Bolstered by strong operating results at its business segments, Lockheed Martin [LMT] yesterday posted a double-digit increase in first quarter earnings amid solid sales and the company announced plans for an orderly leadership succession that will see Chris Kubasik, president and chief operating officer (COO), take over for Bob Stevens as CEO next January.
Stevens, who became CEO in 2004 and has been with Lockheed Martin for 25 years, will remain as company’s chairman through January 2014, subject to approval by the company’s board of directors. Kubasik’s election by the board to be the next CEO is no surprise, although the announcement was a year or two sooner than some analysts expected.
With the exception of the Information Systems & Global Solutions segment, the rest of Lockheed Martin’s business segments each posted higher sales and operating profits with particular strength coming from increased military aircraft deliveries and a number of programs in the Electronic Systems segment.
Net income jumped 26 percent to $668 million, $2.03 earnings per share (EPS), from $530 million ($1.50 EPS) a year ago, topping analysts’ expectations of $1.71 EPS by 31 cents. Segment margins increased 90 basis points to 11.9 percent. Sales increased 6 percent to $11.3 billion from $10.6 billion.
Sales growth was primarily driven by higher volume at the Aeronautics segment on F-35, C-130J, F-16, and to a lesser extent, C-5 aircraft deliveries. The Electronic Systems and Space Systems segments also helped with the growth curve through contributions from a number of programs such as the Littoral Combat Ship, missile defense, tactical missiles and NASA’s Orion Multi-Purpose Crew Vehicle.
Electronic Systems drove the income gains with higher profits on programs such as Vertical Launch Systems, the MH-60 helicopters, the Multiple Launch Rocket System, and fire control systems, among others. The company attributed the increased profits to risk retirement on these programs.
The company left its outlook for 2012 unchanged although segment operating profits are now expected to be higher, up about $50 million from earlier guidance to between $5.1 billion and $5.2 billion, driven by better than expected profits at Electronic Systems in the first quarter. However, total operating profit remains at between $3.9 billion and $4 billion due to higher than expected non-operating expenses.
The guidance does not factor in the likelihood of a continuing budget resolution beginning in October, which would mean the government would operate at the same spending levels it does in FY ’12, Stevens said on a call with media yesterday. However, later in the day on the company’s earnings call, Bruce Tanner, the CFO, said that it will be “interesting” to see in the final quarter of 2012 if a continuing resolution is in effect if the Defense Department decides to reduce spending below FY ’12 levels to begin adjusting for the impact of a budget sequestration in 2013.
Stevens said that the company will continue to drive efficiencies, including facility closures, to improve affordability for its customers. He also expects to be cautious about making acquisitions until there is more clarity as to what sequestration may mean for the company in practical terms.
Stevens said that the machinists strike that began Monday at its fighter aircraft plant in Fort Worth, Texas, won’t have an impact in the second quarter on deliveries of F-35s and F-16s, although he did acknowledge that the strike introduces potential risk in the program. He said that flight-testing of the F-35 is continuing and is ahead of schedule on its test points.
Kubasik said that delivery of the Block IIA software for the F-35 is a couple of months behind schedule and will be ready sometime between July and September. He said that 90 percent of the code is written and 85 percent is in laboratory and flight-testing.
Lockheed Martin’s leadership didn’t expect the machinists to vote to strike and Stevens and Kubasik both said that the key sticking point, that new hires receive a defined contribution benefit plan instead of the current defined pension plan, in the contract offer is the same that employees at other company plants have accepted. The executives said the offer is fair and gave no indication that the company will initiate the next step to resume labor negotiations.
Stevens’ retirement comes amid one of the greatest challenges facing the defense industry, which is caught between growing fiscal restraint on the part of its government customers and their demand for cutting edge technology that can be developed and produced at lower costs as the global security environment grows more complex and uncertain. Still, the transition to new leadership has effectively been in place for nearly two years, as Kubasik, 51, who at one time was the company’s chief financial officer (CFO), became president and COO in January 2010 and joined Stevens in the executive office of the chairman in October 2011.
Stevens, who turns 61 in September, said his reasons for retiring is because he has already given a “full period of service” to the company and that it has the executive bench strength in place to begin making the move now. Lockheed Martin has a mandatory retirement age of 65.
To further an orderly transition, Lockheed Martin’s board also elected Marillyn Hewson, 58, to succeed Kubasik as president and COO come January. Hewson has been with the company 29 years and has led the Electronic Systems segment since January 2010.
Kubasik said his hand in helping to run the business for at least the past two years if not before as CFO means that there won’t be much change in the company’s strategy when he takes over in eight months.
Backlog at the end of the quarter stood at $76.6 billion, down $4.1 billion since the end of 2011.