S
Lockheed Martin just bagged United Technologies' Black Hawk helicopter business -- and that's only part of the good news Lockheed announced Monday. Photo: SIKORSKY.

Lockheed Martin (NYSE:LMT) confirmed Monday morning that, at long last, it has won the right to buy the Sikorsky helicopters unit from United Technologies (NYSE:UTX). From here on out, Black Hawk helicopters won't hail from Airbus (as some had feared they might). Instead, they'll remain made in (and owned by) the U.S. of A.

But if you thought that was Lockheed Martin's best news of the week, you may be interested in knowing the even better news was the earnings.

Lockheed Martin nukes analyst estimates
That's right, folks. Even bigger than the merger news, indeed, threatening to overshadow it, was Lockheed Martin's Q2 earnings report. Let's hit a few of the highlights:

  • Q2 sales came in at $11.6 billion, more than 5% ahead of estimates, and up 3% year over year.
  • Per-share profits of $2.94 per share likewise exceeded the Wall Street consensus, and grew 6.5% in comparison to last year's Q2.
  • Meanwhile, cash from operations was up 29% from the year-ago quarter, at $1.3 billion. Minus $191 million in capital spending (according to S&P Capital IQ), that still left Lockheed with a cool $1 billion in profits for the quarter -- more even. $1.07 billion.

As a result, while it's true that Lockheed Martin's free cash flow for the past year ($2.1 billion) continues to lag reported net income ($3.6 billion), the gap is closing. Year to date, free cash flow at the company actually exceeds net income -- $1.9 billion in FCF versus just $1.8 billion in Net Income.

But perhaps not for long.

The news you haven't heard
On a day that already featured two big news announcements from Lockheed Martin, management unveiled a third development as well: At the same time the company was reporting powerful earnings, free cash flow, and the acquisition of a marquee franchise in Sikorsky, Lockheed management also confirmed it's in the process of deciding to sell or spin off two of its less-hardware-focused businesses. Specifically, "the government IT infrastructure services business within its IS&GS business segment and the technical services business within its MFC business segment."

Together, Lockheed says that these two businesses are responsible for about $6 billion of the $16.5 billion that two Lockheed divisions -- information systems and global solutions; missiles and fire control -- brought in last year.

Curiously, the divisions concerned include both Lockheed's most profitable division (MFC, which earns a 16.9% operating profit margin), and its least profitable -- IS&GS, which is less than half as profitable.

What it means to investors
Jettisoning these two businesses will reduce Lockheed's revenues by $6 billion annually. Buying Sikorsky will add back its $7.4 billion annual revenue stream -- thus leaving the company "up" $1.4 billion in annual sales net of the departing divisions.

Profits, however, are bound to suffer. This is because even the less profitable of the two divisions Lockheed wants to sell or spin off (government IT infrastructure services at IS&GS) still earns a better operating profit margin than the 2.9% op-margin that Sikorsky manages.

Investors who bid up Lockheed Martin stock by 2% Monday in response to the (admittedly terrific) earnings news and the (understandably exciting) Sikorsky development may want to curb their enthusiasm. Good as Monday's news appeared on the surface, Lockheed Martin's restructuring is still in the early innings -- and the company still has every opportunity to disappoint us.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 338 out of more than 75,000 rated members. 

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.