Lockheed Martin [LMT] on Tuesday posted double-digit percentage gains to its top and bottom lines in the second quarter driven by strong operating results across its business segments and the company raised guidance for sales, earnings and cash for 2020.
Lockheed Martin was able to shrug off negative impacts from the ongoing COVID-19 pandemic, which it said impacted each of its business areas and led to higher costs, supplier delivery delays, continued teleworking and altered work schedules, travel restrictions and the inability to access some work locations. The company said its and the government’s “proactive efforts” to help suppliers mitigated supply chain disruptions and it also benefited from favorable contract timing and strong operating performance.
From the time COVID-19 was declared a pandemic through the end of June, Lockheed Martin accelerated $1.3 billion in payments to its suppliers to minimize supply chain disruptions. These funds came from accelerated progress payments made by the Defense Department and from cash on hand, the company said.
Net income climbed nearly 13 percent to $1.6 billion, $5.79 earnings per share (EPS), from $1.4 billion ($5.00 EPS) a year ago, topping consensus estimates by seven pennies per share.
The only dent in the company’s earnings was a $96 million (34 cents EPS) non-cash charge related to a decision to an agreement to sell its interest in the Advanced Military Maintenance Repair and Overhaul Center joint venture. Lockheed Martin said it is selling its stake for $307 million.
Sales in the quarter rose more than 12 percent to $16.2 billion from $14.4 billion a year ago.
The strong earnings were driven by robust operating income gains at the Rotary and Mission Systems, Aeronautics, and Missiles and Fire Controls segments. Lockheed Martin highlighted risk retirements and volume on the F-35 fighter program, improved performance on a Army sustainment program, higher volume and risk retirement on the VH-92A presidential helicopter program, work on international Patriot Advanced Capability (PAC)-3 and Terminal High Altitude Area Defense (THAAD) programs, risk retirements on classified tactical and strike missile programs, and risk retirements on energy programs as driving the gains.
All four of Lockheed Martin’s business segments contributed to the top line increases, led by the Aeronautics segment, which benefited from F-35 production, development and sustainment, and classified development contracts. Other contributors included PAC-3, THAAD, the High-Mobility Artillery Rocket System, the Seahawk and VH-92A helicopter programs, the Next Generation Overhead Persistent Infrared satellite program, and hypersonic development programs.
The Aeronautics segment, which Lockheed Martin officials said during the company’s first quarter earnings call in April is the most susceptible to supply chain disruptions from the pandemic, instituted a rotational facility plan for the F-35 production line that is allowing production to continue while social distancing and deep cleaning practices are in effect, James Taiclet, the company’s new president and CEO, said during an analyst call.
Based on results so far and expectations going forward, Lockheed Martin increased its earnings guidance by a dime to between $23.75 and $24.05 EPS, sales guidance by $1 billion to between $63.5 billion and $65 billion, and cash from operations by $400 million to at least $8 billion.
Still, Lockheed Martin said uncertainty remains related to potential COVID impacts.
Already, supply chain risks around the company’s F-35 production effort with about a $200 million sales impact in the second half, Ken Possenriede, Lockheed Martin’s chief financial officer, said on the earnings call. This impact is factored into the outlook, he said.
Overall, impacts from COVID-19 to the company and suppliers are further out than originally thought, some of it in the fourth quarter and more of it in 2021, Possenriede said. If there isn’t another major federal stimulus to mitigate the effects of the pandemic on the economy, he said the company will work with its customers on a “case-by-case basis” to review impacts. If there isn’t funding for this, then some of the impacts can be made up through forward pricing, he added.
Taiclet said that the company is reviewing its options in case there is a downturn in defense spending due to a change in administrations after the upcoming presidential election. He said the company remains well positioned regardless of the trend lines in defense spending, due to the company’s programs being aligned with the National Defense Strategy and a backlog that reached a record $150.3 billion at the end of the quarter, marking eight straight quarters of record growth and up from $144 billion since the end of 2019.
If spending declines, Taiclet said a silver lining in the downturn might be acquisition and joint venture opportunities if the prices of potential assets fall.
Free cash flow in the quarter was $1.8 billion and orders were nearly $22 billion.