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The world’s largest stand-alone defense contractor, Lockheed Martin Corporation (LMT - Analyst Report) exited full year 2012 with mixed fortunes. The company posted fourth-quarter 2012 operating earnings of $1.73 per share versus the Zacks Consensus Estimate of $1.79.

This was also lower than the year-ago quarterly earnings of $2.14. The downcast in earnings year over year was mainly due to lower government spending on defense.

On a reported basis per share earnings were $1.73 versus $2.09 in the year-ago quarter. Full year 2012 operating earnings came in at $8.36 per share, falling short of the Zacks Consensus Estimate of $8.41 but ahead of the full year 2011 earnings of $7.85.

Operating Statistics

On the revenue front, Lockheed Martin reported quarterly net sales of $12.1 billion, beating the Zacks Consensus Estimate of $11.2 billion by $888 million. However the company came short of the year-ago quarterly revenue of $12.2 billion by $112 million.

Full year 2012 revenue was $47.2 billion versus the Zacks Consensus Estimate of $46.3 billion. However, revenue for the reported fiscal was lower than the full year 2011 number of $46.5 billion.

Earnings from continuing operations for the fourth quarter of 2012 were $569 million versus $698 million a year ago. Lockheed’s reported quarterly earnings were affected by a pension expense adjustment, higher income tax expense from reduced U.S. manufacturing deductions, and a charge related to workforce reductions at the Corporation’s Aeronautics business segment. Overall, Lockheed Martin’s quarterly net earnings fell to $569 million from $683 million in the year-ago period.

Lockheed Martin finished 2012 with $82.3 billion of backlog, including $19.8 billion of new orders booked in the fourth quarter. Of this $30.1 billion belonged to the Aeronautics segment and $18.1 billion to the Space Systems segment. The rest is made up of $14.7 billion for the Missiles and Fire Control segment; $10.7 billion for Mission Systems and Training; and $8.7 billion for the Information Systems & Global Solutions.

Segmental Performance

Restructuring


Earlier in October, Lockheed had announced the restructuring of the organization in order to streamline its operations while enhancing customer alignment. In the process, the Electronic Systems business segment was reorganized into two new business segments: Missiles and Fire Control (MFC) and Mission Systems and Training (MST).  Electronic Systems’ corporate management layer was removed and the Global Training and Logistics business was split between the two new business segments.

Moreover, the business reporting relationship for the Sandia National Laboratories and the U.K. Atomic Weapons Establishment joint venture was transferred from Electronic Systems to Space Systems. The re-organization became effective from Dec 31, 2012. Post-restructuring, the company now operates through the below mentioned five business segments.

Aeronautics

Aeronautics’ quarterly sales increased 7% year over year to $4.1 billion in the reported quarter due to higher volume from C-5 and C-130 programs primarily due to higher aircraft deliveries. Partially offsetting the increases were lower sales from F-16 programs. 

Net sales from F-35 contracts and the F-22 program were comparable to the same period in 2011. Segmental operating profit fell 3% to $445 million while operating margin shrunk by 130 basis points to 10.7% in the reported quarter.

Information Systems & Global Solutions

Information Systems & Global Solutions segment’s quarterly sales decreased 14% to $2.2 billion. In the reported quarter sales decreased due to lower volume on numerous programs (primarily Warfighter Information Network–Tactical; Information Technology Agency Enterprise Transport Management; Command, Control, Battle Management and Communications; and Hanford Mission Support contract); and due to the substantial completion of certain programs during 2011 (primarily Outsourcing Desktop Initiative for NASA; Airborne Maritime Fixed Station Joint Tactical Radio System; and U.K. Census). Segmental operating profit fell by 20% to $203 million while operating margin shrunk by 80 basis points to 9.2% in the reported quarter.

Missiles and Fire Control

Missiles and Fire Control segment’s quarterly sales rose 4% to $1.9 billion. In the reported quarter the upward spike in sales came from higher volume for air and missile defense programs (primarily Terminal High Altitude Area Defense and Patriot Advanced Capability-3). This was partially offset by lower volume sales from tactical missile programs. Segmental operating profit rose by 18% to $272 million while operating margin rose by 160 basis points to 14.3% in the reported quarter.

Mission Systems and Training

Mission Systems and Training segment’s quarterly sales remained flat year over year at close to $1.9 billion. Higher top line from training and logistics solutions programs were offset by lower top line from various undersea systems programs due to lower volume. Segmental operating profit rose by 9% to $187 million while operating margin rose by 90 basis points to 10.1% in the reported quarter.

Space Systems

Space Systems’ segmental sales decreased by 6% to approximately $2.0 billion. In the reported quarter sales declined in certain government satellite programs (primarily Space Based Infrared System and Mobile User Objective System) due to lower volume and a decline in risk retirements. Segmental operating profit fell by 19% to $232 million while operating margin fell by 190 basis points to 11.6%.

Financial Condition

Cash and cash equivalents of Lockheed Martin were $1.9 billion versus $3.6 billion at year-end 2011. Long-term debt fell by $302 million to approximately $6.2 billion versus year-end 2011. The company repurchased 3.1 million shares at a cost of $286 million in the fourth quarter and 11.3 million shares at a cost of $1.0 billion in full year 2012. The company disbursed $373 million as dividends in the reported quarter and $1.4 billion in full year 2012.

Guidance

Lockheed Martin affirmed its full year 2013 earnings per share in the range of $8.80–$9.10, on net revenues in the range of $44.5–$46.0 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.

Shares of the company are currently at their 52-week peak. Furthermore, it is Zacks Rank #2 (Buy) stock. The past 30 days have seen none of the 17 earnings estimates for full year 2013 move either up or down despite an industry-wide threat of budget cutbacks and effects of sequestration.

The cautious outlook is reflected across the board in the defense and aerospace industry. Of Lockheed Martin’s major peers, General Dynamics Corporation (GD - Analyst Report) affected by defense budget cutbacks missed market expectations while Raytheon Company (RTN - Analyst Report) surpassed mainly on capital deployment actions and operational improvements.

Another major aerospace player, Textron Inc. (TXT - Analyst Report) is bullish about near-term prospects solely due to its anticipated double-digit growth at its Cessna business jets segment. Nonetheless there is a general air of pessimism in the market about lackluster prospects for the defense business in 2013.

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