Lockheed Martin (NYSE:LMT) recently announced its fourth quarter and full year earnings for 2014. Following the earnings announcement, the company's stocks declined by nearly 2.6% as the guidance for the current year came in below analyst expectations. While 2015 may be a slow year for the company due to a number of factors, the company is confident that it is progressing in the right direction.
Fourth quarter earnings review
Lockheed Martin reported quarterly revenues of $12.5 billion, up by 8.6% from revenues of $11.5 billion reported in the year ago quarter. 4 out of 5 of the company's segments reported growth in revenues during the fourth quarter. The company's Aeronautics segments saw its revenues increase by 6% during the quarter. Missiles and Fire Control reported increases in revenue of 16.8% in the fourth quarter, while the Mission Systems and Training and Space Systems segments saw their revenues increase by 11.5% and 18.8% respectively.
Operating profits from the segments noted a decline of 1.1% relative to last year and were reported at $1.4 billion. The Aeronautics segment was the only division that recorded a notable rise in operating profits, recording a 6.5% increase. Profits from Mission Systems and Training and Space Systems remained flat during the quarter. Operating profits from Information Systems and Global solutions declined by 7.4% during the quarter, while those from Missiles and Fire Control slipped by 8.6% compared to the year ago quarter.
Overall, the increase in revenues trickled down to the lower levels of the financial tiers, where the company saw its operating profit grow from $834 million in the corresponding period last year to $1.3 billion in the recently concluded quarter. Simultaneously, operating margins expanded from 7.23% in Q4 2013 to 10.7% in Q4 2014. The company reported net earnings of $904 million, which grew by 85% compared to last year. On a per share basis, earnings amounted to $2.82 per share, growing by 88% from the earnings of $1.50 reported last year. Cash from operations was a negative $201 million in the fourth quarter.
Full year earnings review
Net sales for Lockheed Martin remained flat in 2014 and were reported at $45.6 billion at the end of the year. Consolidated operating profits grew during the year. A segment wise analysis of companies showed that 3 out of 5 divisions saw their revenues decline during the year. Aeronautics reported a revenue increase of 5.6% during the year. Space Systems saw its revenues make some progress during the year as well as they were up by 1.3% during the year.
Operating profits from business segments amounted to $5.59 billion, down by 2.85% compared to 2013. Aeronautics was the only segment that was able to increase its profitability during the year. Lockheed Martin reported its consolidated operating profit at $5.6 billion in 2014, up by 24% from the figure reported in 2013. Operating margins grew from 9.9% in 2013 to 12.2% in 2014. Net earnings grew during the year and were reported at $3.6 billion; up by 21% compared to the net earnings of $2.9 billion recorded a year earlier. Earnings per share were announced at $11.21, up by 22.8% year on year. Cash flow from operations during the year amounted to $3.9 billion.
Lockheed Martin returned a total of $3.7 billion to shareholders during the year. The company purchased 11.5 million shares for $1.9 billion during the year, while paying out $1.8 billion in the form of dividends.
Outlook for 2015
Lockheed Martin provided its guidance for net sales during 2015. The company has projected net sales between $43.5-$45 billion during the current year. This is a rather damp outlook for the year, suggesting that investors might see revenues report little to no growth by the end of the year.
The company's outlook for operating profit was even more disappointing. Business segment operating profit is expected at $5.1-$5.25 billion by the end of the year, while consolidated profit is forecasted at $5.3-$5.45 billion. This outlook guides investors to brace themselves for operating profits registering negative growth compared to 2014.
Diluted earnings per share are expected in the range of $10.80-$11.10, which lies below the EPS of 2014. This estimate is lower than analyst expectations of $11.49 earnings per share during the year. The company has cited lower pension income as the reason for a dimmed outlook for earnings in the current year. Lockheed stated that income from pensions during the year have been revised downward from $650 million to $475 million due to the low discount rate.
Analysis
Aeronautics was perhaps the only segment that reported notable progress during the quarter and the full year. The F-35 fighter jet manufacturer noted that contracts for the production of these jets amounted to $260 million during the quarter. The F-35 program is one that will continue to bring benefits for Lockheed Martin in the form of higher sales, especially since the program is not impacted by budget cuts in defense expenditures. However, Lockheed Martin is still on its way to report declines in its organic growth during the year, as the Pentagon is likely to trim defense spending in the future. The Pentagon is ready to present a $530 billion defense spending budget early next month. Though this budget is $30 billion above the sequestration level, the news of a 20% reduction in war spending has also floated in the industry. For Lockheed Martin this sounds more like a further reduction in revenues in the future, especially since the company obtains about 82% of its revenues from the US.
Lockheed Martin seems well aware of these future cuts in revenues from the US and has now directed its focus to seeking revenue growth from international markets. Lockheed Martin has latched onto the prospects of higher spending from countries in the Middle East and the Asia Pacific, especially in the years to come. It seems as though the focus on fueling revenues from the international market could help the company offset declines in revenues from the US to some degree.
While top line growth is a cause of concern, the management expects the company to return towards growth by 2016. Lockheed Martin has signaled that it is prepared to fund acquisitions, dividends and buybacks through acquisition of financing in the future as well. Bruce Tanner, CFO of Lockheed Martin has added that $750 million in revenue increments are expected from the recent deals that the company has signed. In one of the most recent deals, the Sikorsky unit of Lockheed Martin and United Technologies has been able to secure a $1.24 billion contract for the production of 6 out of 23 helicopters for US Marine Corps.
Conclusion
While 2015 may be challenging for the company, the years ahead could be better as it may be able to tackle the problem of growth by 2016. The company seems dedicated towards returning value to its shareholders, and has not drifted away from its focus of cost cutting and expanding top and bottom lines. To add to this, Lockheed Martin has a good track record of posting higher than expected earnings, and its earnings have continued their upward trajectory smoothly over the past few quarters. Moreover, the dividend yield of 3% is an excellent return for income seeking investors. The company and its stock may be prone to some challenges in the current year, but it will definitely be able to pull through. Analysts project stock prices at $203.50 in the next 12 months. Investors will benefit by going long on Lockheed Martin shares for a long-term investment horizon.
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