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The world’s largest stand-alone defense contractor, Lockheed Martin Corporation (LMT - Analyst Report), posted second quarter 2013 earnings of $2.64 per share, comfortably surpassing the Zacks Consensus Estimate of $2.21 by 19.5%.

Earnings in the reported quarter also surged almost 11% from the year-ago profit level of $2.38 per share. The upcast in earnings was mainly attributable to strong operational performance.

Revenue

In the reported quarter, total revenue was $11,408.0 million, higher than the Zacks Consensus Estimate of $11,170.0 million. However, the quarterly figure dropped 4.3% from the year-earlier level of $11,921.0 million.

Lockheed Martin expects revenues for this year to be on the lower end of the $44,500 million to $46,000 million guided range provided in Jan 2013. The cut in U.S. military spending will likely reduce revenues by around $825 million.

Segmental Performance

Aeronautics

Aeronautics’ quarterly sales decreased marginally year over year to $3,407.0 million in the reported quarter due to lower sales from F-16, F-22 and C-130 programs. Partially offsetting the decreases were higher sales from F-35 and C-5 programs.

Segmental operating profit fell 10.4% to $407.0 million, and operating margin dropped 140 basis points to 11.9% in the reported quarter.

Information Systems & Global Solutions

Information Systems & Global Solutions’ quarterly sales decreased 7.2% to $2,101.0 million. Lower net sales from command and control programs, the Transportation Worker Identification Credential contract, Airborne Maritime Fixed Station Joint Tactical Radio System contract, and Outsourcing Desktop Initiative for NASA contract affected segment revenue in the reported quarter.

Segmental operating profit came in at $194.0 million compared with $208.0 million in the year-ago period. Operating margin in the reported quarter was in line with the second quarter 2012 level of 9.2%.

Missiles and Fire Control

Missiles and Fire Control segment’s quarterly sales rose 10.9% to $1,988.0 million. In the reported quarter, the upward spike in sales came from higher volume for tactical missile programs, primarily Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD).

Segmental operating profit also surged more than 21.7% to $381.0 million and operating margin expanded 160 basis points to 18.6% in the reported quarter.

Mission Systems and Training

Mission Systems and Training segment’s quarterly sales declined 12.3% year over year to $1,770.0 million. Lower sales mainly from the Persistent Threat Detection System program and various other programs offset higher sales from the Littoral Combat Ship program.

Segmental operating profit rose 41% to $275.0 million while operating margin expanded 580 basis points to 15.5% in the reported quarter.

Space Systems

Space Systems’ segmental sales decreased 12.6% to approximately $2,087.0 million. In the reported quarter, sales dipped due to decreased commercial satellite deliveries and lower sales from the Orion Multi-Purpose Crew Vehicle (Orion) program.

Segmental operating profit fell 8.0% to $276.0 million while operating margin boosted 60 basis points to 13.2%.

Backlog

Lockheed Martin finished the second quarter 2013 with $75,100 million of backlog. Of this, $26,500 million belonged to the Aeronautics segment and $18,000 million to the Space Systems segment. The rest is made up of $12,600 million for the Missiles and Fire Control segment; $10,600 million for Mission Systems and Training; and $7,400 million for Information Systems & Global Solutions.

Financial Condition

Cash and cash equivalents of Lockheed Martin were $2,845.0 million versus $1,898.0 million at year-end 2012. Long-term debt fell to $6,140.0 million (including current portion) from $6,308.0 million at year-end 2012.

The company repurchased 4.5 million shares at a cost of $465 million in the second quarter 2013 versus 2.2 million shares at a cost of $181 million in the second quarter of 2012. The company disbursed $371 million as dividends in the reported quarter and $326 million in the second quarter of 2012.

Guidance

Lockheed Martin boosted its full year 2013 earnings per share guidance to the range of $9.20–$9.50 from the previous expectation of $8.80–$9.10.

The company also increased its operating profit outlook to the range of $4,550–$4,700 million from the earlier expectation of $4,350–$4,500 million. Cash from operations is now expected to be around $4,200.0 million versus $4,000.0 million earlier.

At the Peers

Of Lockheed Martin’s major peers, General Dynamics Corp. (GD - Analyst Report) is scheduled to report its second quarter 2013 results on Jul 24 and Raytheon Co. (RTN - Analyst Report) on Jul 25.

Another major aerospace player, Textron Inc. (TXT - Analyst Report), recently reported second quarter 2013 earnings from continuing operation of 40 cents per share, beating the Zacks Consensus Estimate by 5.3%.

Outlook

The variety of product offerings, strong program execution and cost reduction measures will help the company to sustain its profitability. However, a major portion of its business comes from the U.S. government. So, cuts in defense spending could limit the results of its operating segments. It has factored sequestration in its 2013 sales guidance, which is expected to be at the low end of the prior range.

Going forward, growth in the Information Systems & Global Services and the Mission Systems & Training segments is critical as sequestration is expected to impact about $275 million in each of these segments.

Given the pros and the cons, the stock is expected to perform in line with the broader market indices. Lockheed Martin retains a Zacks Rank #3 (Hold).

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