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Lockheed Beats on Q2 Earnings, Projects Higher 2015 Profit - Analyst Blog

The Pentagon's prime contractor, Lockheed Martin Corp.LMT , posted second-quarter 2015 earnings before the opening bell today. The company reported quarterly earnings of $2.94 per share, comfortably surpassing the Zacks Consensus Estimate of $2.67 by 10.1%. Earnings also jumped 6.5% from $2.76 per share a year ago, as higher fighter jet demand led to increased revenues.

Lockheed Martin Corporation - Earnings Surprise | FindTheBest

Operational Highlights

In the reported quarter, total revenues came in at $11.6 billion, beating the Zacks Consensus Estimate of $11 billion by almost 5%.

The company's top line also increased 2.7% from $11.3 billion a year ago. All segments, except Missiles and Fire Control and Information Systems & Global Solutions, registered year-over-year sales growth.

Backlog

Lockheed Martin ended the second quarter (on Jun 28, 2015) with $72.8 billion in backlog, down 5.3% from $76.9 billion backlog in the preceding quarter and 9.6% from $80.5 billion at 2014 end. Of this, the lion's share of $23.2 billion went to the Aeronautics segment with Space Systems accounted for $17.6 billion. The rest comprised $12.3 billion each for the Mission Systems and Training and Missiles and Fire Control segments and $7.5 billion for Information Systems & Global Solutions.

The company won $7.5 billion worth of orders during the quarter, down 21.1% year over year.

Segmental Performance

Aeronautics : Quarterly sales increased 7% year over year to $4.1 billion mainly on higher sales for F-35 production contracts and higher deliveries of C-5 program during the quarter.

Operating profit, however, declined 2% year over year to $444 million and operating margin decreased 110 basis points (bps) to 10.7%.

Information Systems & Global Solutions : Quarterly sales decreased 2% to approximately $1.9 billion. The decline reflects lower volume, lower customer funding and heightened competition.

Operating profit came in at $160 million, down 9% year over year while operating margin contracted 60 bps to 8.4%.

Missiles and Fire Control: Quarterly sales dropped 6% year over year to $1.8 billion. The decrease reflects lower net sales for various development activities as well as air and missile defense programs.

Operating profit decreased 12% year over year to $303 million and operating margin shrunk 110 bps to 17.1%.

Mission Systems and Training : Quarterly sales of $1.8 billion increased 2% from the prior-year quarter. The growth primarily reflects higher revenues from integrated warfare systems and sensors programs along with the start-up of new programs.

Operating profit improved 26% year over year to $219 million and operating margin expanded 250 bps to 12.9%.

Space Systems: Sales increased 10% year over year to about $2.0 billion in the second quarter. The increase reflects higher sales of government satellite programs and the Orion program.

Operating profit increased to $259 million from $248 million a year ago. However, operating margin dropped 60 bps to 12.8% from 13.4% in the year-ago quarter.

Financial Condition

Cash and cash equivalents were $3.20 billion at second-quarter end compared with $1.44 billion at year-end 2014. Long-term debt rose to $7.95 billion from $6.17 million at 2014 end.

During the quarter, the company repurchased 4.9 million shares for $937 million compared with 0.8 million shares repurchased for $124 million a year ago.

Sikorsky Acquisition

Lockheed Martin confirmed market rumors and solidified its position as the world's prime supplier of military hardware by agreeing to buy Sikorsky for $9 billion from United Technologies UTX . Sikorsky is the maker of the Black Hawk helicopter.

Taking into account tax benefits resulting from the transaction, the net cost of the Sikorsky deal is around $7.1 billion. Lockheed Martin would integrate Sikorsky under its mission systems and training business and expects the transaction to close by this year-end or early 2016, depending on timing of regulatory approvals.

Strategic Review

Lockheed Martin also announced that it would spin off or sell its government IT and technical services businesses. The programs to be reviewed represent $6.0 billion in estimated 2015 annual sales.

The defense prime would complete a strategic review of its government IT infrastructure services business and the technical services business within its missiles and fire control segment by the end of the year. Services businesses focused on defense and intelligence customers are likely to be retained by the company.

Guidance

Lockheed Martin reaffirmed its 2015 revenue expectations between $43.5 billion and $45 billion with orders in the $43.5-$45 billion range.

However, the company now projects 2015 earnings of about $11.00−$11.30 per share instead of its earlier expectation of $10.85−$11.15.

Lockheed expects cash from operations of approximately $5 billion for the year.

Upcoming Peer Releases

The Boeing Co. BA is slated to report second-quarter 2015 results on Jul 22, before the opening bell.

General Dynamics Corp. GD is slated to report second-quarter 2015 results on Jul 29, before the opening bell.

Northrop Grumman Corp. NOC is also expected to report second-quarter 2015 results on Jul 29, before the opening bell.

Outlook

Considering the constant stress that the U.S. military budget is under, Lockheed Martin's better-than-expected second-quarter earnings are commendable. Moreover, an increased earnings projection for the year should spread positive vibes among investors.

The company is also registering higher foreign sales that will likely offset a lower defense budget scenario at home. Again, the takeover of Sikorsky is a strategic fit for Lockheed Martin. The move could prove to be a revenue booster for the prime defense contractor as its top line was thwarted by a shrinking defense budget.

However, the threat of sequestration still lurks over this defense major, negatively impacting its backlog.

Lockheed Martin has a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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