Lockheed Martin Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2021; comparisons are with the quarter and six months ended June 28, 2020. Amounts are in U.S. dollars unless stated otherwise. The company operates in Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space, with the U.S. Government its principal customer.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $17.03B | $16.22B | $33.29B | $31.87B |
| Gross profit | $2.15B | $2.21B | $4.34B | $4.30B |
| Operating profit | $2.19B | $2.09B | $4.37B | $4.21B |
| Net earnings | $1.82B | $1.63B | $3.65B | $3.34B |
| Diluted EPS | $6.52 | $5.79 | $13.08 | $11.87 |
| Operating cash flow | Not separately reported | Not separately reported | $3.02B | $4.50B |
Margins: Q2 gross margin was approximately 12.6% versus 13.6%; operating margin was 12.9% versus 12.9%; net margin was 10.7% versus 10.0%. For the six months, gross margin was 13.0% versus 13.5%, operating margin 13.1% versus 13.2%, and net margin 11.0% versus 10.5%.
- Sales and earnings: Q2 sales increased 5.0% year over year; diluted EPS increased 12.6%. Six-month sales increased 4.4% and diluted EPS increased 10.2%.
- Cash flow and investment: Six-month operating cash flow fell $1.48B year over year, mainly from working-capital timing and higher tax payments. Capital expenditures were $599M, implying cash flow after capital expenditures of about $2.42B, versus $3.86B in 2020.
- Liquidity and debt: Cash was $2.75B, down from $3.16B at year-end 2020. Current assets were $20.67B and current liabilities $15.24B. Long-term debt, net, was $11.67B and current maturities were $506M; the company reported $13.3B of debt principal. No commercial paper or revolving-credit borrowings were outstanding; the $2.5B revolving facility was available.
- Shareholder returns: Six-month dividends paid were $1.46B and repurchases were $1.50B (4.2M shares). Cash dividends paid per share were $5.20 versus $4.80 in the prior-year period.
Material changes and segment results
- Q2 sales growth came from all four segments. Space grew 10%, RMS 5%, MFC 5%, and Aeronautics 3%. Six-month sales growth was led by RMS, up 7%, and MFC and Space, each up 5%.
- Q2 segment operating profit declined at Aeronautics to $572M from $739M, chiefly due to a $225M loss on a classified fixed-price program. MFC rose to $401M from $370M; RMS to $458M from $429M; and Space to $335M from $252M.
- Companywide net contract estimate adjustments and other non-volume items increased segment operating profit by about $385M in Q2, below the $480M prior-year contribution; six-month contributions were $880M versus $945M.
- Other non-operating income was $120M in Q2 and $289M for six months, up from $25M and $81M, respectively. The six-month 2021 amount included $82M of net gains from Lockheed Martin Ventures Fund investments. Prior-year results included a $128M noncash impairment of the AMMROC investment.
Outlook, commentary and risks
- 2021 outlook: Management expects net sales to grow in the mid-single-digit range from 2020, a total business-segment operating margin of approximately 11.0%, and cash from operations of at least $8.9B, with no pension contributions. The outlook excludes the pending Aerojet Rocketdyne acquisition and potential pension risk transfers and assumes continued program support and funding.
- Management expects 2021 segment sales to increase in the mid-single-digit range at Aeronautics, MFC and RMS, and low-single-digit growth at Space. Segment profit outlook is comparable to 2020 for Aeronautics, mid-single-digit growth for MFC, low-double-digit growth for RMS, and low-single-digit growth for Space.
- The UK renationalized the Atomic Weapons Establishment program effective June 30, 2021, after quarter-end. Lockheed Martin expects the program to leave its reported results beginning in Q3; its outlook reflects this change.
- Program items: The $225M Aeronautics classified-program loss represents estimated losses on the current phase; further losses may arise from performance issues, scope changes or cost growth. The company reversed $40M of previously recorded Warrior program losses following the customer’s decision to stop the program. It also reversed $15M of prior reserves on a ground-based radar program; cumulative losses there were about $235M. EADGE-T cumulative losses remained about $260M.
- COVID-19 and funding: Supplier delays, attendance, travel and site restrictions continued, although management reported stabilizing attendance and deliveries and no significant first-half financial impact. The company had accelerated $1.4B of supplier payments and expected to continue doing so through at least year-end. Future effects remain uncertain. Federal budget, debt-ceiling, continuing-resolution and customer-priority changes could affect orders and funding.
- Acquisition: The proposed Aerojet Rocketdyne transaction has an estimated value of about $4.4B after projected net cash and was expected to close in Q4 2021, subject to regulatory approval and other conditions. The FTC had issued a second request for information. Management expects to use cash and new debt.
- Other risks and contingencies: Environmental liabilities were $778M, with $675M of related probable recovery assets. Potentially higher environmental cleanup standards, including for PFAS and certain drinking-water contaminants, could increase liabilities and costs. A False Claims Act matter seeks approximately $52M, subject to trebling and penalties; the company disputes the claims. In the MTA dispute, the customer seeks about $190M and Lockheed Martin asserts about $95M in claims; the matter was awaiting a court decision. Management says these matters are not expected to have a material adverse effect on the company as a whole, but individual-period effects are possible.
- Additional risks include F-35 supplier, software, schedule, cost and sustainment challenges; Turkey-related sanctions and export-license restrictions; contract execution and cost-estimate uncertainty; and possible changes to tax rules. The filing estimates that, under current interpretation, required five-year amortization of R&D costs could reduce 2022 operating cash flow by about $2.0B.
Important facts for investors to verify
- Whether the classified Aeronautics program’s negotiations, performance and cost-to-complete estimates lead to further charges.
- Whether operating cash flow recovers as contract assets and billing and production cycles normalize; contract assets rose to $11.43B from $9.55B at year-end.
- Whether the 2021 sales, segment-margin and cash-flow outlook is achieved, particularly after the AWE program’s removal from Q3 results.
- FTC review, approval timing, financing and closing conditions for the Aerojet Rocketdyne acquisition.
- F-35 production and supplier recovery, along with exposure to government funding and Turkey-related restrictions.
- Potential environmental, legal and tax developments, including the R&D tax amortization provision and related cash-flow impact.