C-130 tactical airlifter program, which overcame declines related to the F-16 fighter program.
Sales fell a percent to $11.3 billion from $11.4 billion, with international business accounting for about 20 percent of the business, with the goal even “higher,” Bruce Tanner, Lockheed Martin’s chief financial officer, said on the investor call. If orders and backlog come in as expected, he expects international business to be even higher in future years.
“Aspirationally, we are going to continue to grow in our international area,” Marillyn Hewson, Lockheed Martin’s chairman, president and CEO, said on the call. We are very much focused on that expansion of our business. It is where the growth opportunities are for us.”
Hewson, who was in the United Kingdom last week for a pair of international air shows, said that based on meetings with current and prospective customers “my impression is that demand for our portfolio of products is strong and growing. We see broad based customer interest in areas ranging from fighter and cargo aircraft to missile defense systems, tactical missiles, C4ISR and IT (information technology) solutions.”
Over the next five years the nearly 50 percent of F-35 orders will be from international customers and global demand is increasing for missile defense capabilities, Hewson added.
With international business at the company’s target of 20 percent, Hewson and Tanner suggested that a new goal will be announced this fall with the release of third quarter results.
The Aeronautics segment boasted strong revenues, up 13 percent to $3.9 billion on the strength of the F-35 production and development contracts, the F-22, and the C-130 and C-5 air mobility programs. While revenues at the Mission Systems and Training segment held steady at $1.8 billion, Information Systems & Global Solutions, Missiles and Fire Control, and Space Systems all posted declines that drove the company’s overall sales down.
Based on the better than expected operating performance at Space Systems and Aeronautics in the first half of the year and boost from pension income due to a planned freeze in company’s defined benefit plan, Lockheed Martin raised its earnings guidance for the year by 35 cents EPS to between $10.85 and $11.15.
Backlog at the end of the quarter stood at $77.8 billion, down from $82.6 billion since the end of 2013. Free cash flow in the quarter was $827 million and the company increased its outlook for cash from operations this year by $100 million to at least $4.8 billion.