Pentagon’s prime contractor, Lockheed Martin Corp. (NYSE:LMT) reported third-quarter 2016 earnings of $3.61 per share, surpassing the Zacks Consensus Estimate of $2.86 by 26.2%. Earnings also increased 49.2% from the year-ago level, courtesy of strong revenue and operating margin growth.
On Aug 24, 2016, the company’s ownership interest in the AWE Management Limited (AWE) venture, which operates the United Kingdom’s nuclear deterrent program, increased by 18%.
Owing to the divestiture of its Information Systems & Global Solutions (IS&GS) business, Lockheed Martin’s third-quarter operating results exclude the performance of the segment.
During the third quarter, the company renamed its Mission Systems and Training segment as Rotary and Mission Systems (RMS) segment.
LOCKHEED MARTIN Price, Consensus and EPS Surprise
LOCKHEED MARTIN Price, Consensus and EPS Surprise | LOCKHEED MARTIN Quote
Operational Highlights
In the reported quarter, total revenues came in at $11.55 billion, beating the Zacks Consensus Estimate of $11.38 billion by 1.5%.
The company’s revenues increased 14.8% from $10.06 billion a year ago. All segments, except Missiles and Fire Control, registered year-over-year sales growth.
Backlog
Lockheed Martin ended the third quarter (on Sep 25, 2016) with $91.4 billion in backlog, down 3.6% from $94.8 billion at 2015-end. Of this, the Aeronautics segment accounted for $27.9 billion while Rotary and Mission Systems contributed $29.2 billion. Also, $19.8 billion came for Space Systems and $14.5 billion from Missiles and Fire Control.
Quarterly Segmental Performance
Aeronautics: Sales increased 7% year over year to $4.2 billion, mainly on production contracts of F-35 aircraft and sustainment activities during the quarter.
Operating profit also advanced 5% year over year to $437 million, while operating margin dropped 30 basis points (bps) to 10.4%.
Missiles and Fire Control: Quarterly sales dropped 2% year over year to $1.7 billion. The decrease was due to lower volume observed in certain fire control programs and air and missile defense programs.
Operating profit also decreased 9% year over year to $253 million and operating margin contracted 130 bps to 16.6%.
Rotary and Mission Systems: Quarterly sales of $3.3 billion increased 55% from the prior-year quarter on higher revenues from Sikorsky.
Operating profit increased 0.8% year over year to $247 million, while operating margin shrunk 390 bps to 7.4%.
Space Systems: Sales increased 3% year over year to about $2.3 billion in the third quarter. The improvement reflects the company’s increased ownership interest in Atomic Weapons Establishment Venture.
Operating profit increased to $450 million from $265 million a year ago while operating margin expanded 770 bps to 19.7% in the quarter.
Financial Condition
Cash and cash equivalents were $2.90 billion at third-quarter end compared with $1.09 billion at 2015-end. Long-term debt was almost on par at $14.304 billion with the 2015-end level of $14.305 billion.
Cash from operations at the end of the third quarter increased 19.6% to $4.46 billion compared with the year-ago figure of $3.73 billion.
During the quarter, the company repurchased 1.2 million shares for $278 million compared with the buyback of 4.1 million shares for $823 million a year ago. Further, the company raised its share repurchase authorization by $2 billion.
Divestiture of IS&GS
On Aug 16, 2016, Lockheed Martin completed the previously announced divestiture of its IS&GS business segment, which merged with Leidos Holdings. This deal reduced Lockheed Martin’s common stock outstanding by approximately 9.4 million shares (3%). Additionally, the company received a one-time special cash payment of $1.8 billion and recognized another $1.2 billion gain, which represents the $2.5 billion fair value of the common stock tendered. The final gain is subject to certain post-closing adjustments, including final working capital and tax adjustments, which the company expects to complete in the fourth quarter of 2016 or the first quarter of 2017.
Guidance
Adjusting for the divestiture of IS&GS, Lockheed Martin has raised its revenue guidance for 2016 to $46.5 billion, from the prior projection of $45−$46.2 billion. The company also increased its earnings guidance to $12.10 from the previous $11.15–$11.45.
The company expects cash from operations of approximately $5.7 billion for the year (earlier projection: $5.4 billion).
Upcoming Peer Releases
General Dynamics Corp. (NYSE:GD) has an earnings ESP of +0.84% and a Zacks Rank #3 (Hold). The company is scheduled to report quarterly results on Oct 26.
Huntington Ingalls Industries, Inc. (NYSE:HII) , slated to report on Nov 3, has an earnings ESP of +2.09% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Boeing Company (NYSE:BA) has an earnings ESP of +0.76% and a Zacks Rank #3. The company is expected to release results on Oct 26.
Zacks Rank
Lockheed Martin carries a Zacks Rank #4 (Sell).
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