With earnings out of the way, what's next for Lockheed Martin? Here's a hint. Image source: Getty Images.
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The earnings are out and the numbers are in -- and Lockheed Martin (NYSE: LMT) stock is more profitable than ever. Last month, Lockheed Martin, the nation's largest pure-play defense contractor, grew its profits to $3.7 billion earned over the past 12 months, topping its full-year fiscal 2014 total by $103 million.
But that's far from the only news Lockheed let loose on earnings day. In its post-earnings conference call, management offered up a whole lot of valuable commentary that didn't quite fit in the official earnings release. Here at The Motley Fool, we do our best to keep you informed of what Lockheed Martin is telling the analysts who participate in its earnings call. And so we listened in.
And here are five things we thought you'd like to know.
Thing 1: At this defense contractor, everything's going great guns
"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. As a reminder, the guidance continues to assume inclusion of full-year 2016 financial results from the IS&GS [information systems and global solutions] business. If the divestiture of IS&GS is completed in the third quarter as currently anticipated, we will revise our 2016 financial outlook during our call with you in October."
-- Marillyn Hewson, CEO
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Lockheed reported sales of $12.9 billion in Q2, up 11% year over year and "well ahead of our expectations," according to CFO Bruce Tanner. Earnings per share leaped 13% to $3.32, with some help from stock buybacks, while cash from operations grew 15% to $1.5 billion.
Over the course of the remainder of the year, Lockheed Martin plans to hit sales of between $50 billion and $51.5 billion, earn $12.15 to $12.45 per share, and generate cash from operations of $5.5 billion. Subtract the roughly $1 billion a year Lockheed usually spends on capital expenditures, and free cash flow should approximate $4.5 billion -- before the IS&GS quirk, that is.
Thing 2: What the deal means for Lockheed shareholders
"Significant progress toward [selling IS&GS] continues to be achieved ... 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."
Focusing for a minute on IS&GS, this is how things will work from shareholders' perspective: Owners of Lockheed Martin stock are being given the opportunity to convert their shares into shares of a new Lockheed subsidiary called Abacus Innovations, receiving $111 worth of Abacus stock for every $100 worth of Lockheed Martin stock they wish to convert. Leidos (NYSE: LDOS) will then use its own shares to acquire this Abacus stock in a deal valued at $5 billion, absorbing Abacus into itself.
The end result for Lockheed Martin shareholders: Those who want to can switch their Lockheed Martin stock holdings (priced at 21.7 times earnings) into shares of Leidos (priced at 12.5 times earnings) and do so at an even bigger discount than those numbers already imply.
Thing 3: What the deal means for Lockheed itself
"The combination of IS&GS with Leidos is structured as a tax-efficient Reverse Morris Trust transaction. We will then retire the series of Lockheed Martin stock exchanged, achieving a significant reduction in our outstanding share count. The transaction remains subject to customary closing conditions and closing is currently scheduled for Aug. 16." -- Hewson
Lockheed shareholders who prefer to be Leidos shareholders should see their wish granted in very short order. As for those who remain with Lockheed, though, here's what the deal portends: First and foremost, Lockheed will make $5 billion off this deal -- but pay no taxes on the windfall. A total of $3.2 billion worth of Lockheed shares will be bought by Leidos and retired, reducing the share count and concentrating future Lockheed Martin profits among fewer shares. Additionally, Leidos will pay Lockheed $1.8 billion cash, which Lockheed plans to spend on paying down debt, issuing dividends, and buying back even more shares.
But enough about the IS&GS/Leidos transaction. Investors also want to know about how Lockheed's marquee product, the F-35 stealth fighter, is doing. There are a couple of revelations on that front as well.
Thing 4: What's up with the F-35?
"The future price of an F-35 [is] estimated to approach the price of a legacy fighter. ... On production, we are on track to increase our deliveries to 53 aircraft this year and have delivered approximately 180 aircraft since program inception. ... unchanged procurement requirement to replace legacy aircraft with 2,443 JSF fighters for the U.S. Air Force, Navy, and Marines."
We've already seen Lockheed make progress on bringing the cost of the F-35 down below $100 million a copy. Now Lockheed is confirming that through a combination of "lifecycle savings" efforts and plans to "reduce sustainment costs by 10%," the F-35 could soon get even cheaper.
Lower purchase cost and cheaper sustainment cost will make the F-35 even more attractive to buyers. Worst case, management is telling us that the U.S. military is still on board with plans to buy nearly 2,500 units of the F-35. And if the plane keeps getting cheaper, there's every possibility it might end up deciding to buy even more.
But what about U.S. allies?
Thing 5: Talking Turkey
"We'll continue to assess the situation [in Turkey] and make sure that we'll share with you if there's any impact on our business. Their plan is to procure 100 F-35s, so they're a very important partner in that program."
One ally -- and one Lockheed customer -- in particular that's been in the news of late is Turkey. You may have heard how, a few weeks, the Turkish military launched an abortive coup attempt against President Erdogan. You may also have heard that Erdogan has raised accusations that the U.S. was itself involved in the coup attempt, how he's demanded that the U.S. extradite a certain cleric he claims inspired the coup, and even briefly surrounded America's Incirlik air base in Turkey with police, cutting off access to the base.
All of this naturally raises questions about Turkey's continued friendliness to the U.S. and its commitment to buy as many as 100 F-35 fighter jets from Lockheed Martin in a deal valued in excess of $10 billion. According to Hewson, at least, this deal is still a go. No need to worry about having Turkey punch a $10 billion hole in Lockheed's income statement. No news at all here. Please move along.
For now, at least, that seems to be the company line. If it changes, however, trust that we'll keep you informed.
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