Lockheed Martin Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 26, 2021; nine-month results are compared with the periods ended September 27, 2020. Unaudited interim statements received an independent accountant’s review, not an audit.
Business context
Lockheed Martin is a defense and aerospace contractor operating through Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. For the first nine months, 72% of sales were to the U.S. Government, 27% to international customers, and 1% to U.S. commercial and other customers. The UK’s Atomic Weapons Establishment (AWE) program was renationalized effective June 30, 2021 and is excluded from Q3 results.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $16.0bn | $16.5bn | $49.3bn | $48.4bn |
| Operating profit | $2.294bn | $2.147bn | $6.668bn | $6.355bn |
| Net earnings | $614m | $1.698bn | $4.266bn | $5.041bn |
| Diluted EPS | $2.21 | $6.05 | $15.32 | $17.92 |
| Operating cash flow | Not separately provided | Not separately provided | $4.953bn | $6.376bn |
- Q3 sales declined about 3%; nine-month sales grew about 2%. Q3 operating profit rose about 7%, while nine-month operating profit rose about 5%. Net earnings and EPS fell substantially, principally because of a one-time pension settlement charge.
- Q3 gross profit was $2.302bn versus $2.136bn; nine-month gross profit was $6.639bn versus $6.440bn.
- Cash and equivalents were $2.727bn at September 26, 2021, down from $3.160bn at year-end 2020. Current assets were $21.357bn and current liabilities $15.026bn.
- Net debt on the balance sheet was $11.674bn, comprising $11.668bn long-term debt and $6m current maturities. The filing reports $12.8bn of debt principal before unamortized discounts and issuance costs. A $3bn revolving facility was unused; no commercial paper was outstanding.
- Nine-month operating cash flow fell $1.423bn year over year, with working-capital timing, higher tax payments, and lower earnings cited as factors. Contract assets rose $3.152bn to $12.697bn, principally from recognized but not yet billed revenue.
- Dividends paid were $2.178bn and repurchases were $2.0bn in the first nine months. The company declared a Q4 dividend of $2.80 per share and had $6bn of remaining repurchase authorization at quarter-end.
Business segments
| Segment | Q3 sales | Q3 operating profit | Nine-month sales | Nine-month operating profit |
|---|---|---|---|---|
| Aeronautics | $6.568bn | $714m | $19.621bn | $1.979bn |
| MFC | $2.781bn | $413m | $8.474bn | $1.210bn |
| RMS | $3.980bn | $459m | $12.329bn | $1.350bn |
| Space | $2.699bn | $264m | $8.891bn | $826m |
Q3 sales were pressured by supply-chain impacts across Aeronautics, MFC, and Space. Nine-month growth was strongest at RMS, up 5%, and Space, up 3%; segment operating profit increased year over year in MFC, RMS, and Space, but declined at Aeronautics.
Material changes and unusual items
- Pension transaction: On August 3, the company transferred $4.9bn of pension obligations and related assets to an insurer for about 18,000 retirees and beneficiaries, using pension-trust assets with no additional company contribution. It recorded a noncash $1.665bn pretax settlement charge, or $1.3bn/$4.72 per share after tax. Pension remeasurement reduced net unfunded obligations by $2.9bn and increased equity by $2.3bn after tax.
- Contract estimates: Net adjustments not related to volume increased segment operating profit by about $580m in Q3 and $1.5bn for nine months. They included changes in contract profit estimates and other items.
- Program charges and reversals: A classified Aeronautics fixed-price program incurred a $225m loss in Q2; a Q3 customer memorandum of agreement retained the same loss estimate. RMS recorded a $45m Q3 charge on a ground-based radar program, with cumulative losses of about $280m. MFC reversed about $25m of previously recorded Warrior program losses after settlement.
- Investment gains: Fair-value changes and sales in the Lockheed Martin Ventures Fund generated $98m of Q3 and $200m of nine-month pretax gains.
- Backlog: Ending backlog was $134.8bn; management expected about 38% to be recognized as revenue over the next 12 months and 60% over the next 24 months.
Outlook and management commentary
- 2021 outlook: Net sales of approximately $67bn, business-segment operating margin of approximately 11.0%, and operating cash flow of at least $8.3bn; no qualified defined-benefit pension contributions were expected. Management cited growth in F-16 and classified work, integrated air and missile defense, Sikorsky and training programs, and hypersonics.
- 2022 preliminary trends: Net sales of approximately $66bn, segment operating margin of approximately 11.0%, and operating cash flow of at least $8.4bn. If the scheduled tax-law change requiring five-year amortization of R&D expenditures is not modified or repealed, 2022 cash flow could be reduced by up to $2bn. The outlook excludes the pending Aerojet Rocketdyne acquisition.
- The Aerojet Rocketdyne deal, valued at approximately $4.4bn after assumed net cash, remained subject to FTC review; closing was anticipated in Q1 2022, with financing expected primarily through new debt.
- COVID-19 continued to cause supplier delays and operational constraints. The company had accelerated $1.5bn of supplier payments and expected to continue targeted acceleration through 2022. Management said the effects of vaccine requirements on workforce and supplier attrition remained uncertain.
- U.S. FY2022 appropriations were not enacted; a continuing resolution ran through December 3, 2021. Extended continuing resolutions, budget changes, or a government shutdown could delay procurement and program starts.
Risks, contingencies, and other matters
- Execution, cost, schedule, supplier, software, sustainment, and testing risks remain for complex programs, particularly F-35. The company expected 133–139 F-35 deliveries in 2021 and 151–153 in 2022; it reported 282 production aircraft in backlog.
- Turkey-related U.S. sanctions and export-license denials could affect the Turkish Utility Helicopter Program, sales, cost recovery, and supply chains. The filing said effects on the overall business were not then expected to be material, while warning future actions could have material consequences.
- Environmental liabilities were $771m, with $669m of related assets for costs considered probably recoverable under U.S. Government contracts. Tighter standards for PFAS, perchlorate, or hexavalent chromium could increase remediation costs.
- Disclosed litigation includes a U.S. Government claim seeking about $52m, subject to trebling and statutory penalties, and an MTA dispute in which the MTA seeks about $190m while Lockheed Martin seeks about $95m. Management said a reasonably possible loss estimate generally could not be made for individual proceedings and did not believe a material company-wide adverse outcome was probable.
- The company identified Sikorsky goodwill as at risk of impairment if projected cash flows deteriorate. It also cited potential impacts from U.S. Government funding and debt-ceiling uncertainty, contract cost overruns, tax-law changes, and pension assumptions.
Key facts for investors to verify
- Whether supply-chain constraints, COVID-19 effects, and vaccine requirements affect delivery schedules, sales, or the 2021 and 2022 outlook.
- Whether the $134.8bn backlog converts to revenue on the expected schedule and whether contract estimates, including the classified Aeronautics and radar programs, require further charges.
- Whether 2022 R&D tax treatment is changed; the filing’s stated potential cash-flow impact is up to $2bn.
- Progress and regulatory outcome for the Aerojet Rocketdyne acquisition, including financing and timing.
- Future pension expense, funding needs, and goodwill impairment assessment for Sikorsky, as well as developments in environmental and legal contingencies.