Lockheed Posts Mixed Numbers

World’s largest stand-alone defense contractor, Lockheed Martin Corporation (LMT - Analyst Report) exited fiscal 2011 with mixed fortunes. The company posted fourth-quarter 2011 operating earnings of $2.14 per share, beating the Zacks Consensus Estimate of $1.94. However, this was lower than the year-ago quarterly earnings of $2.28 by a margin of 14 cents. The downcast in earnings, year over year, was due to lower government spending on defense.

On a reported basis per share earnings were $2.09 versus $2.67 in the year-ago quarter. The variance of 5 cents in the reported quarter between operating and reported earnings was due to discontinued operations.

Fiscal 2011 operating earnings came in at $7.85 per share, way above both the Zacks Consensus Estimate of $7.63 and fiscal 2010 earnings of $7.10. On a reported basis, the company clocked earnings of $7.81 per share, flat year over year.

Operating Statistics

On the revenue front Lockheed Martin reported quarterly net sales of $12.2 billion, falling short of the Zacks Consensus Estimate of $12.3 billion by $91 million. Also the company came short of the year-ago quarterly revenue of $12.8 billion by $550 million. Fiscal 2011 revenue was $46.5 billion versus the Zacks Consensus Estimate of $46.6 billion. Also, revenue for the reported fiscal was lower than the fiscal 2010 number of $45.7 billion.

Earnings from continuing operations for the fourth quarter of 2011 were $698 million versus $821 million a year ago. Lockheed’s reported quarterly earnings were affected by a pension expense adjustment, a drop in research and development tax credits, premiums on the early extinguishments of debt and expenses related to a facilities consolidation. Overall, Lockheed Martin’s quarterly net earnings fell to $683 million from $961 million in the year-ago period.

Lockheed Martin finished fiscal 2011 with $80.7 billion of backlog, including $19.8 billion of new orders booked in the fourth quarter. Of this $30.5 billion belonged to the Aeronautics segment and $24.9 billion to the Electronic Systems segment. The rest is made up of $16.0 billion for the Space Systems segment and $9.3 billion for the Information Systems & Global Solutions.

Segmental Performance

Aeronautics

Aeronautics’ quarterly sales increased 1% year over year to $3.9 billion in the reported quarter due to higher volume of F-35 Low Rate Initial Production (LRIP) program, F-16 support activities and an increase in aircraft deliveries. In the reported quarter five F-16 aircraft were delivered versus three in the year-ago period. The increases were partially offset by lower volumes on the F-22 program, C-5 programs, C-130 programs, and the F-35 System Development and Demonstration (SDD) program. Segmental operating profit rose 11% to $461 million while operating margin rose by 120 basis points to 12.0% in the reported quarter.

Electronic Systems

Electronic Systems’ quarterly sales decreased 8% year over year to close at $3.7 billion. The downcast in numbers was due to fewer deliveries on tactical missile programs, and declines in volume on certain ship and aviation programs, undersea warfare programs, surface naval warfare programs, and various logistics and training services and other programs. These decreases were partially offset by higher volume on air defense programs and Terminal High Altitude Area Defense and Littoral Combat Ship program. Segmental operating profit fell by 12% to $431 million while operating margin shrunk by 50 basis points to 11.7% in the reported quarter.

Information Systems & Global Solutions

Information Systems & Global Solutions segment’s quarterly sales decreased 3% to $2.5 billion. In the reported quarter sales decreased due to the absence of the Decennial Response Integration System (DRIS) program that supported the 2010 United States census and a decline in activities on the Airborne Maritime Fixed Station Joint Tactical Radio System (JTRS) program.  These decreases were partially offset by increased net sales on numerous programs. Segmental operating profit rose by 28% to $254 million while operating margin rose by 250 basis points to 10.0% in the reported quarter.

Space Systems

Space Systems’ segmental sales decreased by 7% to approximately $2.1 billion. In the reported quarter sales declined due to lower volume on government and commercial satellite activities. This was partially offset by increased volume on the NASA Orion program. Segmental operating profit fell by 8% to $258 million while operating margin remained flat at 12.2% year over year.

Financial Condition

Cash and cash equivalents of Lockheed Martin were $3.6 billion versus $2.3 billion at fiscal-end 2010. Long-term debt rose by $1.4 billion to approximately $6.5 billion versus fiscal-end 2010. The company repurchased 1.9 million shares at a cost of $139 million in the fourth quarter and 31.8 million shares at a cost of $2.4 billion in fiscal 2011. The company disbursed $325 million as dividends in the reported quarter and $1.1 billion in fiscal 2011.

Guidance

Lockheed Martin affirmed its fiscal 2012 earnings to be in the range of $7.70 – $7.90, on revenues in the range of $45 billion–$46 billion.

Outlook

Lockheed Martin is the largest U.S. defense contractor with a platform-centric focus and a steady inflow of follow-on orders due to its 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 fortunes of the defense industry in general and Lockheed Martin in particular.

Considering the fundamentals, we are maintaining our Neutral recommendation on the stock. Our sideline strategy comes from headwinds concerning proposed delays by the Pentagon for the company’s largest program, F-35 Joint Strike Fighter.

The cautious outlook is reflected across the board in the defense and aerospace industry. Of Lockheed Martin’s major peers, The Boeing Company (BA - Analyst Report) topped market optimism on higher commercial airplanes delivery. Another major aerospace player, Textron Inc. (TXT - Analyst Report) is bullish about near-term prospects solely due to its anticipated double-digit growth at both Cessna business jets and Bell helicopters business.

Nonetheless there is an air of pessimism in the market about lackluster prospects for the defense business in 2012. Lockheed Martin currently retains a Zacks #4 Rank, which translates into a short-term Sell rating.

Read the full analyst report on TXT

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