Lockheed Martin Posts Solid Growth Amid Improved Outlook

Lockheed Martin (NYSE:LMT) posted 3% and 5% growth in revenues and net income, respectively, in the second quarter on a year-over-year basis. ^[1] As we anticipated and indicated in our earlier article, the growth was driven by higher production volume on F-35 Low Rate Initial Production (LRIP) contracts, offset by lower volume on F-22 program as final deliveries were made in the second quarter. Revenue growth was also aided by higher commercial satellite deliveries and increased production volume on the Orion program. However, cash from operations declined 5% compared to the year-ago quarter primarily on account of $607 million in pension contributions.

The company has also marginally increased its 2012 outlook for operating profit. On the whole, Lockheed Martin has been able to achieve moderate year-over-year growth in Q2, but long-term growth concerns stay due to looming U.S. defense spending cuts.

We currently have stock price estimate of $95 for the company, approximately 8% above its current market price.

See our complete analysis for Lockheed Martin here

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Higher sales at Aeronautics and Space Systems division drive top-line growth

Net sales in the aeronautics division were $3.4 billion in the second quarter, up 1% compared to the year-ago quarter. The higher sales are attributable to increased production volume on F-35 LRIP contracts, partially offset by losses accrued from the International Association of Machinists and Aerospace Workers strike at the company’s Ft. Worth facility. Also, lower production volumes on the F-22 program impacted the division’s sales and final deliveries under the program were completed during the quarter.

Net sales in the space systems division were $2.4 billion, up 18% from the second quarter of 2011. The increase is attributable to higher commercial satellite deliveries of $285 million and increased production volumes and risk retirements on the Orion multi-purpose crew vehicle program of $70 million during the second quarter. Partially offsetting these increases was the $15 million in lower sales on the NASA External Tank program that ended with the completion of the Space Shuttle program in Q2 2011.

But pension contributions impact cash from operations

However, pension contributions of $607 million in the second quarter caused a 5% decline in cash from operations. The company has been forced to contribute large sums to its pension plans as low interest rates have lowered returns on its pension plan assets. It contributed $2.3 billion and $2.2 billion in 2011 and 2010, respectively, to its pension plans, and has contributed $1.1 billion in the year-to-date period, which completes its required finding for 2012.

The company also utilized cash to pay dividends of $326 million in the second quarter, and repurchased 2.2 million shares for $186 million. It has adopted high dividend distribution and share repurchase as strategies to help address shareholder concerns, which stem from the challenge posed by the U.S. Defense spending cuts to the company’s growth over the coming years.

On the whole, Lockheed Martin has managed to post moderate growth by focusing on timely execution of programs and reducing cost structures. However, the real challenge to the company’s growth over the next few years rises from the U.S. Defense spending cuts.

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1. Lockheed Martin Announces Second Quarter 2012 Results, July 24 2012, www.lockheedmartin.com [↩]