Lockheed Martin (LMT) Q2 2016 Results Conference Call

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Marillyn A. Hewson – Chairman, President & CEO

Increased full-year guidance

“Turning to the summary financials, our team continue to deliver broad-based results across the corporation, the second quarter numbers exceeding all of our internal plans. This strong year-to-date performance enabled us to increase full-year 2016 guidance for sales, segment operating profit, earnings per share, and cash from operations.”

There´s some progress on divesting IS&GS. Expect updated outlook if completed soon.

“Significant progress towards transaction closure continues to be achieved. We commenced our exchange offer on Monday of last week. Also last week, the Competition and Markets Authority in the United Kingdom concluded its review, satisfying another condition to closing…the offer provides Lockheed Martin stockholders the opportunity to exchange their shares of Lockheed Martin for shares of stock in a Lockheed Martin subsidiary, which then become shares of Leidos common stock upon completion of the transaction.”

Note: IS&GS (Information Systems & Global Solutions) is one of five business units in LMT. The transaction alluded to here is the separation of IS&GS business from LMT and the merger of IS&GS with Leidos Holdings, Inc. which is expected to close in the third quarter of 2016.

The F-35 has significantly improved capabilities.

“Overall the [F-35 Joint Strike Fighter] program program continued to achieve good progress across the multiple fronts of winding down development activities, ramping up production rate and sustainment activities and securing customer support and demand….The tremendous technological leap in capabilities that the F-35 provides are being demonstrated on a daily basis to a growing number of domestic and international customers as the aircraft is fielded at additional sites.”

There´s been notable demand from customers n the US and internationally…

“Turning to customer support and demand for the F-35, key milestones this past quarter on the domestic side include revalidation to Congress by the Department of Defense of the critical and unchanged procurement requirement to replace legacy aircraft with 2,443 JSF fighters for the U.S. Air Force, Navy and Marines. Internationally, support remains strong and growing…I was able to see firsthand the growing international interest and support of the F-35 earlier this month, when I had the opportunity to attend both the Royal International Air Tattoo and Farnborough air shows in the United Kingdom.”

…as customers get exposed to its capabilities. 

“Customers and attendees were able to see up close the revolutionary capabilities of both CTOL and STOVL F-35 aircraft at the air shows as they performed their aerial maneuvers. This marked the debut of the F-35 at major international air shows, demonstrating the increasing maturity and progress on the program.”

They’re on track on production and cost reduction strategy.

“On production, we are on track to increase our deliveries to 53 aircraft this year and have delivered approximately 180 aircraft since program inception. In the area of cost reductions, we continue to make significant progress on our previously announced blueprint for affordability, shared commitment between the government and industry.”

Bruce L. Tanner – CFO & Executive Vice President

Improved top line and bottom line growth.

“Sales were higher by $1.3 billion or 11% this year than last year, driven by the inclusion of Sikorsky in the results of MST for about $1.2 billion and nearly $250 million in growth at Aeronautics driven by $400 million higher F-35 volume which more than offset two fewer C-5 deliveries in the quarter compared to last year…Our EPS in the quarter was $3.32, which represents about a 13% increase over the EPS in the second quarter of last year. “

Significant capital return via dividends and share buybacks.

“We generated $1.5 billion in cash from operations and returned $1 billion of cash to our stockholders in the quarter…With just over $1 billion returned to stockholders evenly split between dividends and share repurchases, we returned over 80% of free cash flow in the quarter.”

NB: In Q2 2016, LMT repurchased 2.1 million shares for $501 million (4.9 million shares for $937 million in Q2 2015) paying cash dividends of $501 million ($467 million in Q2 2015)

They might do some more share repurchases coming up.

“30%, 35% of our investor base is sort of income base. So, that’s a pretty significant element of our ownership that is driven, in fact, by the dividend yield. So, that’s an important aspect of capital allocation going forward…there’s still a backlog of options out there that as those do get exercised, we will clearly do share repurchases to offset that dilution. We will do share repurchases to offset dilution from the equity compensation as well.”

F-35 production step ups not expected in the H2 2016.

“We don’t currently have plans for F-35 production step-ups for the rest – or for the second half of the year, and so that’s one of the things that will cause the second half of the year to look a little wider probably than the first half of the year.”