The Pentagon’s prime contractor, Lockheed Martin Corp. (LMT - Analyst Report), posted third-quarter 2014 earnings before the opening bell. The company reported quarterly earnings of $2.76 per share, comfortably surpassing the Zacks Consensus Estimate of $2.72 by 1.5%.

Earnings in the reported quarter also rose 7.4% from $2.57 per share in the year-ago quarter led by strong operational performance.

Lockheed Martin Corporation - Earnings Surprise | FindTheBest

Operational Highlights
 
In the reported quarter, total revenues were $11.1 billion, missing the Zacks Consensus Estimate of $11.2 billion by 1.1%.
 
The tepid defense budget scenario pulled its top line down by 2.1% from $11.3 billion a year ago. All segments, except Space Systems, recorded year-over-year sales decline.

Lockheed Martin ended the quarter with $76.5 billion of backlog, down 7.4% from $82.6 billion as on Dec. 31, 2013. Of this, $23.3 billion belonged to the Aeronautics segment and $20 billion to the Space Systems segment. The rest is made up of $12.8 billion for the Missiles and Fire Control segment, $12.2 billion for Mission Systems and Training and $8 billion for Information Systems & Global Solutions.

Segmental Performance

Aeronautics

Aeronautics’ quarterly sales decreased 2% year over year to $3.5 billion − the decline is all the more striking for a segment that builds the F-35 fighter jet. The lower revenue generation mainly reflects weak sales related to the C-130 program and lower sustainment activities.
 
Segmental operating profit dropped 12.1% year over year to $362 million and operating margin contracted 110 basis points (bps) to 10.2%.
 
Information Systems & Global Solutions
 
Information Systems & Global Solutions’ quarterly sales decreased 5% to $1.9 billion. The decline reflects lower net sales and completion of certain programs. The negatives were, however, partially offset by the initiation of certain U.S. government IT programs and integration of recently acquired companies.

Segmental operating profit came in at $175 million, down 6% year over year while operating margin decreased 10 bps to 9.0% year over year.

 Missiles and Fire Control
 
Missiles and Fire Control segment’s quarterly sales dropped 5% to $1.9 billion. The decrease reflects lower net sales for various technical services programs and for air and missile defense programs.
 
Segmental operating profit decreased 6% to $335 million and operating margin contracted 20 bps year over year to 17.6% in the reported quarter.

Mission Systems and Training
 
Mission Systems and Training segment’s quarterly sales of $1.7 billion declined 1% from the year ago. The decline primarily reflects softer revenues in ship and aviation systems programs on lower volume.
 
Segmental operating profit dropped 11% to $193 million while operating margin shrunk 120 bps to 11.5%.
 
Space Systems
 
Space Systems’ segmental sales increased 4% year over year to $2 billion in the third quarter. The increase reflects higher sales for commercial space transportation programs due to launch-related activities and for the Orion program due to increased volume.
 
However, segmental operating profit fell 1% to $281 million and operating margin contracted 70 bps to 13.8% from 14.5% in the year-ago quarter.
 
Financial Condition
 
Cash and cash equivalents were $2.96 billion at quarter end as compared to $2.62 billion at year-end 2013. Long-term debt rose slightly to $6.17 billion from $6.15 million at 2013 end.

During the third quarter, the company repurchased 2.6 million shares for $446 million compared with 4.9 million shares repurchased for $607 million a year ago. It also contributed $485 million to its pension trust during the third quarter of 2014, compared with $750 million during the third quarter of 2013.

Recently, Lockheed Martin increased its fourth quarter dividend by 13%, bringing the annualized payout to $6.00 per share from $5.32 per share earlier.  It also boosted its share repurchase authorization by $2 billion. With this increase, the total remaining authorization for future common share repurchases under the program was $3.9 billion as of Sep 28, 2014. The company also expects at least $2.0 billion of share repurchases in 2015.

Guidance
 
Lockheed Martin now expects 2014 revenues at $45 billion with orders in the $41,500–$43,000 million range. The company had earlier expected 2014 revenues in the $44 billion to $45.5 billion range. International sales were earlier projected to account for about 20% of 2014 revenues.
 
The company now projects earnings of about $11.15 per share for 2014, which is at the high end of the previously guided range of $10.85–$11.15.
 
However, Lockheed expects lower cash from operations of approximately $3.8 billion for the year compared with its previous forecast of $4.8 billion.
 
For 2015, the company provided a preliminary outlook with net sales expected to decline at a low single-digit rate from 2014 levels. Total business segment operating margin will likely be in the 11.5% to 12% range.

Outlook

Considering that the U.S. military budget is increasingly under pressure, Lockheed Martin’s better-than-expected third quarter earnings are commendable. Also, the company continued to generate strong cash from operations while maintaining its cash deployment strategy.

Given the vital role played by satellites in the military space, Lockheed Martin is looking to bolster its satellite product coverage by increasingly investing in R&D and acquisitions.

However, the threat of sequestration still lurks over this defense major, negatively impacting the company’s third quarter 2014 sales. Again, the latest boost to the share repurchase authorization is below the $3 billion increase made in Sep 2013 and a $2.5 billion rise in 2011. The moderating share repurchase activity is also an indicator that it might be preserving its cash.

Lockheed Martin has a Zacks Rank #3 (Hold). Other better-ranked defense stocks worth considering include Air Industries Group (AIRI), General Dynamics Corp. (GD - Analyst Report) and The Boeing Co. (BA - Analyst Report), all with a Zacks Rank #2 (Buy).

Get the latest research report on BA - FREE

Get the latest research report on GD - FREE

Get the latest research report on LMT - FREE

Get the latest research report on AIRI - FREE