By Calvin Biesecker
Lockheed Martin [LMT] yesterday posted strong second quarter earnings due to big gains at its Space and Information Systems segments and the world’s largest defense contractor raised its profit forecast for the year due to previous land sale, lower interest expense and improved performance.
Net earnings increased 13 percent to $882 million, $2.15 earnings per share (EPS), from $778 million ($1.82 EPS), handily beating consensus estimates by 27 cents EPS. About half of the earnings beat was due to a reversal of reserves taken for a prior year land sale. Segment operating margins increased to 11.9 percent. Free cash flow was $1.3 billion.
Sales rose 4 percent to $11 billion from $10.7 billion a year ago, driven mainly by gains in the Information Systems and Global Services (IS&GS) segment and to a lesser extent increases in the Electronic Systems and Space Systems segments, which more than offset an expected decline in the military aircraft making business.
Operating profits at the Space Systems business were up a handsome 25 percent on a 6 percent hike in sales, driven by higher earnings in the United Launch Alliance joint venture with Boeing [BA], higher sales on NASA’s Orion Crew Exploration Vehicle, a boost from a terminated commercial launch vehicle service contract and improved performance on commercial satellite activities. However, space profits are expected to decline in the second half of the year as no commercial satellite launches are planned versus three in the second half of 2007, Bruce Tanner, Lockheed Martin’s chief financial officer, said during yesterday’s investor call.
At IS&GS, operating profits rose 18 percent on a 13 percent increase in sales due to higher revenues from information technology programs, the benefit from a contract restructuring in the first quarter, better performance on secure enterprise solutions and mission and combat support solutions activities.
The Electronic Systems segment turned in solid results all around. Sales and profits were both up 6 percent, led by higher volume in fire control and tactical missile programs, undersea systems, surface systems and radar systems. These increases were partially offset by declines in an international program within the Platform, Training & Energy business area.
Tanner said the international program, which concerns an electronic warfare contract that has faced demanding requirements, appears to be progressing well now. He cited that program, and trouble with an upgrade effort for the Air Force’s C-5 transport aircraft, as the only problem programs the company is facing. The C-5 effort faced tooling expenditures and learning curve issues in the transition from development to installation, he said.
The C-5 issue was one reason that profits in the Aeronautics segment sagged 3 percent in the quarter. Another was a decrease in revenues on the F-16 fighter program. However, the company’s large installed base of fighter and transport aircraft in the U.S. and internationally helped offset some of the profit decline through increased sustainment activity. Still, aircraft sales overall fell 8 percent.
The F-35 Joint Strike Fighter flight test program for both the conventional and short take-off and vertical landing variants continues to go well, Tanner said. The next major program milestone will be the start of flight testing early next year for the carrier variant of the aircraft, he said. Work on the remaining 17 development aircraft is also going well, he added.
As for Lockheed Martin’s F-22 fighter program, which the Pentagon currently plans to terminate production when the last aircraft is built in 2011, Tanner said the company will need a decision sometime in the FY ’09 budget timeframe from the government if it is going to extend the production run. He said the company would not build any aircraft on the bet that the Air Force will eventually pay for them nor would it invest a lot of resources to keep the production line viable while the Pentagon decides its future course of action.
Given the strong quarter, Lockheed Martin upped its financial guidance for the rest of the year. Earnings per share are expected to be 30 cents higher on the low end of previous guidance and 25 cents higher on the upper end to between $7.45 and $7.60. About half of the increase is from the gain due to the previous land sale. The remainder is due to improved operating performance at Aeronautics, Electronic Systems and IS&GS and lower interest expense. Sales are expected to be $100 million higher, to between $41.9 billion and $42.9 billion, due to the recent acquisition of the Eagle Group.
Backlog has declined $2.2 billion to $74.5 billion since the start of the year but Tanner said that there will be year-over-year growth here.
As for cash deployment, the company continued to balance its use of cash among share repurchases, dividends, debt repayments, acquisitions and capital expenditures. Moving forward Tanner sees the possibility for two to four small acquisitions in the second half of 2008.