BETHESDA, Md. - Lockheed Martin Corp reported second quarter 2014 net sales fell slightly to $11.3 billion, compared to $11.4 billion in the second quarter of 2013. Net earnings in the second quarter of 2014 rose to $889 million compared to $859 million in the second quarter of 2013. Backlog at the end of June 2014 was down to $77.8 billion compared to $82.6 billion at year-end 2013.
"Based on our solid program execution and operational performance through the first half of the year, we increased our 2014 financial guidance for profit, earnings, and cash flow," said Lockheed Martin Chairman, President and CEO Marillyn Hewson. "Our sound strategy, diverse portfolio and focus on affordability are yielding results and delivering value to our customers and shareholders."
As is moves ahead, Lockheed Martin is continuing its current tack of resizing for the new economy. In late 2013, the company announced plans to cut its workforce by some 4,000 and close several facilities. Since 2008, the company has cut its workforce from 146,000 to 116,000.
In this recent round, the cuts are focused on the space, mission training, and information systems operations. Hardest hit will be the company's space operations unit in Newtown, Pennsylvania, which will see its work transferred to Denver. Space operations that build satellites in California will also bear the brunt. Other facilities in Goodyear, Arizona, and Horizon City, Texas, as well as most of a facility in Akron, Ohio, will be closed. The company will also shutter part of its Sunnyvale, California, space campus.
While difficult, the moves are needed to position Lockheed Martin for the current downturn. As priorities shift at home, Lockheed Martin is looking abroad to maintain revenues. Company officials have said they would like to see the export business account for 20 percent of sales in the coming years as a counter to the sequestration cuts. International sales currently account for about 17 percent of revenue, and officials expect the company will easily hit the 20 percent mark soon.
As part of this effort, the company established Lockheed Martin International with joint headquarters in London and Washington. This operation will be the tip of the spear as the company looks to aggressively penetrate foreign markets. The company already is at home in areas such as Canada, the U.K., and Australia. Now, it plans to ramp up operations in such countries as the UAE, Saudi Arabia, Japan, and India.
Products from the firm's aeronautics segment would be the key drivers in this push. Programs such as missile defense (with the Patriot PAC 3 and THAAD), C-130 airlifters, and even the F-35 should mitigate some of the sequestration pain in the long term.
In the face of defense uncertainty, companies such as Lockheed are also looking toward diversification. Within the defense markets, companies are increasing their focus on unmanned aerial vehicles (UAVs); cybersecurity; healthcare IT; and command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR). In addition, shifting military technologies to the commercial arena is also being investigated. For example, the company has developed a new product that may cut costs for water desalinization facilities. Most recently, the company has pushed into green energy with a partnership to develop wave energy systems under the PowerBuoy project.
INDUSTRY SEGMENTS
Aeronautics
Aeronautics' net sales for the second quarter of 2014 increased 13 percent to $3.86 billion, compared to $3.41 billion in the same period in 2013. The increase was primarily attributable to higher net sales of about $210 million for F-35 production contracts due to increased volume; approximately $85 million for the F-35 development contract due to an adjustment recorded during the second quarter of 2013 to reflect the inception-to-date impact of the downward revision to the profit booking rate that was not repeated in 2014; about $75 million for the C-130 program due to increased aircraft deliveries (six aircraft delivered in the second quarter of 2014 compared to five delivered during the same period in 2013) and aircraft contract mix, partially offset by decreased sustainment activities; approximately $45 million for the C-5 program due to increased aircraft deliveries (two aircraft delivered in the second quarter of 2014 compared to one delivered during the same period in 2013), partially offset by decreased support and spares activities; and approximately $40 million for the F-22 program due to increased risk retirements and volume. Net sales for the F-16 program were comparable as aircraft contract mix was offset by increased sustainment activities.
Aeronautics' operating profit for the second quarter of 2014 increased 11 percent to $453 million, compared to $407 million in the same period in 2013. The increase was primarily attributable to higher operating profit of about $35 million for the F-22 program due to increased risk retirements; approximately $25 million for the C-130 program due primarily to aircraft contract mix; and about $85 million for the F-35 development contract due to the adjustment mentioned above recorded during the second quarter of 2013. The increases were partially offset by lower operating profit of approximately $80 million for the F-16 program due to decreased risk retirements and aircraft contract mix; and about $15 million for various other programs due to lower risk retirements. Operating profit was comparable for F-35 production contracts, as increased volume was offset by lower risk retirements. Adjustments not related to volume, including net profit booking rate adjustments, for the second quarter of 2014 were comparable to the same period in 2013.
Information Systems & Global Solutions
IS&GS' net sales for the second quarter of 2014 fell 8 percent to $1.94 billion, compared to $2.10 billion in the same period in 2013. The decrease was primarily attributable to lower net sales of approximately $175 million due to the wind-down or completion of certain programs (primarily command and control programs); and about $150 million due to a decline in volume for various programs, which reflects lower funding levels and programs impacted by in-theater force reductions (such as Persistent Threat Detection System). The decreases were partially offset by higher net sales of about $165 million due to the start-up of new programs, growth in recently awarded programs and integration of recently acquired companies.
IS&GS' operating profit for the second quarter of 2014 decreased 10 percent to $175 million, compared to $194 million in the same period in 2013. The decrease was primarily attributable to the activities mentioned above for sales. Adjustments not related to volume, including net profit booking rate adjustments, for the second quarter of 2014 were comparable to the same period in 2013.
Missiles and Fire Control
MFC's net sales for the second quarter of 2014 decreased 7 percent to $1.89 billion, compared to $2.04 billion in the same period in 2013. The decrease was primarily attributable to lower net sales of approximately $125 million for various technical services programs due to lower volume; and approximately $125 million for tactical missiles programs due to fewer deliveries (including High Mobility Artillery Rocket System). These decreases were partially offset by higher net sales of about $55 million for fire control programs (primarily Apache due to increased deliveries and Special Operations Forces Contractor Logistical Support Services due to higher volume); and approximately $25 million for air and missile defense programs (primarily Terminal High-Altitude Area Defense due to higher volume, partially offset by Patriot Advanced Capability-3 due to fewer deliveries).
MFC's operating profit for the second quarter of 2014 decreased 9 percent to$345 million, compared to $381 in the same period in 2013. The decrease was primarily attributable to lower operating profit of approximately $35 million for tactical missile programs due to fewer deliveries and net warranty reserve adjustments for various programs (including Joint Air-to-Surface Standoff Missile and Guided Multiple Launch Rocket System). Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $35 million lower for the second quarter of 2014 compared to the same period in 2013.
Mission Systems and Training
MST's net sales for the second quarter of 2014 were comparable to the same period in 2013 at $1.78 billion. Net sales increased approximately $50 million for integrated warfare systems and sensors programs primarily due to increased deliveries for radar programs and increased volume and risk retirements for the Aegis program. The increase was offset by lower net sales of approximately $30 million for the settlements of contract cost matters on certain programs during the second quarter of 2013 (including a portion of the terminated presidential helicopter program) that were not repeated in 2014; and about $15 million for various other programs due to lower volume.
MST's operating profit for the second quarter of 2014 decreased 33 percent to $185 million, compared to $275 million in the same period in 2013. The decrease was primarily attributable to lower operating profit of approximately $75 million due to the settlements of contract cost matters on certain programs during the second quarter of 2013 (including a portion of the terminated presidential helicopter program) that were not repeated in 2014; and about $50 million for reserves recorded on certain training and logistics solutions programs. The decreases were partially offset by higher operating profit of about $30 million due to increased risk retirements on MH-60 and combat systems programs. Adjustments not related to volume, including net profit booking rate adjustments and other matters, were approximately $80 million lower for the second quarter of 2014 compared to the same period in 2013.
Space Systems
Space Systems' net sales for the second quarter of 2014 dropped 11 percent to $1.85 billion, compared to $2.09 billion in the same period in 2013. The decrease was primarily attributable to lower net sales of about $205 million for government satellite programs due to lower volume (primarily Advanced Extremely High Frequency and Mobile User Objective System (MUOS)).
Space Systems' operating profit for the second quarter of 2014 decreased 10 percent to $248 million, compared to $276 million in the same period in 2013. The decrease was primarily attributable to lower operating profit of approximately $30 million for government satellite programs due to lower risk retirements and volume (primarily Space Based Infrared System and MUOS). The decrease was partially offset by higher operating profit of about $10 million due to higher equity earnings and other program activities. Adjustments not related to volume, including net profit booking rate adjustments, were approximately $25 million lower for the second quarter of 2014 compared to the same period in 2013.
Total equity earnings (primarily ULA) recognized by Space Systems represented approximately $80 million, or 32 percent, of this business segment's operating profit for the second quarter of 2014, compared to approximately $75 million, or 27 percent, for the second quarter of 2013.
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