Lockheed Martin [LMT] yesterday reported higher second quarter sales and income with three of the company’s four reporting segments adding to both the top and bottom lines and the company raised its earnings guidance for the year due to better operating performance.
Net income increased 5 percent to $748 million, $2.38 earnings per share (EPS), from $742 million ($2.14 EPS), soaring above consensus estimates of $1.91 EPS. Sales increased 3 percent to $11.9 billion versus $11.5 billion a year ago.
The company’s Aeronautics, Electronic Systems and Space Systems segments drove the gains in the quarter with all three posting higher sales and operating profits, with segment operating margins improving 60 basis points to 12.3 percent due to operating improvements.
Aeronautics and Electronic Systems each posted double-digit profit gains due to profit adjustments related to retiring risk on several programs including the C-130 transport plane, F-35 Joint Strike Fighter low rate production contracts, the persistent threat detection system (PTDS), Vertical Launch and Multiple Launch Rocket Systems, and fire control systems. Higher F-16 aircraft deliveries and a contract resolution on the F-22 fighter program also contributed to the higher profits.
Profits on the F-35 development contract were below the company’s expectations as the company has reduced its profit booking rate, resulting in a one-time charge in the quarter that isn’t expected to be repeated. Bruce Tanner, Lockheed Martin’s chief financial officer said on yesterday’s earnings call that the government has no plan in place for how the company can earn $500 million in remaining award fees under the development portion of the program “and we are nearing the point where the amount of profit recorded would exceed the amount of fees received to date on the contract. In addition, we’ve been disappointed recently with the amount of fee available to be earned for developmental milestones and the government’s evaluation of our performance against those milestones compared with our own assessment.”
F-35 flight testing is 34 percent ahead of schedule through June with test points 24 percent beyond plan, Chris Kubasik, Lockheed Martin’s president and Chief Operating Officer, said on the earnings call. He also said that the program continues to make progress on the schedule for software development on the F-35.
The Space Systems segment reported a 7 percent increase in operating profits on higher commercial satellite deliveries and profit adjustments and profit adjustments on NASA’s Orion Crew Exploration Vehicle.
On the sales line Space Systems drove the company’s overall gains due to an increase in commercial satellite deliveries, higher volume on Orion and strategic and missile defense programs. Electronic Systems and Aeronautics squeezed out 2 and 1 percent increases in sales on the strength of F-35 aircraft production, F-16 deliveries, PTDS, Littoral Combat Ship, MLRS and the Javelin anti-tank weapons programs.
Growth at aeronautics was dampened by a machinists union strike at the company’s Fort Worth, Texas, facility during the quarter and delays in several international F-16 deliveries. The company says that strike will reduce sales at Aeronautics by about $200 million this year.
Information Systems & Global Solutions was the lone segment to post declines in sales and earnings. The segment is facing tough competition in the form of aggressive bidding by competitors and several of its program wins are being protested but overall the company’s senior management is pleased with its margins, which rose slightly in the quarter, Kubasik said.
IS&GS did see growth in its intelligence business and cyber security work, the company said.
Based on the improved operating performance the company raised its earnings outlook for the year by 20 cents to between $7.90 and $8.10 EPS. Sales expectations remain the same at between $45 million and $46 billion. Kubasik said the outlook is cautious given the likelihood that federal government will begin FY ’13 in October under a continuing budget resolution.
Backlog at the end of June stood at $75.5 billion, down $5.2 billion since the end of 2011. Kubasik said there are opportunities in the second half of the 2012 to build the backlog back to 2011 levels.