The world’s largest stand-alone defense contractor, Lockheed Martin Corporation (LMT) started fiscal 2012 on a strong footing. The company posted first-quarter 2012 operating earnings of $2.02 per share, beating the Zacks Consensus Estimate of $1.70. This was also higher than the year-ago quarterly earnings of $1.57. The upcast in earnings year over year was mainly due to strong numbers from Aeronautics and Electronic Systems segments. However, this was partially offset by a lower figure from the Information Systems and Global Solutions segment, mainly owing to the cessation of the Airborne Maritime Fixed Station Joint Tactical Radio System program, and completion of the Outsourcing Desktop Initiative for NASA program.

On a reported basis, per share earnings were $2.03 versus $1.50 in the year-ago quarter. The variance of a penny in the reported quarter between operating and reported earnings was due to discontinued operations.

Operating Statistics

On the revenue front, Lockheed Martin reported quarterly net sales of $11.3 billion, beating past the Zacks Consensus Estimate of $10.6 billion by $736 million. Also, the company posted higher revenues than the year-ago quarterly revenue of $10.6 billion by $667 million.

Earnings from continuing operations for the first quarter of 2012 were $665 million versus $556 million a year ago. Overall, Lockheed Martin’s quarterly net earnings rose to $668 million from $530 million in the year-ago period.

Lockheed Martin finished the reported quarter with $76.6 billion of backlog. Of this $28.2 billion belonged to the Aeronautics segment and $24.3 billion to the Electronic Systems segment. The rest is made up of $15.4 billion for the Space Systems segment and $8.7 billion for the Information Systems & Global Solutions.

Segmental Performance

Aeronautics

Aeronautics’ quarterly sales increased 18% year over year to $3.7 billion. This was due to higher volume of F-35 Low Rate Initial Production (LRIP) program; an increase in F-16 aircraft deliveries (13 F-16 aircraft delivered in the first quarter of 2012 compared with 5 in the same 2011 period) and support activities; an increase in C-130J aircraft deliveries (10 C-130J aircraft delivered in the first quarter of 2012 compared with 6 in the same 2011 period); and from C-5 programs due to increased aircraft deliveries (one C-5M aircraft delivered in the first quarter of 2012 compared with none in the same 2011 period). These increases were partially offset by lower volume on the F-22 program and decreased volume on the F-35 System Development and Demonstration (SDD) contract and other Aeronautics sustainment activities. Segmental operating profit rose 17% to $385 million while operating margin remained flat at 10.4% in the reported quarter.

Electronic Systems

Electronic Systems’ quarterly sales increased 4% year over year to more than $3.6 billion. The increase was due to higher net sales from ship and aviation programs; increased volume on air defense programs and certain tactical missile programs, primarily Hellfire and Javelin. The increases were partially offset by lower net sales from fire control systems such as Low Altitude Navigation and Targeting Infrared for Night (LANTIRN), various undersea warfare programs, and lower net sales from various other programs, including logistics and training. Segmental operating profit rose by 25% to $541 million while operating margin shot up 260 basis points to 15.0% in the reported quarter.

Information Systems & Global Solutions

Information Systems & Global Solutions segment’s quarterly sales decreased 3% to $2.1 billion. In the reported quarter, sales decreased due to cessation of the Airborne Maritime Fixed Station Joint Tactical Radio System program, as well as the completion of the Outsourcing Desktop Initiative for NASA program. The decreases were partially offset by increased net sales as a result of higher activity on numerous programs. Segmental operating profit fell by 3.1% to $188 million while operating margin remained flat at 9.0% in the reported quarter.

Space Systems

Space Systems’ segmental sales increased by 2% to approximately $1.9 billion. The increase was attributable to higher net sales due to increased volume on the Orion Multi-Purpose Crew Vehicle program. Partially offsetting the increase was lower net sales from the NASA External Tank program, which ended in connection with the completion of the Space Shuttle program in the second quarter of 2011. Segmental operating profit rose by 4.1% to $226 million while operating margin scaled up 20 basis points to 12.0% year over year.

Financial Condition

Cash and cash equivalents of Lockheed Martin were $3.5 billion versus $3.6 billion at fiscal-end 2011. Long-term debt remained flat at approximately $6.5 billion versus fiscal-end 2011. The company repurchased 2.7 million shares at a cost of $242 million in the reported quarter. As of March 25, 2012, the Corporation had repurchased a total of 45.7 million shares of its common stock under its share repurchase program for $3.4 billion, and had remaining authorization of $3.1 billion for future share repurchases. The company disbursed $327 million as dividends in the reported quarter.

Guidance

Lockheed Martin affirmed its fiscal 2012 earnings to be in the range of $7.70 – $7.90, on revenues in the range of $45 billion-$46 billion.

Outlook

Lockheed Martin is the largest U.S. defense contractor with a platform-centric focus and a steady inflow of follow-on orders due to its leveraged presence in the Army, Air Force, Navy and IT programs. However, the ongoing trend of governmental delays in program decisions coupled with program cancellations has affected the fortunes of the defense industry in general and Lockheed Martin in particular.

Considering the fundamentals, we are maintaining our Neutral recommendation on the stock. Our sideline strategy comes from headwinds concerning proposed delays by the Pentagon for the company’s largest program, F-35 Joint Strike Fighter and proposed headwinds in future defense budgets.

The cautious outlook is reflected across the board in the defense and aerospace industry. Of Lockheed Martin’s major peers, The Boeing Company (BA) topped market optimism on higher commercial airplanes delivery. Nonetheless, there is a cautious air in the market about tepid prospects for the defense business in 2012. Lockheed Martin currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

To read this article on Zacks.com click here.

Zacks Investment Research