Before markets opened today, Lockheed Martin Corporation (LMT) showing resilience reported strong second quarter fiscal 2011 earnings of $2.14, sailing past the Zacks Consensus Estimate of $1.94. Reported earnings were burdened with charges related to workforce reduction and pension adjustments.
Excluding discontinued operations and a tax benefit related to the recognition of a deferred tax asset, operating earnings in the year-ago quarter were $1.92. On a reported basis, the company reported EPS of $2.14, missing the year-ago quarterly level of $2.22.
Operating Statistics
On the revenue front, Lockheed Martin reported quarterly net sales of $11.55 billion, marginally beating the Zacks Consensus Estimate of $11.42 billion. The company also whisked past the year-ago quarterly revenue of $11.28 billion.
Earnings in the reported quarter were affected by a FAS/CAS pension charge of $230 million; an unusual tax charge of $97 million related to workforce reductions at Aeronautics and Space Systems; and an unusual tax benefit of $89 million from resolution of certain tax matters. Similarly, in the year-ago quarter, the company digested a FAS/CAS pension charge of $110 million.
Overall, the company garnered earnings of $742 million from continuing operations versus $714 million in the year-ago quarter. Net earnings, however, declined to $742 million in the reported quarter from $824 million in the year-ago quarter.
Lockheed Martin finished the second quarter of 2011 with $77.30 billion of backlog versus $78.40 billion at fiscal-end 2010. Of this, $29.90 billion belonged to the Aeronautics segment and $22.30 billion to the Electronic Systems segment.
Segmental Performance
Aeronautics
Aeronautics quarterly sales increased 9% year over year to $3.42 billion in the reported quarter due to additional volume on F-35, C-5, C-130J, and F-16. These increases were partially offset by lower volume on the F-22 program, as production continues to wind down with final deliveries expected to be completed in 2012. Segmental operating profit rose 8% to $400 million while operating margin dipped 10 basis points to 11.7% in the reported quarter.
Electronic Systems
Electronic Systems quarterly sales increased 6% year over year to $3.78 billion due to higher volume on various air defense programs; increased deliveries on tactical missiles programs; and higher volume on logistics activities. These were, however, partly offset by lower volume on various other training and logistics services programs. Segmental operating profit rose 6% to $466 million while operating margin fell 10 basis points to 12.4% in the reported quarter.
Information Systems & Global Solutions
Information Systems & Global Solutions segment’s quarterly sales decreased 6% to $2.36 billion. The decline in quarterly sales was due to the absence of the Decennial Response Integration System (DRIS 2010) program that supported the U.S. census in 2010.
These decreases were partially mitigated by higher volume on numerous smaller programs. Segmental operating profit rose by 1.4% to $213 million while operating margin expanded 70 basis points to 9.0% in the reported quarter.
Space Systems
Space Systems’ segmental sales decreased 3% to approximately $2.01 billion. In the reported quarter, sales declined due to lower volume on the Orion program and for NASA’s External Tank program. The downside was partially offset by higher volume in fleet ballistic, defensive missile systems, and government satellite activities.
Segmental operating profit climbed 7% to $263 million while operating margin increased 130 basis points to 13.1% in the reported quarter.
Financial Condition
At the end of the second quarter of 2011, cash and cash equivalents of Lockheed Martin were $3.27 billion versus $2.26 billion at fiscal-end 2010. Long-term debt rose marginally to $5.03 billion versus $5.02 billion versus fiscal-end 2010.
Lockheed Martin generated $843 million in cash from operations in the reported quarter, compared with $1.20 billion in the year-ago quarter. The company, in the reported quarter, repurchased 13 million shares for a total of $1 billion and disbursed $258 million as dividends.
Guidance
Lockheed Martin raised its fiscal 2011 earnings per share guidance range to $7.35–$7.55 from its earlier guidance range of $6.95–7.25. The company also narrowed its net sales guidance range for fiscal 2011 to $46 billion–$47 billion from the earlier range of $45.75 billion–$47.25 billion.
Outlook
Lockheed Martin is the largest U.S. defense contractor with a platform-centric focus, steady inflow of follow-on orders and 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 affected the fortunes of defense industry in general and Lockheed Martin in particular.
Lockheed Martin currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock. Reductions in defense budgets, which will likely hurt the company’s profitability, induce us to remain on the sidelines.
The cautious outlook is reflected across the board in the defense and aerospace industry. Of Lockheed Martin’s major peers, General Dynamics Corporation (GD) and The Boeing Company (BA) are also retaining a short-term Zacks #3 Rank.
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