Lockheed Martin [LMT] on Tuesday posted strong second quarter results driven by strong top and bottom-line gains in its Aeronautics and Space segments and the absence of a pension-related charge that gouged its earnings a year ago.
Net income more than quadrupled to $1.7 billion, $6.63 earnings per share (EPS), from $309 million ($1.16 EPS) a year ago, topping consensus estimates by 18 cents per share. The improved bottom-line results were due mainly to the absence of pension settlement charges, which lopped nearly $1.2 billion ($4.33 EPS) from earnings a year ago.
At the operating level, double-digit percentage profit gains at Aeronautics and Space more than offset declines at the other segments. Aeronautics benefited from the F-35 fighter and classified programs while Space was up on NASA’s Orion spacecraft and the United Launch Alliance
joint venture with Boeing [BA].
Segment operating margin declined 30 basis points from a year ago to 11.1 percent in the quarter.
Sales in the quarter increased 8 percent to $16.7 billion from $15.4 billion a year ago. The top-line results were driven by F-35 production and sustainment, classified programs, and C-130 sustainment within Aeronautics and at Space on Next-Generation Interceptor development, classified work, the Space Development Agency’s Transport Layer satellites and Orion.
Lockheed Martin expects to deliver between 100 and 120 F-35s this year, including the first aircraft in the Tech Refresh (TR) 3 upgrades, which host updated core processing power, memory capacity and computational core, James Taiclet, chairman, president, and CEO, said during the company’s earnings call. Delivery of the TR3 aircraft could slip into early 2024, he cautioned.
So far, there have been 58 flight tests of the F-35 in the TR3 configuration, including a successful flight in May with the most recent software release, he said. The updated software provides upgraded data links, a new electro-optical targeting system and radar.
Upcoming F-35 TR3 testing will include multi-aircraft missions, sensor fusion and additional weapons with the next software release, Taiclet said.
Backlog at the end of the quarter stood at a record $158 billion, up $8 billion, or 5 percent, from the end of 2022. There were 421 F-35s in backlog at the end of June due to the recent Lot 17 production contract, providing a clearer outlook for production and stability for the supply chain, Jay Malave, the chief financial officer, said during the call.
Another key driver to the record backlog were a $9 billion in record orders at the Missiles and Fire Control segment on demand for the PAC-3 Patriot air and missile defense system, Guided Multiple Launch Rocket Systems, HIMARS, Joint Air-to-Surface Standoff Missile, Long-Range Anti-Ship Missile, and Javelin anti-tank missile, Malave said.
Taiclet said of the $44 billion the U.S. has committed to restore weapons systems it has drawn from to support Ukraine in its war against Russia, about $7 billion “could be allocated” to Lockheed Martin-built systems.
Strong results so far in 2023 coupled with the healthy backlog led Lockheed Martin to increase its outlook for the year with sales expected to reach between $66.3 billion and $66.8 billion, up from the prior forecast of between $65 billion and $66 billion. Aeronautics and Space will drive the improved sales expectations.
On the earnings front, the new forecast is between $27 and $27.20 EPS versus the prior outlook of $26.60 to $26.90 EPS. The lead driver of the improved earning outlook is $100 million in operating profits followed by a reduced share count, lower than expected taxes, and other items.
Free cash flow in the quarter was $771 million and the forecast for at least $6.2 billion this year is unchanged.
During the call, Taiclet was asked by one analyst whether L3Harris Technologies [LHX] has been able to satisfy Lockheed Martin’s concerns over the pending acquisition of rocket and missile propulsion company Aerojet Rocketdyne [AJRD]. Taiclet replied that they “have not received any commitment from L3Harris at this time that would assure us that they are going to AJRD as a merchant supplier and that’s the one thing we really are looking for.”
The main interest in ensuring Aerojet remains a merchant supplier is access to solid rocket motors, he said.
Taiclet also said that Aerojet’s performance has been improving and needs to continue doing so. That means whether on its own or as part of another company, “resources be applied to AJRD’s operations so that it becomes a more capable supplier for on time deliveries, quality, etc.”