Lockheed Martin Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; comparisons are with periods ended June 24, 2018. Amounts are in U.S. dollars. The interim financial statements were reviewed by the independent auditor, not audited.
Business context and results
Lockheed Martin is a global defense and aerospace contractor operating through Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. For the first six months, 71% of sales were to the U.S. Government (including 60% to the Department of Defense), 28% to international customers, and 1% to U.S. commercial and other customers. The F-35 accounted for approximately 26% of sales.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $14.427bn | $13.398bn | $28.763bn | $25.033bn |
| Operating profit | $2.008bn | $1.795bn | $4.291bn | $3.520bn |
| Net earnings | $1.420bn | $1.163bn | $3.124bn | $2.320bn |
| Diluted EPS | $5.00 | $4.05 | $11.00 | $8.07 |
| Operating margin | 13.9%* | 13.4%* | 14.9%* | 14.1%* |
| Cash from operations | — | $3.331bn | $0.560bn |
*Calculated as operating profit divided by net sales. The filing reports segment operating margins separately.
Financial position and liquidity
- Cash and equivalents were $1.167bn at June 30, versus $0.772bn at year-end 2018. Operating cash flow of $3.331bn was partly offset by $0.533bn of capital expenditures and $2.428bn of financing outflows.
- Net debt carrying value was approximately $13.5bn, including $0.9bn due within one year; no commercial paper or revolving-credit borrowings were outstanding at quarter-end. The company had a $2.5bn revolving facility available.
- Total current assets were $18.1bn and current liabilities $15.1bn. Contract assets rose to $10.4bn from $9.5bn at year-end; inventories rose to $3.6bn from $3.0bn.
- Total equity was $2.896bn, up from $1.449bn at year-end. Six-month cash dividends paid were $1.260bn and share repurchases were $0.500bn. The remaining repurchase authorization was $2.5bn.
Material changes versus prior comparable periods
- Q2 sales increased 8%, operating profit 12%, net earnings 22%, and diluted EPS 23%; six-month sales increased 15%, operating profit 22%, net earnings 35%, and diluted EPS 36%.
- Growth reflected higher F-35 production and sustainment, missile programs, and government satellite programs. All four segments reported higher sales for the first half. MFC had the largest percentage sales increase, up 27%; segment sales and operating profit also increased at Aeronautics, RMS, and Space.
- Operating cash flow improved substantially from the prior-year first half, primarily because the company contributed $3.5bn to qualified pension plans in 2018 and made no such contributions in 2019. Cash taxes were $474m paid in 2019 versus $406m of net refunds in 2018.
- Effective tax rates were 15.6% for Q2 and 13.9% for the first half, down from 18.1% and 16.5%. 2019 benefited from tax deductions, including a $65m prior-year-related benefit recorded in Q1.
Outlook, commentary, and risks
- 2019 outlook: Management expected sales growth in the low-double-digit percentage range, segment operating margin of approximately 10.8%, and operating cash flow of at least $7.6bn. The outlook assumed continued U.S. Government support and funding and excluded potential effects of U.S. Government actions concerning Turkey.
- Segment outlook: Aeronautics sales and operating profit growth in the low-double-digit range; MFC sales and profit growth in the low-double-digit range, with slightly lower margin; RMS sales and profit growth in the mid-single-digit range, with comparable margin; Space sales growth in the high-single-digit range and profit growth in the mid-single-digit range, with lower margin.
- Backlog was $136.7bn; management expected to recognize approximately 38% within 12 months and 65% within 24 months.
- Program exposures: The company reported cumulative losses of about $410m on two commercial satellite programs; delivery of the third satellite was late, and further technical or schedule problems, penalties, or termination could require additional material reserves. Cumulative losses were about $195m on an RMS ground-based radar program and $140m on the MFC Warrior turret program; management did not then expect additional losses on those programs to be material.
- Turkey/F-35: The U.S. Government had suspended Turkey’s participation and begun the removal process. Turkey had committed to purchase up to 100 aircraft, and Turkish suppliers provided some sole-sourced parts. Replacement suppliers and buyers were being pursued, but disruption, delays, funding changes, supplier claims, and related impacts on results and cash flows remained possible.
- Government funding: A proposed agreement to raise defense spending limits for FY2020 and FY2021 had not yet become law as of the filing. Budget uncertainty, continuing resolutions, shutdowns, and debt-limit issues remained risks.
- Legal and environmental matters: The company described False Claims Act litigation involving Sikorsky with government damages sought of approximately $52m before potential trebling; a separate DOJ case involving MSA and related parties with damages unspecified; and an MTA dispute in which the MTA sought about $190m while Lockheed Martin asserted claims of about $95m. Environmental liabilities were $823m, with $715m of estimated recoveries recorded. Management did not believe these matters were probable to have a material adverse effect on the company as a whole, but individual-period earnings could be affected.
- The company identified potential impairment risk for Sikorsky goodwill and intangible assets if projected cash flows, orders, or market conditions deteriorate. Pension assumptions, contract estimates, customer funding, supplier performance, and complex program execution are also significant uncertainties.
Important facts for investors to verify
- Whether 2019 sales, margin, and operating-cash-flow guidance was achieved, and whether funding assumptions held.
- Progress and financial effects of Turkey’s removal from the F-35 program, including replacement sourcing for sole-sourced components and replacement aircraft orders.
- Technical progress, delivery timing, and any additional reserves or penalties on the third commercial satellite and other loss-making programs.
- Cash conversion and working-capital trends, particularly the growth in contract assets and inventories.
- Developments in the cited legal cases and environmental estimates, and any impact on reserves, recoveries, earnings, or cash flow.
- Changes in backlog, F-35 production and sustainment, ULA equity earnings, and the company’s debt, dividends, and repurchases.