Lockheed Martin [LMT] blew open the door in its first quarter financials with a strong showing across all of its operating segments and the company increased its guidance for earnings, sales and cash this year.
Net income jumped a whopping 42 percent to $1.7 billion, $5.99 earnings per share (EPS), from $1.2 billion ($4.02 EPS) a year ago, smashing consensus estimates of $4.34 EPS. Strong gains in operating income at the segment level combined with a pension tailwind, lower taxes, and a deferred gain from the sale of properties in 2015 drove the earnings result.
Sales increased 23 percent to $14.3 billion from $11.6 billion a year ago, with all four of the company’s segments up double digits. The company also benefited from having an extra week in the accounting period.
At the operating level, all four segments boosted their profit by at least 22 percent, with Missiles and Fire Control (MFC) up the highest at 60 percent and Rotary and Mission Systems holding the low rung. Income drivers across the company were many, including the F-35 Joint Strike Fighter for increased production and higher risk retirement on the production and sustainment efforts, international sales and risk retirement on the THAAD and PAC-3 missile defense programs and precision fires programs, radar surveillance systems, the Advanced Extremely High Frequency and GPS III satellite programs, government satellite services and NASA’s Orion spacecraft program.
Overall operating margin increased around 2 percent to nearly 12 percent.
The company was able to pull-forward some risk retirements in programs that it had planned for later in the year, Kenneth Possenriede, Lockheed Martin’s chief financial officer, said during the earnings call.
Top line growth drivers were also broad-based. Sales were up on the F-35, classified development work in the Aeronautics segment, F-22 fighter modernization and sustainment, precision fires, THAAD and PAC-3, sensor and sustainment work on the Apache-64 helicopter program and Special Operations Forces global logistics support, a radar surveillance system at RMS, the combat rescue helicopter program, the Multi-Mission Surface Combatant for Saudi Arabia, Next Generation Persistent Overhead Infrared, AEHF, GPS III, government satellite services and Orion.
Asked on the company’s earnings call about the Pentagon’s plans to reduce planned purchases of the F-35 in fiscal year 2020 and concerns about future purchases from Turkey, Italy and Canada, Lockheed Martin Chairman, President and CEO Marillyn Hewson replied that the demand signals for the fifth-generation fighter keep growing.
She said the Defense Department has been “very clear” that overall planned buys of the aircraft haven’t changed, noting that “how they manage what they buy year to year, that’s always been a challenge as they look at what their overall needs are relative to the budgets that they have to work with.”
The Air Force is reducing its buy of planned F-35s in FY ’20 in favor of a new
Boeing [BA] variant of the F-15 strike fighter, the F-15EX.
Hewson added that more countries are expressing an interest in the F-35, including Poland and Romania, and that existing international partners are seeking more aircraft. The current program of record is around 3,300 F-35s and the demand interest is beyond that, she said.
The company delivered 26 F-35s in the first quarter compared to 14 a year ago, Hewson said in her scripted remarks.
Possenriede said that the unit price for the F-35A is on a “path” to fall below $80 million with the Low Rate Initial Production 14 order in FY ’20, which will be delivered in 2022. He also said the sustainment costs are on track to get to $25,000 per flight hour by 2025.
Later in the call, he said sales from F-35 sustainment will grow double-digits and that this growth will continue, including through modernization of already fielded aircraft.
The strong first quarter results combined with expectations led Lockheed Martin to increases its financial guidance. Sales are now forecast to be between $56.8 billion and $58.3 billion, up a billion from the prior outlook, and earnings are projected to be between $20.05 and $20.35 EPS, 90 cents per share higher than guidance given in January. The top and bottom line guidance is higher across the company’s segments than the prior outlook.
Strong order intake drove backlog to a record $133.5 billion at the end of the quarter, which Hewson said sets the company very well for the next few years. An $800 million Navy award for work on hypersonic weapons in the quarter increased the company’s overall awards to date in this space to more than $2.5 billion across the corporation, Hewson said.
Threats are driving the market for hypersonic weapons and countermeasures, she said.
Free cash flow in the quarter was $1.4 billion and the company increased its guidance for operating cash flow for the year by $100 million to greater than or equal to $7.5 billion.