Before markets opened today, Lockheed Martin Corporation (LMT) reported strong second quarter fiscal 2010 results sailing past the Zacks Consensus estimate of $1.78. On a reported basis with an EPS of $2.22, the company topped the year-ago quarterly earnings of $1.88. Excluding discontinued operations and a tax benefit related to the recognition of a deferred tax asset, EPS was $1.96 compared to $1.87 in the year-ago period.
Operating Statistics
A different picture was on the revenue front, where Lockheed Martin reported quarterly net sales of $11.4 billion, lagging behind the Zacks Consensus estimate of $11.5 billion by $76 million. However, the company smoothly sailed past the year-ago quarterly revenue of $11.1 billion by $370 million.
Earnings from continuing operations were $727 million compared to $731 million in the year-ago quarter. However, after including earnings of Pacific Architects and Engineers Inc. (PAE) a division the company plans to sell, net income came in at $825 million compared to $734 million in the year-ago quarter.
Lockheed Martin finished the second quarter of fiscal 2010 with $72.8 billion of backlog, of which $24.4 billion belonged to the Aeronautics segment and $21.9 billion to the Electronic Systems segment. However, total backlog fell 6.1% compared to fiscal-end 2009 backlog of $77.5 billion.
Segmental Performance
Aeronautics
Aeronautics sales increased 2% year over year to $3.1 billion, boosted by higher volume sales from C-130J programs. This was partially offset by lower Combat Aircraft deliveries year over year.
Segmental operating profit however decreased by 7% to $372 million, primarily due to lower sales of high-margin Combat Aircrafts. As a result operating margin shrunk by 110 basis points to 11.8% in the reported quarter.
Electronic Systems
Electronic Systems sales increased 4% year over year to $3.5 billion due to higher sales volume on simulation & training, air defense and certain tactical missile programs. Segmental operating profit increased by 2% to $432 million, mainly was due to improved performance on certain tactical missile programs and fire control systems. This was partially offset by lower operating profit on air defense programs. Overall operating margin fell 30 basis points year over year to 12.2% in the reported quarter.
Information Systems & Global Solutions
Information Systems & Global Solutions segment’s quarterly sales increased 6% to $2.7 billion. Sales increased year-over-year principally due to higher volume from enterprise civilian services. This was partially offset by lower volume sales on mission and combat systems activities.
Segmental operating profit increased by 6% to $238 million, mainly due to improved performance on security solutions, enterprise integration activities and other intelligence activities. This was partially offset by lower volume on mission and combat systems activities. Overall operating margin rose 10 basis points year over year to 8.9% in the reported quarter.
Space Systems
Space Systems’ segmental sales increased by a percent to $2.1 billion, due to higher volume in government satellite activities and the Orion program. This was partially offset by lower volume on defensive missile and strategic missile programs.
Segmental operating profit increased by 9% to $245 million in the reported quarter. Upside in operating profit came from higher volume on the Orion, government satellites and strategic missile programs. Similarly, operating margins shot up 90 basis points to 11.8%.
Financial Condition
Cash and cash equivalents of Lockheed Martin were $2.7 billion versus $2.4 billion at fiscal-end 2009. Long-term debt remained stagnant compared to fiscal-end 2009 at slightly above $5 billion. At the same time, debt-to-total-capitalization rose to 57.3% from 55% at fiscal-end 2009, primarily due to repurchase of common stock.
Lockheed Martin generated $2.9 billion of cash in operating activities in the first half of fiscal 2010, compared to $2.4 billion in cash generated in the year-ago period. The company repurchased 9.7 million shares for $782 million and distributed $233 million as cash dividend in the reported quarter.
Outlook
Lockheed Martin has revised upward its fiscal 2010 earnings range to $7.15 – $7.35 from the earlier guidance range of $7.00 – $7.20. On the other hand, the company revised downward its revenue outlook for fiscal 2010 to a range of $45.5 billion – $46.5 billion from earlier guidance range of $46.3 billion – $47.3 billion.
Our Take
The near-term apprehension over governmental cutbacks on high-cost platform programs will hang high over the defense industry in general and Lockheed Martin in particular. Although the company raised its EPS guidance, the upside will be fueled to a large extent by the company’s focus on stock buybacks and higher government satellite programs. Thus in the near-term we would advise investors to remain Neutral on the Zacks #3 Rank stock.
A tepid outlook was reflected in the results of fellow defense player, L-3 Communications Holdings Inc. (LLL) also. Although L-3 Communications released strong numbers for the first half of 2010, it lowered its fiscal 2010 earnings outlook to reflect the loss of a key logistics (Special Operations Forces Support Activity) contract.
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