Lockheed Martin Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 24, 2023; comparisons are to periods ended September 25, 2022. Amounts are U.S. dollars. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context
Lockheed Martin is a global aerospace and defense contractor operating Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. For the first nine months, 74% of sales were to the U.S. Government, 25% to international customers, and 1% to U.S. commercial and other customers. The F-35 represented about 26% of sales in both the quarter and year-to-date period.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $16.878B | $16.583B | $48.697B | $46.993B |
| Operating profit | $2.042B | $2.159B | $6.214B | $6.055B |
| Net earnings | $1.684B | $1.778B | $5.054B | $3.820B |
| Diluted EPS | $6.73 | $6.71 | $19.97 | $14.31 |
| Operating cash flow | Not separately provided | Not separately provided | $5.555B | $5.874B |
| Free cash flow | Not separately provided | Not separately provided | $4.568B | $4.897B |
Q3 sales grew about 1.8%, while operating profit fell about 5.4% and net earnings declined about 5.3%. Nine-month sales rose about 3.6%; net earnings increased about 32%, principally reflecting the absence of the 2022 pension settlement charge. Nine-month free cash flow was down about 6.7% year over year. Approximate gross margin was 12.1% in Q3 versus 12.8% a year earlier, and 12.7% for both nine-month periods; approximate operating margin was 12.1% versus 13.0% in Q3 and 12.8% versus 12.9% year to date.
Quarterly segment sales/profit: Aeronautics $6.717B/$671M; MFC $2.939B/$398M; RMS $4.121B/$482M; Space $3.101B/$259M. For the nine months, Space had the strongest sales growth (+12%), while RMS operating profit declined 4% and MFC operating profit declined 3%. Aeronautics Q3 sales and profit fell 5% and 12%, respectively, largely on lower F-35 production volume.
Financial position and capital allocation
- Cash and cash equivalents were $3.551B, up from $2.547B at year-end 2022. Current assets were $23.322B and current liabilities $17.193B (current ratio about 1.36).
- Long-term debt, net, was $17.221B, with $168M of current maturities; total carrying debt was about $17.4B, versus about $15.5B at year-end. Gross principal debt was $18.7B. Interest expense rose to $662M for nine months from $421M.
- Operating cash flow was $5.555B; capital expenditures were $987M. Cash uses included $3.0B of share repurchases and $2.289B of dividends paid. The company issued $2.0B of senior notes in May.
- Contract assets increased $1.287B to $13.605B, primarily from unbilled revenue on F-35 work; contract liabilities declined $552M to $7.936B. Backlog was $156.0B; management expected about 35% to convert to revenue within 12 months and 60% within 24 months.
Material changes, outlook, and risks
- Consolidated profit-booking adjustments added about $335M to segment operating profit in Q3 and $1.1B for the first nine months, below the comparable prior-year contributions of $455M and $1.3B. These contract-estimate changes are a meaningful source of earnings variability.
- Management said cash, expected operating cash flow, and credit access should meet requirements and planned cash deployments. No quantified full-year revenue or earnings guidance is stated in the supplied filing text. Management expected 97 F-35 deliveries in 2023, all in the TR-2 configuration; first TR-3 deliveries were projected for April–June 2024. The TR-3 schedule change was not then expected to affect the 2023 financial outlook.
- Supply-chain shortages, supplier performance, inflation, labor and material cost increases, and higher interest rates pressured costs and margins, particularly on fixed-price contracts. Management noted continuing delays to some customer deliveries.
- U.S. budget uncertainty and continuing-resolution funding may delay new awards; a prolonged government shutdown could disrupt programs and payments. The company noted strong defense-spending sentiment but uncertainty from budget caps and appropriations timing.
- Two programs had significant cumulative losses: about $270M on a classified Aeronautics fixed-price incentive contract and about $280M on an RMS ground-based radar program. The Canadian Maritime Helicopter Program recorded a $100M loss in Q2; further losses or reduced recovery remain possible. Potential later fixed-price phases of a classified MFC program could be performed at a loss.
- Environmental liabilities were $690M, with $613M of associated probable-recovery assets. New or tighter standards for perchlorate, hexavalent chromium, or PFAS could raise remediation estimates. Outstanding letters of credit and surety bonds totaled $2.9B; third-party guarantees were $962M.
- In October, after quarter-end, the board increased repurchase authorization by $6B (to $13B total) and authorized a $3.15-per-share fourth-quarter dividend. The company expected to use repurchase authorization through 2026, potentially funded partly with debt.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether F-35 TR-3 development, testing, supplier hardware, and delivery timing remain on plan, and whether the 2023 delivery projection is achieved.
- Whether elevated contract assets and working-capital needs convert to billings and cash, particularly on F-35 and Canadian helicopter work.
- Whether profit-booking adjustments remain supportive, and whether fixed-price program cost growth results in additional losses.
- Cash generation, debt issuance and interest costs, and the funding and pace of expanded share repurchases and dividends.
- U.S. appropriations and continuing-resolution outcomes, supply-chain recovery, inflation exposure, and potential environmental or legal liabilities.