Lockheed Martin’s Revenue Jumps on F-35 Sales

Military contractor’s net earnings jumped 13% to $1 billion

Source: Company's Website
Source: Company’s Website

Lockheed Martin Corp. (NYSE: LMT), the largest pure-play defense contractor in the U.S., announced its Q2 FY16 financial results on July 19th, 2016. Headquartered in Bethesda, Maryland, Lockheed is a global security and aerospace company. The Company is engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The Company operates in five segments: Aeronautics; Information Systems & Global Solutions (IS&GS); Missiles and Fire Control (MFC); Mission Systems and Training (MST), and Space Systems. The Company provides a range of management, engineering, technical, scientific, logistics, and information services. The Company’s areas of focus are in defense, space, intelligence, homeland security and information technology, including cyber security. It serves customers, including military services, the United States Navy, and various government agencies of the United States and other countries, as well as commercial and other customers. Read more about Lockheed Martin’s financial results below.

Q2 FY16 financial highlights

Lockheed Martin’s Q2 FY16 revenue increased 11% to $12.91 billion from revenue of $11.6 billion in the year-ago quarter. During the reporting quarter, the Company’s growth is mainly attributed to higher F-35 sales, which pushed revenue in its Aeronautics segment, it Lockheed Martin’s biggest, by 5.9% to $4.38 billion. Meanwhile, revenue in its MST segment surged 53%, mainly due to Sikorsky sales, which offset lower sales in the IS&GS and Space Systems segments.

Source: Company's Website
Source: Company’s Website

Lockheed Martin’s consolidated net adjustments not related to volume, including net profit booking rate adjustments and other matters, represented about 31% of total segment operating profit in Q2 FY16 compared to approximately 39% in Q2 FY15.

Lockheed Martin’s operating margin for Q2 FY16 declined 30 basis points to 12.1% compared to the year-ago period, mainly because the Sikorsky division’s weak profit margins which dragged down Lockheed’s overall numbers.L3

Segmental highlights

Source: Company's Website
Source: Company’s Website

Aeronautics: Aeronautics’ net sales in Q2 FY16 grew 6% to $244 million as compared to the year-ago period, mainly due to higher sales of about $390 million from the F-35 program. This gain was offset by lower net sales of about $180 million for the C-5 program due to decreased deliveries and sustainment activities. Aeronautics’ operating profit in Q2 FY16 grew 8% to $34 million as compared to the same period in 2015. Adjustments not related to volume, including net profit booking rate adjustments, were roughly $25 million lower in Q2 FY16 compared to the year-ago quarter.

IS&GS: IS&GS’ net sales in Q2 FY16 fell 5% to $71 million as compared to the year-ago period, mainly because of lower net sales of about $50 million as a result of the completion of certain programs to provide IT solutions to U.S. defense and intelligence agencies. IS&GS’ operating profit in Q2 FY16 jumped 41% to $44 million, mainly due to higher operating profit of approximately $40 million due to contract close-out activities and completion of various programs. Adjustments not related to volume, including net profit booking rate adjustments, were about $55 million higher in Q2 FY16 as compared to the year-ago period.

MFC: MFC’s net sales in Q2 FY16 grew 2% to $31 million as compared to the year-ago quarter because of higher net sales of approximately $60 million for fire control programs and approximately $35 million for air and missile defense programs. MFC’s operating profit in Q2 FY16 fell 14% to $40 million, owing to lower operating profit of about $15 million for air and missile defense programs, lower risk retirements, and contract mix. Adjustments not related to volume, including net profit booking rate adjustments, were approximately $35 million lower in Q2 FY16 compared to the same period in 2015.

Source: Company's Website
Source: Company’s Website

MST: MST’s net sales in Q2 FY16 shot up 53% to $1.1 billion, mainly due to net sales of approximately $1.2 billion from Sikorsky after adjustments required to account for its acquisition. MST’s operating profit in Q2 FY16 fell 23% to $60 million, mainly due to an operating loss of $30 million from Sikorsky on account of intangible amortization and adjustments required to account for the acquisition. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were $35 million lower in Q2 FY16 as compared to the year-ago period.

Space Systems: Space Systems’ net sales in Q2 FY16 decreased 3% to $71 million, due to lower net sales of approximately $115 million for government satellite programs. However, Space Systems’ operating profit in Q2 FY16 jumped 16% to $46 million, primarily because of $80 million of increased equity earnings in joint ventures (primarily ULA). Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $75 million lower in Q2 FY16 as compared to the year-ago period.

As a result of higher revenue, net earnings during Q2 FY16 jumped 13% to $1.0 billion, or $3.32 per share, compared to $929 million, or $2.94 per share, in the year-ago period.

Cash from operations in Q2 FY16 was $1.5 billion, compared to $1.3 billion in Q2 FY15. For the first half of FY16, Lockheed generated $2.8 billion in positive free cash flow, nearly 50% more than the $1.9 billion generated in last year’s first half.

Other highlights

The Company’s outlook for 2016 reflects a full year of operations of the IS&GS business, as the transaction to separate and merge the IS&GS business with Leidos Holdings Inc. is expected to be completed in Q3 FY16.

Source: U.S. Department of Defense
Source: U.S. Department of Defense

In 2014 and 2015, Lockheed Martin received authorization and initial funding from the Pentagon to begin producing F-35 aircraft under low-rate initial production (LRIP) 9 and 10 contracts, respectively. However, contract talks over the multibillion-dollar, 160-aircraft deal have been pulling on for months without a firm contract in place. Despite not receiving funding, Lockheed Martin continued production to meet the aircraft delivery dates. As a result, as of June 26th, 2016, Lockheed Martin has approximately $900 million of potential cash exposure and $3.0 billion in termination liability exposure related to the F-35 LRIP 9 and 10 contracts. Lockheed Martin expects to receive additional funding by the end of 2016, failing which the Company will have to take out extra loans to pay suppliers. The F-35 Joint Strike Fighter is the Pentagon’s most expensive weapons program.

Acquisitions

During Q2 FY16, Maryland-based Lockheed Martin has been working to revamp its business by focusing on building military jets, helicopters and missiles. During Q2 FY16, Lockheed Martin benefited from the acquisition of helicopter producer Sikorsky Aircraft Corp., which it acquired from United Technologies Corp. (NYSE: UTX) on November 6th, 2015 for $9 billion.

Share repurchases

L7Lockheed Martin repurchased 2.1 million shares for $501 million in Q2 FY16 compared to 4.9 million shares for $937 million in the Q2 FY15. It also paid cash dividends of $501 million, compared to $467 million in the year-ago period.

Outlook for FY16

For FY16, Lockheed now expects to report EPS of $12.15 to $12.45, up from an earlier prediction of $11.50 to $11.80 a share. The company expects to log $50 billion to $51.5 billion in revenue in FY16, higher than its previous estimate of $49.6 billion to $51.1 billion.

Stock Performance

L8Lockheed Martin’s stock stood at $254.14, dipping 0.09%, at the close on Thursday, July 21st, 2016, having vacillated between an intraday high of $257.49 and a low of $251.60 during the session. The stock’s trading volume was at 2,741,162 for the day. The Company’s market cap was at $77.39 billion as of Thursday’s close.

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