The Pentagon’s prime contractor, Lockheed Martin Corp. LMT, posted first-quarter 2015 earnings before the opening bell today. The company reported quarterly earnings of $2.74 per share, comfortably surpassing the Zacks Consensus Estimate of $2.48 by 10.5%. Earnings in the reported quarter however declined 4.5% from $2.87 per share a year ago, as lower fighter jet demand led to less revenue.
Operational Highlights
In the reported quarter, total revenues were $10.1 billion, missing the Zacks Consensus Estimate of $10.2 billion by almost 1%.
Given the tepid defense budget scenario, the company’s top line decreased 5.1% from $10.7 billion a year ago. All segments, except Mission System & Training and Space Systems, registered year-over-year sales declines.
Backlog
Lockheed Martin ended the first quarter (ending Mar 29, 2015) with $76.9 billion of backlog, down 4.5% from $80.5 billion as on Dec 31, 2014. Of this, the lion’s share of $25.3 billion went to the Aeronautics segment and $18.4 billion to the Space Systems segment. The rest comprised $12.8 billion for the Missiles and Fire Control segment, $12.3 billion for Mission Systems and Training and $8.1 billion for Information Systems & Global Solutions.
The company won $6.5 billion worth of orders during the quarter, down 15.5% year over year.
Segmental Performance
Aeronautics: Aeronautics’ quarterly sales decreased 7% year over year to $3.1 billion − the decrease was mainly due to lower deliveries as well as sustainment activities during the quarter.
Segmental operating profit declined 5.6% year over year to $371 million while operating margin increased 20 basis points (bps) to 10.8% in the quarter.
Information Systems & Global Solutions: The segment’s quarterly sales decreased 2% to approximately $1.9 billion. The decline reflects lower net sales due to wind-down or completion of certain programs.
Segmental operating profit came in at $136 million, down 21.8% year over year while operating margin contracted 180 bps to 7.3%.
Missiles and Fire Control: The segment’s quarterly sales dropped 19% to $1.5 billion. The decrease reflects lower net sales for various technical services programs, air and missile defense programs as well as for Joint Air-to-Surface Standoff Missile.
Segmental operating profit decreased 18.4% to $292 million but operating margin expanded 20 bps to 19.4% in the reported quarter.
Mission Systems and Training: The segment’s quarterly sales of $1.7 billion increased 1% from the prior year. The growth primarily reflects higher revenues in integrated warfare systems and sensors programs and the start-up of new programs.
Segmental operating profit declined $31 million year over year to $219 million while operating margin shrunk 210 bps to 13.3%.
Space Systems: Sales increased 5% year over year to about $2.0 billion in the first quarter. The increase reflects higher sales for government satellite programs and for the Orion program.
Segmental operating profit increased to $288 million from $254 million a year ago. Operating margin also expanded 100 bps to 14.7% from 13.7% in the year-ago quarter.
Financial Condition
Cash and cash equivalents were $3.45 billion at the first quarter end as compared to $1.45 billion at year-end 2014. Long-term debt rose to $8.4 billion from $6.17 million at 2014 end.
During the quarter, the company repurchased 3 million shares for $604 million compared with 7 million shares repurchased for $1.1 billion a year ago.
Guidance
Lockheed Martin reaffirmed its 2015 revenue expectations between $43.5 billion and $45 billion with orders in the $43.5–$45 billion range.
However, the company now projects earnings of about $10.85−$11.15 per share from its earlier expectation of $10.80−$11.10 per share for 2015.
Lockheed expects cash from operations of approximately $5 billion for the year.
Upcoming Peer Releases
The Boeing Co. BA is slated to report its first-quarter 2015 results on Apr 22, 2015, before the opening bell.
General Dynamics Corp. GD is slated to report its first-quarter 2015 results on Apr 29, 2015, before the opening bell.
Northrop Grumman Corp. NOC is slated to report its first-quarter 2015 results on Apr 29, 2015, before the opening bell.
Outlook
Considering that the U.S. military budget is increasingly under pressure, Lockheed Martin’s better-than-expected first quarter earnings are commendable. It has also boosted its earnings expectations for the year that will likely spread a positive sentiment among investors.
Given the vital role played by satellites in the military space, Lockheed Martin is looking to bolster its satellite product coverage by increasingly investing in R&D and acquisitions.
However, the threat of sequestration still lurks over this defense major, negatively impacting the company’s backlog as well as revenues.
Lockheed Martin has a Zacks Rank #3 (Hold).
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