Lockheed Martin Reports Strong - Analyst Blog - Employers Holdings (NYSE:EIG), Boeing (NYSE:BA)

World's largest stand-alone defense contractor, Lockheed Martin Corporation (LMT) ended fiscal 2010 with a bang. The company posted fourth-quarter 2010 operating earnings of $2.30 per share, beating both the Zacks Consensus Estimate of $2.20 and year-ago adjusted quarterly earnings of $2.19 by margins of 10 cents and 11 cents, respectively.

However reported quarter results were affected by a one-time per share charge of 8 cents related to internal facilities consolidation within Mission Systems & Sensors (MS2), a line of business in Electronic Systems. Also in November 2010, the company completed the divestiture of its Enterprise Integration Group (EIG) business, resulting in a per share gain from sale of 51 cents.

On a reported basis after adjusting for the above one-time items, the company posted per share earnings of $2.73 versus $2.17 in the year-ago quarter. Fiscal 2010 operating earnings came in at $7.18 per share, way above the Zacks Consensus Estimate of $6.91. However this came below fiscal 2009 earnings of $7.71.

Operating Statistics

On the revenue front Lockheed Martin reported quarterly net sales of $12.8 billion, beating the Zacks Consensus estimate of $12.5 billion by $331 million. Also the company sailed past the year-ago quarterly revenue of $12.2 billion by $591 million.

Fiscal 2010 revenue was $45.8 billion versus the Zacks Consensus Estimate of $46.2 billion. However revenue for the reported fiscal was greater than $44 billion in fiscal 2009.

Lockheed Martin's quarterly net earnings grew to $983 million from $827 million in the year-ago period. Earnings from continuing operations for the fourth quarter of 2010 were $829 million versus $836 million year-over-year.

Lockheed Martin finished fiscal 2010 with $78.2 billion of backlog, including $20.5 billion of new orders booked in the fourth quarter. Of this $27.5 billion belonged to the Aeronautics segment and $23.2 billion to the Electronic Systems segment.

Segmental Performance

Aeronautics

Aeronautics quarterly sales increased 19% year over year to $3.9 billion in the reported quarter due to higher deliveries of C-130J and volume sales in programs like C-5 Reliability Enhancement and Re-Engineering Program (RERP), P-3 and advanced development programs.

These increases partially were offset by a decrease in volume on F-16 and F-22 production programs, the F-35 System Development and Demonstration (SDD) contract and other combat aircraft programs. Segmental operating profit however fell 4% to $410 million while operating margin shrunk by 250 basis points to 10.6% in the reported quarter.

Electronic Systems

Electronic Systems quarterly sales increased 7% year over year to close to $4 billion due to higher volume on tactical missile programs, readiness and stability operations, and surface naval warfare programs. This was partially offset by lower volume on fire control systems, air defense, simulation & training and other logistics, ship & aviation systems and undersea warfare programs.

Segmental operating profit rose by 5% to $451 million, while operating margin shrunk by 30 basis points to 11.3% in the reported quarter.

Information Systems & Global Solutions

Information Systems & Global Solutions segment's quarterly sales increased 2% to $2.9 billion. In the reported quarter sales increased due to higher volume on mission & combat systems activities, and enterprise civilian services.

This was partially offset by lower volume on security solutions. Segmental operating profit fell by 2% to $255 million while operating margin shrunk by 30 basis points to 9.5% in the reported quarter.

Space Systems

Space Systems' segmental sales decreased by 13% to approximately $2.3 billion. In the reported quarter sales declined due to lower volume on commercial launch vehicle activities, the Orion program, the space shuttle external tank program, government satellite activities and defensive missile programs.

This was partially offset by higher volume on commercial satellites. Segmental operating profit fell by 7% to $279 million while operating margin rose by 70 basis points to 12.2% in the reported quarter.

Financial Condition

Cash and cash equivalents of Lockheed Martin were $2.3 billion versus $2.4 billion at fiscal-end 2009. Long-term debt fell marginally by $33 million to slightly above $5 billion versus fiscal-end 2009. However at the same time debt to total capitalization rose to 58% from 55% at fiscal-end 2009, primarily due to repurchase of common stock.

Lockheed Martin generated $3.5 billion of cash in operating activities in fiscal 2010, compared to $3.2 billion in cash generated in fiscal 2009. The company year-to-date repurchased 33 million shares for $2.5 billion and distributed $969 million as cash dividend.

Guidance

Lockheed Martin expects its fiscal 2011 earnings to be in the range of $6.70 – $7.00. The company expects its revenue for fiscal 2011 to be in the range of $45.75 billion – $47.25 billion.

Outlook

Lockheed Martin is the largest U.S. defense contractor with a platform-centric focus, a steady inflow of follow-on orders and a leveraged presence in the Army, Air Force, Navy and IT programs. However the ongoing trend of governmental delays in program decisions coupled with program cancellations has affected the fortunes of the defense industry in general and Lockheed Martin in particular.

Lockheed Martin currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock.

Headwinds concerning the company's largest program F-35 Joint Strike Fighter facing margin blues are our concern. All eyes are on the outcome of the fiscal 2012 congressional budget process.

The cautious outlook is reflected across the board in the defense and aerospace industry. Of Lockheed Martin's major peers, General Dynamics Corporation (GD) sailed past market expectations. On the other hand, the big daddy of aerospace, The Boeing Company's (BA) results failed to pass market optimism.