Lockheed Martin [LMT] on Tuesday reported higher sales and earnings in its second quarter and increased its outlook this year for sales and earnings.
Net income in the quarter surged 10 percent to $1 billion, $3.32 earnings per share (EPS), from $929 million ($2.94 EPS) a year ago, well ahead of consensus estimates of $2.94 EPS. The bottom line results benefited from a pension tailwind, an accounting change, and a slight increase in segment operating profit.
At the operating level, Lockheed Martin’s Information Systems & Global Solutions (IS&GS) segment led the way with a 41 percent gain in profit to $151 million due to contract closeouts, improved performance, and the absence of charges compared to a year ago. The merger of IS&GS with Leidos [LDOS] is expected to close in the third quarter, Lockheed Martin said.
Net income was also aided by strong profits at the Space Systems and Aeronautics segments. Space profit was up on the United Launch Alliance joint venture with Boeing [BA] and Aeronautics benefited from increased production, sustainment activities and risk retirement on the F-35 Joint Strike Fighter program.
Overall operating segment margins dipped a percent in the quarter to 11 percent from a year ago.
Sales in the quarter increased 11 percent to $12.9 billion from $11.6 billion a year ago, with the acquisition of helicopter manufacturer Sikorsky Aircraft last year making up most of the increase, $1.2 billion.
Higher sales at Aeronautics from F-35 activities and the Missiles and Fire Control segment on Patriot PAC-3 deliveries, SNIPER fire control systems, and a logistics support contract for Special Operations Forces also contributed to the top line increase at the company.
Lockheed Martin said it continues to spend its own funds related to low-rate initial production (LRIP) contracts for the Pentagon’s F-35 Lot 9 and 10 buys in excess of government payments, which the company says so far are “insufficient to cover the production process.” Thorough June 26, the company “has approximately $900 million of potential cash exposure and $3 billion in termination liability exposure related” to the two LRIP contracts, it said.
Bruce Tanner, Lockheed Martin’s chief financial officer, said on the earnings call that he’s “optimistic” the government will provide cash soon under the two F-35 contracts. Without this cash infusion, he warned that “at some point in the future, because of the growth that we see over the next few months,” the company is going to be paying $400 million to $500 million per month “sorts of levels,” to keep the program going and “we will not be able to sustain that.”
Marillyn Hewson, Lockheed Martin’s chairman, president and CEO, said on the call that the company is on track to meet its target of 53 F-35 deliveries this year.
Results in the quarter topped the company’s own expectations, leading it to raise its guidance for the year. Sales are now expected to be between $50 billion and $51.5 billion, a $400 million increase from the prior outlook due mainly to higher projects in Aeronautics and to a lesser extent Space Systems.
The outlook for segment operating profit was raised by $125 million to between $5.2 billion and $5.3 billion and earnings guidance was increased by 65 cents EPS to between $12.15 EPS and $12.45 EPS. The increase in earnings projections is largely due to the accounting standard change that also helped boost second quarter results and to a lesser extent the improved outlook for segment profit.
Free cash flow in the quarter was nearly $1.3 billion and the company returned $1 billion to shareholders split evenly between dividends and share repurchases. Backlog at the end of the quarter stood at $96.4 billion, down from $99.6 billion at the start of the year.