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The world’s largest stand-alone defense contractor, Lockheed Martin Corporation (LMT - Analyst Report) ended the second quarter of 2012 on a strong footing. The company posted second-quarter 2012 continuing earnings of $2.38 per share, beating the Zacks Consensus Estimate of $1.92. This was also higher than the year-ago quarterly earnings of $2.16. The upcast in earnings year over year was mainly due to strong numbers from Aeronautics, Electronic Systems and Space Systems segments. However, this was partially offset by a lower figure from the Information Systems and Global Solutions segment, mainly owing to the cessation of the Airborne Maritime Fixed Station Joint Tactical Radio System program, and completion of both the U.K. Census program and Outsourcing Desktop Initiative for NASA program.
On the revenue front, Lockheed Martin reported quarterly net sales of $11.9 billion, beating the Zacks Consensus Estimate of $11.3 billion by $616 million. Also, the company superseded the year-ago quarterly revenue of $11.5 billion by $378 million.
Earnings from continuing operations for the second quarter of 2012 were $781 million versus $748 million a year ago. Overall, Lockheed Martin’s quarterly net earnings rose to $781 million from $742 million in the year-ago period.
Lockheed Martin finished the reported quarter with $75.5 billion of backlog. Of this $26.9 billion belonged to the Aeronautics segment and $24.6 billion to the Electronic Systems segment. The rest is made up of $15.7 billion for the Space Systems segment and $8.3 billion for Information Systems & Global Solutions.
Aeronautics’ quarterly sales increased 1% year over year to $3.4 billion. The increase was attributable to increased production volume on F-35 Low Rate Initial Production (LRIP) contracts and higher F-16 deliveries. Partially offsetting the increases were lower net sales from the F-35 development contract; decrease in C-5M aircraft deliveries; lower sales from F-22 program due principally to decreased production as final aircraft deliveries were completed in the second quarter of 2012; and lower volume on other sustainment activities. Segmental operating profit rose 14% to $454 million while operating margin rose 160 basis points to 13.3% in the reported quarter.
Electronic Systems’ quarterly sales increased 2% year over year to $3.9 billion. The increase was due to higher volume and risk retirements from ship and aviation programs (Persistent Threat Detection System or PTDS and Littoral Combat Ship or LCS) and from tactical missile programs (Multiple Launch Rocket System or MLRS and Javelin). Partially offsetting these increases were lower net sales due to decreased volume on air defense programs (Patriot Advanced Capability-3 or PAC-3, Terminal High Altitude Area Defense or THAAD); training and logistics programs; fire control systems programs (Sniper, Target Acquisition Designation Sight/Pilot Night Vision Sensor or TADS/PNVS); and integrated warfare systems and sensors programs (Aegis, DDG-1000). Segmental operating profit rose by 10% to $526 million while operating margin shot up 100 basis points to 13.6% in the reported quarter.
Information Systems & Global Solutions
Information Systems & Global Solutions segment’s quarterly sales decreased 4% to $2.3 billion. In the reported quarter sales decreased due to cessation of the Airborne Maritime Fixed Station Joint Tactical Radio System program, as well as the completion of both the U.K. Census program and Outsourcing Desktop Initiative for NASA program. The decreases were partially offset by increased net sales as a result of higher activity on numerous programs. Segmental operating profit fell by 2% to $208 million while operating margin rose 20 basis points to 9.2% in the reported quarter.
Space Systems’ segmental sales increased by 18% to approximately $2.4 billion. The increase was attributable to higher net sales as a result of increased commercial satellite deliveries due to increased production volume and risk retirements on the Orion Multi-Purpose Crew Vehicle program (Orion); and increased volume on various strategic and defensive missile systems programs. Partially offsetting these increases were lower net sales from the NASA External Tank program, which ended in connection with the completion of the Space Shuttle program in the second quarter of 2011. Segmental operating profit rose by 7% to $282 million while operating margin scaled down 130 basis points to 11.8% year over year.
Cash and cash equivalents of Lockheed Martin were $3.8 billion versus $3.6 billion at fiscal-end 2011. Long-term debt fell to approximately $6.3 billion versus $6.5 billion at fiscal-end 2011. The company repurchased 2.2 million shares at a cost of $186 million in the reported quarter. As of June 24, 2012, the Corporation had repurchased a total of 47.9 million shares of its common stock under its share repurchase program for $3.6 billion, and had remaining authorization of $2.9 billion for future share repurchases. The company disbursed $653 million as dividends in the first half of 2012.
Lockheed Martin reaffirmed its fiscal 2012 revenues in the range of $45 billion – $46 billion. However, the company raised its earnings per share from continuing operations in the range of $7.90 – $8.10, versus its prior range of $7.70 – $7.90.
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.
The tepid recovery of the U.S. economy raises fears of further cutbacks in future defense budgets. We expect the Euro-area crisis to continue to impact financial markets. Slower growth implies a significantly higher unemployment rate. We now see greater downside risks for the U.S. economy in the near term, which may affect government spending on defense. Finally the apprehension over cutbacks is fueled by Defense Secretary Leon Panetta s ambitious plans to save $487 billion over the next ten years. The heightened uncertainty may contribute to sharply lower equity prices and wider risk spreads. We feel this will invariably lead to slow consumer spending and the general pull-back from risk may affect government spending on defense.
Considering the fundamentals, we are maintaining our Neutral recommendation on the stock. Our sideline strategy comes from headwinds in the face of downward defense budget trends and the incoming effect of sequestration. The cautious outlook is reflected across the board among its peers like The Boeing Company (BA - Analyst Report) and General Dynamics Corporation (GD - Analyst Report).