Lockheed Martin [LMT] on Monday posted higher sales and net income in its second quarter with the bottom line gains driven by a lower tax rate and favorable pension adjustments.
The solid results were above the company’s expectations and led it to increase earnings guidance for the year.
The company was slated to report the quarterly results on Tuesday but moved the release up a day to coincide with its announcement that it has agreed to acquire Sikorsky Aircraft from United Technologies Corp. [UTX] for $9 billion and also divest most of its government information technology (IT) and technical services businesses, which account for about $6 billion in annual sales.
Net income increased 4 percent to $929 million, $2.94 earnings per share (EPS), from $889 million ($2.76 EPS) a year ago, topping consensus estimates by 28 cents per share. The higher profits were driven by a nearly 3 percent lower tax rate and a $35 million improvement in pension income.
Sales increased 3 percent to $11.6 billion from $11.3 billion a year ago with the top line results benefiting from higher revenues in the Aeronautics, Space Systems, and Mission Systems and Training (MST) segments, and also from acquisitions. Free cash flow was $1.1 billion.
Backlog at the end of the quarter stood at $72.8 billion, softer than the $80.5 billion reported at the end of 2014, while orders were well below sales at $7.5 billion.
Lockheed Martin raised its 2015 earnings guidance to between $11 and $11.30 EPS versus prior expectations of between $10.85 and $11.15 EPS as it is forecasting higher business segment operating profits that previously expected.
The outlook for sales in 2015 is still between $43.5 billion and $45 billion although there is potential upside in the second half of the year if the trend of earlier than planned aircraft deliveries continues, Bruce Tanner, Lockheed Martin’s chief financial officer, said on the company’s call Monday to discuss the strategic deals and the financial results.
If the deal for Sikorsky is approved, the acquisition is expected to have a diluted effect on earnings in 2016, with marginal accretion occurring in 2017, Tanner said. Afterward, earnings accretion should accelerate, he said.
Sales at Aeronautics were up 7 percent to $4.1 billion due to higher F-35 aircraft production and sustainment, and higher deliveries of C-5 aircraft. Operating profits at the segment dipped 2 percent to $444 million due to lower risk retirements and contract mix related to the C-130 aircraft program, and lower risk retirements and sustainment activities for the F-22 fighter program.
Space Systems posted a 10 percent gain in sales to $2 billion on NASA’s Orion manned spacecraft program and acquired businesses while operating profit increased 4 percent to $259 million on increased risk retirement on the Mobile User Objective System and Space Based Infrared System satellite programs.
The MST segment’s top line increased 2 percent to $1.8 billion on the start of the Space Fence program and higher volume for Aegis systems. Segment profit jumped 26 percent to $234 million due to charges taken a year ago on some training and logistics programs, and increased risk retirements for integrated warfare systems and sensor programs.
Sales at IS&GS and MFC slipped on lower work related to overseas contingencies, declining defense budgets for command and control programs, increased competition, fewer deliveries of Patriot Advanced Capability-3 (PAC-3) air and missile defense systems, and lower development activity for the Medium Extended Air Defense Systems (MEADS). Profits in the two segments fell on the lower sales and lower risk retirements for the Apache helicopter and PAC-3 programs.
Most of IS&GS’ business will be divested as part of the strategic review announced on Monday. The portions of the segment that are excluded from the process will likely be realigned with MFC, MST and Space Systems.
Segment operating margins fell 40 basis points to 12 percent.
Lockheed Martin said it returned $467 million to shareholders in dividends and $937 million in share repurchases.