Lockheed Martin Corporation — Q2 2023 Form 10-Q
Business context and period. Lockheed Martin is a global defense and aerospace contractor serving primarily U.S. government and international customers. This unaudited filing covers the quarter and six months ended June 25, 2023; comparisons are with periods ended June 26, 2022. In the first half, 74% of sales were to the U.S. Government, 25% to international customers and 1% to U.S. commercial and other customers.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $16.693 billion | $15.446 billion | $31.819 billion | $30.410 billion |
| Operating profit | $2.135 billion | $1.963 billion | $4.172 billion | $3.896 billion |
| Net earnings | $1.681 billion | $309 million | $3.370 billion | $2.042 billion |
| Diluted EPS | $6.63 | $1.16 | $13.24 | $7.62 |
| Operating cash flow | Not separately presented for quarter | $2.664 billion | $2.741 billion | |
| Free cash flow (company-defined, non-GAAP) | Not separately presented for quarter | $2.041 billion | $2.169 billion |
Q2 sales rose 8.1% and operating profit rose 8.8% year over year. Consolidated operating margin was approximately 12.8%, compared with 12.7%; gross margin was approximately 12.5%, compared with 12.7%. Six-month sales rose 4.6% and operating profit rose 7.1%. Q2 2023 net earnings benefited from the absence of the prior-year $1.5 billion noncash pension settlement charge ($1.2 billion after tax, or $4.33 per share). Profit booking-rate adjustments added approximately $288 million after tax ($1.14 per share) to Q2 2023 net earnings, versus $359 million ($1.35 per share) in Q2 2022.
Segment trends. Q2 Aeronautics sales increased 17% to $6.875 billion, primarily on higher F-35 production and sustainment volume; operating profit rose 17% to $718 million. Space sales increased 12% to $3.166 billion and operating profit rose 15% to $312 million. MFC sales were essentially flat at $2.755 billion, while operating profit declined 11% to $371 million, reflecting lower favorable contract adjustments. RMS sales declined 3% to $3.897 billion and operating profit declined 2% to $454 million; the segment recorded a $100 million Canadian helicopter program loss.
Cash, debt and liquidity. Cash and equivalents were $3.673 billion at June 25, versus $2.547 billion at year-end 2022. First-half operating cash flow decreased to $2.664 billion from $2.741 billion, mainly due to timing of federal tax payments, partly offset by working-capital movements. Capital expenditures were $623 million, producing free cash flow of $2.041 billion. The company paid $1.542 billion in dividends and repurchased $1.250 billion of shares in the first half. Debt, net of unamortized discounts and issuance costs, was $17.5 billion; principal debt was $18.8 billion. The company issued $2.0 billion of notes in May. It reported no borrowings under its $3.0 billion revolving facility or commercial paper at quarter-end and said it was in compliance with debt covenants. Current assets were $24.087 billion and current liabilities $17.704 billion.
Material changes and outlook
- Sales growth was led by Aeronautics and Space, while MFC and RMS first-half sales and operating profit were lower year over year.
- Interest expense increased to $223 million for Q2 and $425 million for the first half, primarily following debt issuance in October 2022 and May 2023.
- F-35 deliveries: 45 aircraft in Q2; backlog was 421 aircraft. Management expected 100–120 deliveries in 2023, citing TR-3 software maturation, acceptance and certification and hardware timing. It expected delayed deliveries to be recovered primarily in 2024, with 2024 deliveries above the prior expectation of 147–153; it continued to expect 156 deliveries in 2025 and thereafter. Further TR-3 delay could reduce Lot 15–17 profitability.
- Ending company backlog was $158.0 billion. Management expected approximately 36% to convert to revenue within 12 months and 59% within 24 months. These are expectations, not guaranteed revenue.
- Management stated that cash, expected operating cash flow and credit-market access should be sufficient for requirements and planned cash deployment over the next 12 months and beyond. No general earnings or revenue guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- Management cited U.S. budget and appropriations uncertainty, the risk of shifting defense priorities, supply-chain and labor constraints, inflation and higher interest rates. Inflation may pressure margins and cash flow, particularly on fixed-price contracts.
- Two program exposures merit attention: cumulative losses remained approximately $270 million on a complex classified Aeronautics fixed-price program and $280 million on a ground-based radar program in RMS. The filing warns further losses could arise; it says additional radar losses were not currently expected to be material.
- The Canadian Maritime Helicopter Program recorded a $100 million Q2 loss amid higher estimated production costs and lower-than-planned support revenue. Recovery depends in part on uncertain aircraft flight hours and discussions with the Canadian Government; further losses could be material.
- Management said future fixed-price phases of a classified MFC contract, if awarded, were expected to be performed at a loss; a reach-forward loss could be required if circumstances change.
- Environmental liabilities were $687 million, with $610 million of related probable-recovery assets. Potential tighter standards for perchlorate, hexavalent chromium and PFAS could raise remediation estimates.
- Disclosed litigation includes a False Claims Act matter with approximately $52 million in asserted government damages, subject to trebling and penalties, and an MTA dispute in which the MTA seeks approximately $190 million and Lockheed Martin seeks approximately $95 million. The company disputes the claims; it said it did not currently believe a material loss was probable in the False Claims Act matter.
- Other items include $2.9 billion of outstanding letters of credit and surety bonds and $912 million of third-party guarantees. The filing reports no material amounts recorded for those guarantees. Uncertain tax position liabilities increased to $2.1 billion; the company estimated the tax-law change requiring R&D expense amortization would increase 2023 cash taxes by approximately $575 million.
Investor verification priorities
- Track F-35 TR-3 readiness, delivery cadence, backlog conversion and any impact on Lot 15–17 contract profitability.
- Monitor cost and recovery assumptions for the Canadian helicopter program, the two loss-making programs, and any potential MFC fixed-price phase.
- Assess whether first-half cash conversion, working capital and the estimated 2023 cash-tax increase affect full-year cash generation and capital returns.
- Review defense appropriations, contract funding and supplier capacity, especially given the company’s reliance on government customers and fixed-price work.
- Follow environmental remediation estimates, tax examinations and the resolution or updated loss assessments in material legal matters.