By Calvin Biesecker
Lockheed Martin [LMT] yesterday reported solid first quarter financial results with each of its operating segments posting higher earnings, led by strong performance in the Space Systems business.
Operating profits in the Space Systems segment increased 25 percent to $231 million, driven primarily by better earnings at the United Launch Alliance (ULA) joint venture with Boeing [BA] and from a fee related to a terminated commercial launch services contract. The improving profit picture at ULA is expected to continue, Bruce Tanner, Lockheed Martin’s chief financial officer, said during yesterday’s analyst call.
The strong Space earnings combined with several non-operating gains led Lockheed Martin to raise its earnings per share (EPS) outlook for 2008. The company estimates it will earn between $7.15 and $7.35 EPS this year, which is 10 cents higher on both ends of the range than previous guidance.
For the quarter net income increased 6 percent to $730 million ($1.75 EPS) versus $690 million ($1.60 EPS) a year ago, beating consensus estimates by 12 cents EPS. The solid earnings were a result of higher sales and operating margins, which grew 70 basis points to 11.5 percent. Free cash flow was $778 million.
Sales increased 8 percent to $10 billion from $9.3 billion, driven by double-digit gains at the Information Systems & Global Services (IS&GS) and Electronic Systems segments. Backlog stood at $74.7 billion, down $2 billion since the end of 2007.
The latest backlog numbers exclude the company’s win earlier this year of the potential $1 billion project to develop a next-generation, multi-modal biometric database for the FBI. That award has been protested by IBM [IBM].
In addition to the strong profits at the Space business, which were bolstered by higher volume on NASA’s Orion exploration vehicle and a commercial satellite delivery, the IS&GS and Electronic Systems segments also posted double-digit profit gains. Higher sales at both segments contributed to the profit gains as did improved margin performance at Electronic Systems. Margins at IS&GS were flat but are expected to improve as the year progresses.
The Aeronautics segment also boosted profits by 5 percent on a strong increase in margins despite flat sales. Higher volume on the C-130 transport program and improved performance on F-16 fighter programs led to the improved profits.
Tanner said that international demand for the C-130 remains strong and that aircraft production rates could double by 2010. He also believes that Morocco could finalize an order for 24 F-16s in the second quarter of 2008 but said it remains unclear whether Taiwan will close a deal for the fighter this year.
As for the F-35 Joint Strike Fighter program, Tanner said it is achieving all of its performance parameters. The Air Force variant of the aircraft is exceeding expectations through 40 flight-tests to date, he said. Flight-testing of the short take-off and vertical landing variant will occur in the second quarter following the successful start of engine power tests last week, Tanner added. Factory rollout and flight-testing of the Navy’s carrier variant remains on schedule for next year, he said.
Despite cash flow being lower than expected in the quarter, the company continues to expect strong cash from operations for the year. Lockheed Martin’s main use of cash in the first quarter was the repurchase of over 11 million shares of stock for $1.2 billion, the largest quarterly purchase ever in dollar terms.
The company is well ahead of plan this year to return at least half of its free cash flow to shareholders in share repurchases and dividends and has the flexibility to keep its options open, Tanner said. Prospects for closing an acquisition soon are good, Tanner said, with deal sizes likely to be $500 million or less and aimed at obtaining new technology, customers or improved access to customers. He doesn’t expect the company to spend the $1 billion it doled out in 2006 for acquisitions.