Lockheed Martin Earnings: Record Sales Drive Earnings This Quarter

Lockheed Martin (NYSE: LMT) performed solidly in the fourth quarter, soundly beating consensus estimates. About 80% of all the company’s revenues come from defense contracts, and the company has considerable momentum, given its strong market position. The defense contractor also managed to increase its international business to account for 21% of all corporate sales, as it grew by 6% year over year. During the quarter, the company also concluded the Sikorsky acquisition which has enabled the company to add tilt-rotor aircraft to its broad systems offering. ^[1] All in all, 2015 was a great year for the company. In meeting its financial targets, it generated record levels of revenue, cash flow and backlog.  And it achieved significant strategic objectives with the completed acquisition of Sikorsky recent decision to divest the government IT business.

Going forward, the management is highly optimistic about what they can achieve next year. With new contracts and synergies from the Sikorsky deal beginning to pay off, 2016 could be one of the best for the contractor.

Financial Highlights: 

• The company posted revenues of $12.9 billion which surpassed analyst expectations of $12.1 billion by almost 6.7%.
• In terms of earnings, the defense giant recorded $3.01 per share — beating the analyst estimate of $2.93 by nearly a dime.
• All segments posted positive revenues and margins, most notably in the Aeronautics and Space Systems divisions.

Acquisitions and Divestitures:

As mentioned previously, the company concluded its acquisition of Sikorsky. This deal enables the company to diversify its product catalogue by allowing it to provide customers with a wide range of mission ready solutions in rotary aircraft. The management has noted that since the closure of the deal, a lot of interest has been generated in both military and search and rescue opportunities, primarily from customers based in the Middle East, Asia and Europe. So far, the backlog witnessed from this segment has already accumulated to approximately $16 billion. With time, it seems very likely that there is opportunity for prolonged revenue generation as new contracts are awarded and synergies from the deal start paying off.

Another major strategic implementation was the decision to separate and combine the company’s Information Systems & Global Solutions businesses with Leidos in a Reverse Morris Trust transaction. This comes as a part of the portfolio shaping strategy that the management announced in July. Such moves will enable the company to focus more on their (more profitable) core business of aerospace and defense. This could result in higher revenues from the core business segments going forward.

See our complete analysis of Lockheed here

Record Sales Figures Help Drive Earnings:

As mentioned previously, Lockheed witnessed record sales figures in the year. The company’s F-35 Joint Strike Fighter program proved to be integral in achieving this feat. The company managed to complete 45 aircraft deliveries (up 25% from the preceding year) to various domestic and international customers. It has been trying to improve operational rate and efficiency over the past year, and such sales figures are a testament to the fact that the implemented strategies are bearing fruit. In 2016, the jet manufacturer hopes to expand production further. In this respect, the company hopes to deliver 53 F-35 aircraft by the end of the year.

Since almost 80% of the company’s revenues come from defense contracts awarded by the U.S. Government, it would be worthwhile to talk about the Department of Defense (DoD) procurement budget. The new budget reflects a $25 billion increase above the previous year’s base. This, incidentally, happens to be the first time since 2012 that such an increase has been recorded. The budget also includes a double-digit annual percentage increase in investment accounts. This has been done to fund new equipment procurement and research and development activities — a move which fares well for Lockheed. The management is confident that the company’s product line and technologies “will line up very well with (the Department’s) essential recapitalization actions in the areas of ballistic missile defense, tactical missiles and rotary aircrafts.” ((LMT Q4 2015 Earnings Call Transcript, www.seekingalpha.com))

The company recently nabbed a $1.17 billion contract to buy titanium and other such materials to build a fresh batch of 11 F-35s. ^[2] Apart from this, the company has also managed to procure two multi-year contracts for the C-130J Transporter Aircraft which help extend the production line well into 2019. In total, Lockheed managed to procure contracts worth $26 billion in Q4.

In conclusion, the quarter proved to be extremely impressive, carrying forward the initial momentum gained early in the year. With all the new contracts, the Sikorsky acquisition and streamlining of the business, it seems likely that this momentum is poised to continue well into the next year. Things seem to be going very well for the company and hopefully this will reflect well on the share price going forward.

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1. LMT Q4 2015 Earnings Call Transcript, www.seekingalpha.com [↩]
2. What’s in Store for Lockheed Martin in Q4 Earnings, www.nasdaq.com [↩]