Lockheed Martin [LMT] on Tuesday posted higher sales but lower earnings in the third quarter as severance charges and higher corporate expenses more than offset a slight increase in operating profit.
Sales in the quarter rose 3 percent to $11.5 billion from $11.1 billion a year ago, driven primarily by increased production and sustainment activities for the F-35 fighter program, and to a lesser extent by higher deliveries of targeting systems, the start of the Space Fence program, and higher volume on radar surveillance programs and ship and aviation systems programs.
Marillyn Hewson, Lockheed Martin’s chairman, president and CEO, said on the company’s earnings call that company is on track to deliver 45 F-35s this year, a 25 percent increase from 2014. The program accounts for about 20 percent of corporate revenue, she said.
Net income slipped 3 percent to $865 million, $2.77 earnings per share (EPS), from $888 million ($2.76 EPS) a year ago due to severance charges related to the planned elimination of certain positions at the Information Systems and Global Solutions segment and higher corporate expenses for various items. Per share earnings results topped consensus estimates by 4 cents and were also a penny higher than a year ago due to stock repurchases that lowered the company’s overall share count.
At the segment level, before various expenses and other cost adjustments, operating profit was up nearly 2 percent to $1.4 billion, driven primarily by strong showings in Aeronautics–on F-35 production and risk retirements and C-5 program performance–and Mission Systems and Training–mainly on MH-60 helicopter risk retirements and a ship modernization program. Segment operating margin was 11.9 percent, down 20 basis points from a year ago.
For the rest of 2015, Lockheed Martin is targeting its sales and earnings guidance at the high end of the previous ranges. Sales are expected to be around $45 billion and earnings around $11.30 EPS.
The company also provided a glimpse into expectations for next year, offering a flattish outlook for sales that it said is already largely in backlog. At the end of the third quarter, total backlog stood at $71.7 billion, nearly $9 billion lower than at the start of the year.
Total segment operating margin is pegged between 11 and 11.5 percent. If the federal government operates under a continuing resolution for all of FY ’16, the impact on the company will be felt in orders and backlog, Hewson said. Orders in the quarter were $10.3 billion.
The rough outlook for 2016 doesn’t factor in the pending acquisition of the Sikorsky helicopter business from United Technologies Corp. [UTX] and an ongoing strategic review related to the divestiture of its information technology and technical services businesses. Most of regulatory reviews related to the Sikorsky purchase are done and the company expects to close the deal in the fourth quarter, Hewson said.
Hewson said the strategic review is on track to be finished this year. Bruce Tanner, the company’s chief financial officer, said that depending on whether it’s a sale, spin-off or a Reverse Morris Trust, the divestiture of the information systems businesses will likely be complete in the middle of 2016 and possibly stretch into the third quarter of that year.
Free cash flow in the quarter was $1.3 billion. Lockheed Martin warned that $750 million in cash it expects to collect from the government this year may slip into 2016 because it is continuing to cover production process costs related to pending multiyear contracts for the F-35 and C-130J aircraft programs.
The company also warned that it has $2.4 billion in potential cost and termination liability exposure related to the C-130J and F-35 contracts. Tanner said in the past the government has also provided funding for ongoing production programs while contract terms are negotiated for additional production lots.