A good 2019 keeps rolling for Lockheed Martin [LMT] as the company reported strong increases in earnings and sales in its second quarter, building on handsome gains in the first quarter.

The strong results led the company to increase its guidance for sales, earnings and cash this year.

Net income in the quarter increased 22 percent to just over $1.4 billion, $5 earnings per share (EPS), from just under $1.2 billion ($4.05 EPS) a year ago. Each of the company’s operating segments contributed to the gain and the results also benefited from a severance charge a year ago that didn’t recur.

The earnings results beat consensus estimates by 16 cents per share.

Sales increased 8 percent to $14.4 billion from $13.4 billion a year ago.

At the operating level, higher sales were driven by double-digit percentage gains at the Missiles and Fire Control (MFC) and Space segments, which were up on precision fires, new hypersonic missile programs, classified, work, a Special Operations Forces logistics contract, AH-64 Apache helicopter work, the Next Generation Overhead Persistent Infrared satellite, GPS III satellite, government satellite services, and hypersonic programs. Sales were up single digits at Rotary and Missions Systems, and Aeronautics on the Multi-Mission Surface Combatant, Littoral Combat Ship (LCS), Aegis combat system, training and logistics, and F-35 fighter production, development and sustainment.

All of the company’s operating segments posted higher operating income, led by MFC, which was hit a year ago on charges on the Warrior Capability Sustainment program. At the other segments, F-35 production, lower commercial satellite charges, increased government satellite services, GPS III, the Advanced Extremely High Frequency Satellite, radar surveillance systems, Aegis and LCS all contributed to the bottom-line gains.

Through the first two quarters of 2019, Lockheed Martin’s sales are up 15 percent to $28.8 billion and net income is up 35 percent to $3.1 billion, leading the company to again raise its guidance for the year. Sales this year are now forecast to be between $58.3 billion and $59.8 billion, a $1.5 billion increase from the prior guidance in April. Each of the company’s segments are contributing to the improved outlook.

The higher sales, combined in part with better than expected performance and to a lesser extent a lower tax rate, led the company to increase its segment operating income guidance by $225 million to between $6.3 billion and $6.5 billion. Per share earnings are now forecast to be 80 cents higher at between $20.85 and $21.15.

Operating cash flow is now projected to be $100 million higher to at least $7.6 billion.

Backlog at the end of the second quarter stood at a record $136.7 billion, up $6.2 billion from the start of the year, showing that the company is poised for “very strong performance in the next few years” with upside coming from new program wins, Lockheed Martin Chairman, President and CEO Marillyn Hewson said on the company’s analyst call.

The proposed two-year budget deal announced Monday that was negotiated between the White House and House Speaker Nancy Pelosi (D-Calif.) that would eliminate potential budget caps and allow for higher defense spending in fiscal year 2020 is an “encouraging step” toward buying new military systems and investing in defense, Hewson said. Congress still has to agree to the budget deal.

Hewson was asked during the analyst call about revenue visibility due to the budget deal and she replied that it’s still too early for the company to forecast its growth expectations in 2020. That outline will come in the third quarter earnings call in October.

“Talking about budgets maybe gives us a better sense of what our customers will have in terms of where they would make their decisions,” Hewson said. “We will have to see how it plays out in terms of what that means for Lockheed Martin. I mean for the current budget negotiations, it appears that our programs are well supported but again we’ll just have to wait until Congress gets through its process and closes on that.”

The strong backlog has been driven by strong order flow, and the company is about $11 billion ahead of its expected bookings, Ken Possenriede, the company’s chief financial officer, said on the call.

On the F-35 program, Hewson shrugged off negatives associated with the U.S. canceling planned sales of the fifth-generation fighter aircraft to NATO ally Turkey after that country began accepting advanced air defense systems from Russia. Of the 100 F-35s that Turkey planned to acquire, only 24 are in the upcoming block buy contract that will cover lots 12, 13 and 14, she said.

That contract, which the company hopes to be definitized in the third quarter for 478 aircraft, will be the largest so far for the F-35 and largest ever for the Pentagon, Hewson said.

Lockheed Martin-built F-35. The company expects to definitize a contract for more than 470 of the aircraft during the third quarter. Photo: Lockheed Martin

The unit price for the F-35A variant in Lot 13 will be less than $80 million, reaching that cost milestone a year sooner than planned, Hewson also said. At that price target, the cost for the aircraft will be “equal to or lower than legacy fourth-generation aircraft, making this platform the best value fighter jet available in the world,” she said.

Global demand for the F-35 remains higher than the program of record and Hewson believes that lost sales to Turkey could be made up elsewhere.

Having known for a while the sales to Turkey could collapse, Hewson said the company has been working for months on finding new suppliers for the aircraft parts that are made in that country. The company has until March 2020 to resolve these issues and pointed out that the Defense Department is seeking to reprogram funds to help mitigate risks here.

Possenriede said that if there is “any harm to industry,” stemming from the Turkish cancellation, “we will be compensated for that” by DoD.

Free cash flow in the quarter was $1.4 billion and segment operating margin dipped 10 basis points to 10.8 percent. Total operating margin was up a half-percent to 13.9 percent.