Lockheed Martin [LMT] yesterday posted a gain in its earnings from continuing operations in the second quarter due to higher profits in each of its operating segments while sales increased due to growth at the Aeronautics and Electronic Systems segments.
Net income was actually down 10 percent to $742 million, $2.14 earnings per share (EPS) from $824 million ($2.22 EPS) a year ago when the company earned $110 million from business units it no longer owns. Excluding the discontinued operations, income rose 4 percent to $742 million ($2.14 EPS) from $714 million ($1.92 EPS), smashing consensus estimates of $1.94 EPS.
To boost its earnings from continuing operations, the company overcame higher pension costs and severance charges that were partially offset by a tax benefit in the quarter. Higher pension expenses reduced earnings by $142 million in the quarter versus a $68 million headwind a year ago. Severance charges associated with recent layoff announcements at the Aeronautics and Space Systems segment totaled $97 million, reducing earnings by $63 million, while the tax benefit was $89 million.
Bruce Tanner, Lockheed Martin’s chief financial officer, said on the company’s earnings call that profit gains stemmed from higher sales, improved segment operating margins, and the impact of the tax benefit offsetting the impact to earnings from the severance charges.
All four of Lockheed Martin’s operating segments had profit gains, led by Aeronautics which benefited from hitting milestones on the C-130J tactical airlifter and other programs.
The Space Systems segment benefited from higher earnings at the United Launch Alliance joint venture with Boeing [BA] while Electronic Systems benefited mainly from higher volume and production milestones on the Patriot Advanced Capability (PAC-3) air defense program.
Sales nudged up just over 2 percent to $11.6 billion from $11.3 billion. Lockheed Martin attributed the growth to higher volume on the F-35 Joint Strike Fighter, the C-5 strategic airlifter modernization program, C-130J and support activities for the F-16 fighter. Air defense programs such as PAC-3 and the Terminal High Altitude Area Defense as well as increased deliveries of tactical missiles such as Hellfire and more volume on logistics activities contributed to the revenue growth.
For the year, Lockheed Martin increased its earnings expectations by 40 cents EPS on the low end of the range and 30 cents on the high end to between $7.35 and $7.55. Projected earnings are benefiting from higher than expected segment operating profit as well as a reduced share count. The company maintained the mid-point of its sales guidance but narrowed the range to between $46 billion and $47 billion.
Free cash flow in the quarter was $696 million and backlog at the end of June stood at $77.3 billion, down $1.1 billion since the beginning of the year.
Bob Stevens, Lockheed Martin’s chairman and CEO, spent more than 10 minutes on the earnings call reviewing the company’s marquis program, the F-35. Through June, flight-testing is 18 percent ahead of the plan and test point achievements are 30 percent ahead of plan, he said.
Stevens acknowledged a new estimate by the F-35 Joint Program Office that puts the costs for the first three production lots, 31 aircraft in all, as much as $900 million over target. These estimates assume “worst case conditions” with about 50 percent of the overrun related to program execution and the other half due to concurrency in the test program and the start of production, he said.
Lockheed Martin “accepted challenging cost targets” but has been “unable to meet all of the challenges” and is “sharing in any of the overruns,” Stevens said. He added that the company has identified about $200 million in cost avoidance opportunities through the first three production lots that are under evaluation by the customer.
Stevens also discussed a recent Pentagon estimate that models the sustainment costs of Defense Department’s fleet of F-35s, 2,443 in 107 squadrons at more than 50 cites globally, at $1 trillion over 50 years. Stevens said the estimate includes myriad variables and assumptions about wage rates, fuel costs, inflation, basing and more, adding that he thinks it may be the first program with such an extensive estimate.
Still, Stevens said it is “my sense” that if the F-35 sustainment estimate is compared to other aircraft, the results would be “similar if not greater,” not to mention that the F-35 provides greater systems benefits and capabilities. Still, regarding the $1 trillion estimate, Stevens said that “No one will accept this outcome.”