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Tickers in this Article: LMT, GD
Lockheed Martin Corporation (LMT) posted third-quarter 2012 results. The company reported third-quarter 2012 earnings of $2.26 per share, beating the Zacks Consensus Estimate of $1.85. This was also higher than the year-ago quarterly earnings of $2.06.

Operating Statistics

On the revenue front, Lockheed Martin reported quarterly revenue of $11.9 billion, beating the Zacks Consensus Estimate of $11.1 billion. However, the figure fell below the year-ago quarterly revenue of $12.1 billion.

Backlog at the end of the reported quarter was $75.6 billion versus $80.7 billion at the end of the previous year quarter.

Segmental Performance

Aeronautics

Aeronautics' quarterly sales decreased 6.7% year over year to $3.7 billion. The decline reflects less aircraft deliveries on C-130 programs, lower sales from F-22 program, mainly due to decreased production as final aircraft deliveries were completed in the third quarter of 2012 and lower volume on other sustainment activities on F-16 programs. However, these negatives were partially offset by higher F-16 deliveries and rise in sales due to increased production volume for F-35 Low Rate Initial Production (LRIP) contracts.

Electronic Systems

Electronic Systems' quarterly sales increased 4.2% year over year to $3.8 billion. The year-over-year increase reflects higher volume for Aegis and other radar systems, tactical missile programs (Javelin), air and missile defense programs (Patriot Advanced Capability-3) and fire control systems programs (Longbow).  However, these increases in volumes were partially offset by lower net sales for undersea systems programs.

Information Systems & Global Solutions (IS&GS)

Information Systems & Global Solutions segment's quarterly sales decreased 1.3% to approximately $2.3 billion. The decline reflects decrease of sales resulting from the completion of the Outsourcing Desktop Initiative program for NASA, cessation of the Airborne Maritime Fixed Station Joint Tactical Radio System program and the completion of the U.K. Census program in the fourth quarter of 2011.

However, these decreases were partially offset by increased activity for other numerous programs, primarily federal cyber security programs and PTDS operational support, as well as net sales from the acquisition in the fourth quarter of 2011.

Space Systems

Space Systems' segmental sales decreased by 4.9% to approximately $2.1 billion. The decline reflects decrease in commercial and government satellite programs, primarily resulting from fewer commercial satellite deliveries.

Financial Condition

Cash and cash equivalents of Lockheed Martin were $4.7 billion versus $3.6 billion at the end of fiscal 2011. Long-term debt fell to approximately $6.4 billion versus $6.5 billion at the end of fiscal.

During the quarter, the company repurchased 3.3 million shares at a cost of $294 million. In September this year, the company increased its quarterly dividend rate to $1.15 per share, up approximately by 15 cents from the current payout of approximately $1.00 per share. The proposed hike would bring the annual dividend to $4.60, up 15% from the previous payout. The increased quarterly dividend will be paid on December 28, 2012 to shareholders of record at the close of business on December 3, 2012.

Restructuring

Recently, 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 will be reorganized into two new business segments: Missiles and Fire Control ("MFC") and Mission Systems and Training ("MST").  Electronic Systems' corporate management layer will be removed and the Global Training and Logistics business will be 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 will transfer from Electronic Systems to Space Systems. The re-organization will be effective from December 31, 2012. Post-restructuring, the company will operate into five business segments - Aeronautics, IS&GS, MFC, MST, and Space Systems.

Guidance

Lockheed Martin increased its fiscal 2012 revenues and expects it to be in the range of $45.5 billion - $46.5 billion versus its prior expectation of $45 billion - $46 billion. The company also raised its earnings per share from continuing operations and expects it to be in the range of $8.20 to $8.40 versus its prior expectation in the range of $7.90 - $8.10.

In full-year 2013, the company expects net sales to decline at low single digit rate year over year mainly due to decline in IS&GS net sales at mid single digit rate. Lockheed Martin expects segment operating margin to remain above 11%.

The guidance reflects no sequestration and that the U.S. Government will continue to support and fund the Corporation's programs. The guidance also takes into account that the Congress will approve defense budget legislation for government in fiscal year 2013 at a level that is in line with the President's proposed defense budget for the second half of the U.S. Government's fiscal year 2013.

At the Peer

One of the Lockheed's peers, General Dynamics Corporation (GD) also released its third-quarter 2012 results. General Dynamics posted operating earnings of $1.70 per share, falling short of the Zacks Consensus Estimate by 7 cents. It also missed the year-ago figure by 7.1%.

Outlook

Lockheed easily surpassed our estimates based on persistent focus on affordability and program execution and proven portfolio of products and technologies. Going forward, we expect a stable performance due to the company's leveraged presence in the Army, Air Force, Navy and IT programs. Further, we expect shareholder return to continue to be shored up by the company's focus on debt repayment, its ongoing share repurchase program and the incremental dividend.

However, we are concerned about the budget deficits and political uncertainty that make future defense budgets vulnerable to cutbacks. Going forward, continuing growth in the Information Systems & Global Services segment is critical, since it has the potential to be the primary growth driver in situations, where cuts in defense spending could hinder other operating segments. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Lockheed Martin Corporation is the largest defense contractor in the world. The company's customer base includes the U.S. government, foreign governments, and other commercial buyers.

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