The world’s largest stand-alone defense contractor, Lockheed Martin Corporation (LMT), posted third quarter 2013 earnings of $2.57 per share, comfortably surpassing the Zacks Consensus Estimate of $2.26 by 13.7%. Earnings in the reported quarter also surged almost 16.3% from the year-ago profit level of $2.21 per share. The upcast in earnings was mainly attributable to strong operational performance.
Operational Highlights
In the reported quarter, total revenue was $11,347 million, higher than the Zacks Consensus Estimate of $11,207 million. However, the quarterly figure dropped 4.4% from the year-earlier level of $11,869 million.
Lockheed Martin ended the quarter with $78,700 million of backlog. Of this, $29,200 million belonged to the Aeronautics segment and $17,200 million to the Space Systems segment. The rest is made up of $14,100 million for the Missiles and Fire Control segment; $10,500 million for Mission Systems and Training; and $7,700 million for Information Systems & Global Solutions.
Segmental Performance
Aeronautics
Aeronautics’ quarterly sales decreased 1.8% year over year to $3,632 million. The decline reflects fewer F-16 and F-35 deliveries and lower sustainment activity, partially offset by higher net sales for the C-5 program.
Segmental operating profit fell marginally to $412 million, and operating margin increased to 11.3% from 11.2%.
Information Systems & Global Solutions
Information Systems & Global Solutions’ quarterly sales decreased 10.2% to $2,059 million. The decline reflects lower net sales and completion of certain programs like the Transportation Worker Identification Credential program. These negatives were however partially offset by the initiation of certain programs like Global Information Grid Services Management Operations.
Segmental operating profit came in at $187 million, down 10.5% year over year while operating margin remained at 9.1%, flat year over year.
Missiles and Fire Control
Missiles and Fire Control segment’s quarterly sales rose 2.7% to $2,003 million. The increase reflects higher nets sales for air and missile defense programs like Terminal High Altitude Area Defense and Patriot Advanced Capability-3. However, these increases were partially offset by lower net sales for technical services programs.
Segmental operating profit surged 18.7% to $356 million and operating margin expanded to 17.8% from 15.4% in the reported quarter.
Mission Systems and Training
Mission Systems and Training segment’s quarterly sales declined 8.8% year over year to $1,698 million. The decline reflects lower sales for integrated warfare systems and sensors programs, various ship and aviation systems programs, undersea systems programs and various training and logistics programs. These decreases were partially offset by higher sales for the Littoral Combat Ship program.
Segmental operating profit rose 9% to $216 million while operating margin expanded to 12.7% from 10.6%.
Space Systems
Space Systems’ segmental sales decreased 5.4% to approximately $1955 million. The decline reflects lower net sales for Orion Multi-Purpose Crew Vehicle program and government satellite programs. These decreases were partially offset by an increase in sales for the Advanced Extremely High Frequency program.
Segmental operating profit fell 9% to $284 million while operating margin declined to 14.5% from 15.1%.
Financial Condition
Cash and cash equivalents of Lockheed Martin were $2,661 million versus $1,898 million at year-end 2012. Long-term debt marginally fell to $6,156 million from $6,158 million at year-end 2012.
The company repurchased 4.9 million shares at a cost of $607 million in the third quarter 2013. The company disbursed $370 million as dividends in the reported quarter. Indeed, during the quarter, the company increased its quarterly dividend by 15.7% to $1.33 per share and authorized the purchase of up to an additional $3 billion of its common stock under the share repurchase program.
Guidance
Lockheed Martin increased its revenue guidance for 2013 to $45,000 million versus its previous expectation of $44,500 million to $46,000 million. However, it expects revenue to decline year over year in 2014.
The company also increased its earnings per share forecast to the range of $9.40 to $9.70 from the prior $9.20 to $9.50.
Outlook
Lockheed Martin has succeeded in beating the top as well as the bottom line. Also, the company continued to grow its backlog and generate strong cash from operations while maintaining its cash deployment strategy.
Despite the uncertainty plaguing the industry, the company has been able to generate $15 billion in orders. Going forward, the diverse product offerings, strong program execution and cost reduction measures will help the company to sustain its profitability.
Lockheed Martin has a Zacks Rank #2 (Buy). Other defense stocks also worth considering are Erickson Air-Crane Inc. (EAC), Huntington Ingalls Industries, Inc. (HII) and Northrop Grumman Corp. (NOC), all with a Zacks Rank #2 (Buy).
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