Jesus Malave
Chief Financial Officer at Lockheed Martin
Thanks, Jim. And good morning, everyone. Today, I'll walk you through our consolidated results, business area detail and provide an update to our 2022 outlook. As I highlight our results, please follow along with the web charts we have posted with our earnings release today.
Let's begin with Chart 3 and an overview of our consolidated second quarter financials. Operating results were largely in line with our expectations for the quarter, along with non-operating impacts that we previously had highlighted. We generated sales of $15.4 billion. And as Jim noted, our revenues were affected by the delayed contract agreement for production Lots 15-17 on the F-35 program and supply chain impacts. Underlying performance was solid with segment operating profit of $1.7 billion and segment margin expansion of 60 basis points year-over-year to 11%.
Earnings per share were $1.16, including $5.16 in non-operational charges. And we delivered greater than $1 billion in free cash flow, while returning 107% of that amount to shareholders through share repurchases and dividends. As noted in the press release, we updated our outlook, which I'll review later in my remarks.
Turning to consolidated sales and segment operating profit results on Chart 4. Total sales declined 9% due to anticipated program transitions and supply chain impacts across the business areas, in addition to more than $300 million in revenue shortfall from the GAAP in F-35 funding in advance of our agreement on Lots 15-17. Operating profit declined 4%. As previously mentioned, segment operating margins expanded 60 basis points to 11%, reflecting another solid -- another quarter of solid underlying performance, benefits from contract mix as well as higher net step-ups, largely due to the absence of last year's classified program charge in aeronautics.
Moving to earnings per share on Chart 5. We've included a reconciliation of our GAAP EPS to an adjusted or operational EPS. First, we've refinanced $2.3 billion of outstanding debt, current maturities from the next three years in lowering our near-term exposure to interest rate risk. This impact was $0.10. In addition, we executed our latest pension transfer transaction. And as a reminder, this is our seventh such transaction to reduce long-term risk and volatility of pension trust asset returns. The impact to the quarter was $4.49, including $0.16 of tax timing that will reverse over the balance of the year.
Lastly, volatile capital markets have significantly impacted asset returns at our Lockheed Martin Ventures fund and other plans. Despite the short-term volatility, our ventures fund has delivered significant financial returns over the long-term, but more importantly, has infused Lockheed Martin with emerging technologies to benefit our core business. Adjusted for these non-operating items, our second quarter earnings per share would have been $6.32 and even higher had the F-35 funding constraint been lifted.
Moving to cash flow on Chart 6. As you've come to expect, we delivered solid free cash flow in the quarter and accelerated payments of $1 billion to suppliers. Once again, cash deployed to shareholders exceeded free cash flow in the quarter. And for the first half of 2022, we have returned 178% of free cash flow through dividends and share repurchases.
Okay. Moving over to segment results and starting with aeronautics on Chart 7. Second quarter revenue decreased approximately $800 million from last year. F-35 sales were down over $900 million due to supply chain impacts, the impact of the Lot 15-17 unrecognized sales and sustainment award timing. This was partially offset by strength in our classified area, which increased by more than $200 million this quarter, a 50% increase from the second quarter of 2021. Segment operating margin for aero increased 180 basis points, primarily due to the absence of last year's loss recorded on a large classified program.
Moving to Missiles and Fire Control on Page 8. Sales were lower by approximately $200 million, including the expected reduction in sustainment, following the withdrawal of US troops from Afghanistan, as well as lower volume in multiple missile programs. Strong performance in tactical and strike missiles and in the missile defense PAC-3 program as well as favorable program mix drove a 160 basis points increase in segment operating margin.
At Rotary and Mission Systems on Page 9, lower Black Hawk and Presidential helicopter volume, along with supply chain impacts across the business area, lowered year-over-year sales by approximately $200 million. Operating profit was lower based on fewer favorable profit adjustments on Aegis and Radar programs, the impact from lower volume and changes in contract mix.
Turning to Chart 10 in our Space business area. Overall sales were down $350 million, driven by a $425 million reduction from the renationalization of the atomic weapons establishment, which is partially offset by solid growth on a next-generation interceptor program. This will be the last quarter we'll be affected by the AWE compare. Operating profit was lower primarily due to the mix and timing of launches at United Launch Alliance as well as lower profit step-ups.
Okay. Moving over to our updated outlook on Page 11. Our expectations for segment operating profit and free cash flow remain unchanged despite a lower sales outlook, reflecting solid year-to-date results and management's focus on operating performance. Our expectation for full year sales have been by $750 million to approximately $65.25 billion. Three of our four business areas have been reduced due to supply chain impacts, award timing and program schedule shifts, all of which are incorporated into our new guidance. The impact of lower anticipated sales volume is expected to be offset by improved margins for the year, which is supported by our year-to-date margin performance.
We're lowering the earnings per share outlook by $5.15 to reflect the impact of one-time items such as the pension transfer, debt refinancing and year-to-date mark-to-market adjustments. It's important to note that these expectations assume that we definitize the Lots 15-17 contract here in the third quarter. In addition, there are no incremental mark-to-market impacts assumed for the second half of the year.
Okay. Moving to Chart 12. We provided a detailed view of the changes to earnings per share for the year. The one-time pension settlement charge is now included in our outlook. And following the execution of that pension transfer, the remeasurement of our pension plans has caused us to reduce our FAS/CAS pension adjustment by $50 million. We've also incorporated the impacts of the year-to-date mark-to-market adjustments and our debt refinance to the new estimate of approximately $21.55.
On Chart 13, you'll see the changes to guidance by business area. As I mentioned before, three of our four business areas have reduced sales outlooks, reflecting supply chain impact and award timing. But as noted, each business area is holding to the previous guidance for segment operating profit. We're confident that we can deliver higher operating margins, offsetting the top-line headwinds with our continued focus on cost reduction, program performance and leveraging the size and scale of the enterprise.
Okay, let's wrap up on Chart 14. Our operational performance in the second quarter was solid with improved segment margins and consistent cash generation and deployment. We revised our 2022 financial outlook, incorporating headwinds, but held our commitments for segment operating profit, free cash flow and cash deployment.
Now looking beyond 2022, the Lockheed Martin fundamentals remain strong. We continue to invest in support of our customers' important security missions, leveraging the breadth of our platforms and solutions. Our broad portfolio, as well as the current and projected backlog, underpin our future growth expectations. In addition, the outlook for domestic and international defense spending has improved and we expect to incorporate these changes over the coming months as we gain clarity on the timing of global security spending commitments and industry fulfillment.
To close, our pillars of growth, financial position, focus on strong cash generation and our disciplined and dynamic capital deployment strategy places us in an enviable position to deliver long-term value to shareholders.
With that, Brad, let's open up the call for Q&A.