Lockheed Martin Corporation’s (LMT) third quarter 2010 earnings came in at $1.57, a penny shorter than the Zacks Consensus Estimate of $1.58 and way below the year-ago quarterly earnings of $2.07. However, reported quarter’s results were affected by a one-time charge of $178 million related to the VESP (Voluntary Executive Separation Program). Through VESP the company retrenched approximately 600 executives, or about 25% of its total executive population.
Although effects of the retrenchment program would prove to be beneficial to the company over the long-term, it has to absorb the near-term bumps in earnings. In contrast, year-ago quarterly earnings were boosted by an unusual tax benefit from the resolution of an IRS examination, which increased earnings by $58 million.
Operating Statistics
The lower trend was reflected on the revenue front also, where Lockheed Martin reported quarterly net sales of $11.4 billion, lagging behind the Zacks Consensus Estimate of $11.6 billion by $203 million. However, the company smoothly sailed past the year-ago quarterly revenue of $10.8 billion by $608 million.
Lockheed Martin finished the third quarter of fiscal 2010 with $70.5 billion backlog, of which $24 billion belonged to the Aeronautics segment and $21.2 billion to the Electronic Systems segment. However, total backlog fell 8.7% compared to fiscal-end 2009 backlog of $77.2 billion.
Segmental Performance
Aeronautics
Aeronautics sales increased 7% year over year to $3.3 billion boosted by higher volume sales from C-130J. There were seven C-130J deliveries compared to four in the year-ago quarter. However, this was partially offset by lower volume on the F-22 program and a decline in sales on F-16 and other combat aircraft programs.
There were six F-16 deliveries compared to eight in the year-ago quarter. Segmental operating profit, however, was at the same level of $396 million while operating margin shrunk by 90 basis points to 12% in the reported quarter.
Electronic Systems
Electronic Systems sales increased 10% year over year to $3.5 billion due to higher sales volume. Sales increased in all the three lines of business. The increase at Mission Systems & Sensors (MS2) mainly was due to higher volume on ship & aviation systems, radar systems and surface naval warfare programs, which partially got offset by lower volume on undersea warfare programs.
The increase at Global Training & Logistics (GT&L) primarily was due to growth on readiness and stability programs, which was partially offset by lower volume on simulation & training programs. The increase at Missiles & Fire Control (M&FC) primarily was due to higher volume on fire control systems. Segmental operating profit increased by 5.2% to $425 million, while operating margin shrunk by 50 basis points to 11.9%.
Information Systems & Global Solutions
Information Systems & Global Solutions segment’s quarterly sales increased 7% to $2.5 billion. In the reported quarter, sales increased in Civil and Defense programs but declined in Intelligence programs. Civil programs volume was boosted principally due to higher volume on enterprise civilian services.
Defense programs sales increased primarily due to higher volume on mission and combat systems activities. Sales in Intelligence programs declined mainly due to lower volume on security solutions. Segmental operating profit increased by 2.4% to $217 million while operating margin shrunk by 40 basis points year over year to 8.6% in the reported quarter.
Space Systems
Space Systems’ segmental sales decreased by 5% to approximately $2 billion. In the reported quarter sales declines at Space Transportation and Strategic & Defensive Missile Systems business (S&DMS) were partially offset by growth in Satellites business.
The decrease in Space Transportation business principally was due to lower volume on the Orion and space shuttle external tank programs. Lower volume on defensive missile programs resulted in lower S&DMS sales.
The sales growth in Satellites programs primarily was attributable to higher volume in government satellite activities, which was partially offset by lower volume on commercial satellites. Segmental operating profit remained at the same level of $235 million year over year. The segment only witnessed a spike in operating margin of 50 basis points to 11.9% during the quarter.
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. However, at the same time debt-to-total capitalization rose to 56% from 55% at fiscal-end 2009, primarily due to repurchase of common stock.
Lockheed Martin generated $3.4 billion of cash in operating activities in the first nine months of fiscal 2010, compared to $3.8 billion generated in cash in the year-ago period. The company year-to-date repurchased 19.8 million shares for $1.6 billion and distributed $700 million as cash dividend.
Outlook
Lockheed Martin has revised downward its fiscal 2010 earnings range to $6.75 – $6.95 from the earlier guidance range of $7.15 – $7.35. The company also revised downward its revenue outlook for fiscal 2010 to a range of $44.9 billion – $45.9 billion from earlier guidance range of $45.5 billion – $46.5 billion.
Our Take
Lockheed Martin is the largest U.S. defense contractor, with a platform-centric focus with a steady inflow of follow-on orders with a 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 fortune of defense industry in general and Lockheed Martin in particular.
Thus in the near-term we would advise to keep away from the Zacks #5 Rank (Strong Sell) Lockheed Martin stock. Over the longer term, we are Neutral on the stock.
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