Lower profits on the F-35 fighter program and fewer space launches led to a decline in net income at Lockheed Martin [LMT] in the third quarter despite a small gain in sales, the company reported on Tuesday.
Net income fell 5 percent to $1.7 billion, $6.73 earnings per share (EPS), from $1.8 billion ($6.71 EPS) a year ago, still topping consensus estimates by 6 cents per share. Sales increased 2 percent to $16.9 billion from $16.6 billion.
Per share results increased in the quarter due to a lower share count. The company spent nearly $1.8 billion to repurchase 4 million of its shares.
At the operating level, profit declines at the Space and Aeronautics segments more than offset gains at Rotary and Mission Systems (RMS), and Missiles and Fire Control (MFC). F-35 profits dipped on lower volume and lower favorable profit adjustments. The program also benefited a year ago from sales and related profit related to the Lot 15 production contract.
The lower operating profit in the Space segment was due to less launch volume at the United Launch Alliance (ULA) joint venture with Boeing [BA].
Lockheed Martin delivered 30 F-35s in the quarter, three more than in the same quarter a year ago. However, in the third quarter of 2022, the program benefited from recognizing revenue that had been deferred from the second quarter. Lockheed Martin has delivered 80 F-35s through the first nine months of 2023 and continues to expect to deliver 97 for all the year, Jim Taiclet, the company’s chairman, president, and CEO, said during the company’s third quarter earnings call.
Overall operating margin declined 90 basis points to 12.1 percent.
Higher sales were driven by the RMS, Space, and MFC segments due to the ramp up of new programs including Defense of Guam, Indirect Fire Production Capability High Energy Later, and the TPY-4 radar, and increased work on the Aegis combat system, C6ISR programs, Next Generation Interceptor development, Fleet Ballistic Missile, GPS III satellite, NASA’s Orion spacecraft, the Guided Multiple Launch Rocket Systems (GMLRS), and High Mobility Artillery Rocket System.
Lockheed Martin left its financial outlook for 2023 intact with sales still expected to be between $66.3 billion and $66.8 billion and net earnings between about $27 EPS and $27.20 EPS. Free cash flow is still expected to be at least $6.2 billion. In the third quarter, free cash flow was $2.5 billion.
The only change in the forecast is that the company now expects to repurchase more of its stock than before although these buybacks may be delayed if the federal government shuts down, Jay Malave, Lockheed Martin’s chief financial officer, said during the earnings call. In addition to no new program starts, a shutdown could lead to program disruptions and force the company to “self-fund” programs to keep them on track, he said.
Lockheed Martin will provide a detailed forecast for 2024 when it reports final 2023 results in January but still expects low single-digit sales growth despite a backlog that supports a higher growth rate, Malave said. The reason for the subdued growth outlook is because “the value chain remains constrained by extended lead times that have yet to compress,” he said.
Segment operating margin could slip between 25 and 50 basis points in 2024 due to challenges with a classified missile program at MFC, Malave said. The margin impacts will depend on timing of recognizing losses on the program, he said. Excluding the missile program, underlying segment margin is flat next year, he said.
Asked by one analyst during the call about Taiclet’s recent announcement that Lockheed Martin’s plan to add another supplier of solid rocket motors to its supply chain, Taiclet replied that the goal is to “bring anti-fragility into our own supply chain first” and later to help the Defense Department. Taiclet has not identified the new solid rocket motor supplier but highlighted the first program to benefit from the strengthened supplier base will be GMLRS, and then “extend into other systems large and small, legacy and advanced.”