Lockheed Martin Corporation — Q1 2023 Form 10-Q
Reporting period: Quarter ended March 26, 2023; comparisons are with the quarter ended March 27, 2022 unless noted. Lockheed Martin is a global aerospace and defense contractor, with four segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. Approximately 73% of quarterly sales were to the U.S. Government, 26% to international customers, and 1% to U.S. commercial and other customers.
Financial results and position
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $15.126 billion | $14.964 billion |
| Gross profit | $2.046 billion; 13.5% margin | $1.909 billion; 12.8% margin |
| Operating profit | $2.037 billion; 13.5% margin | $1.933 billion; 12.9% margin |
| Net earnings | $1.689 billion | $1.733 billion |
| Diluted EPS | $6.61 | $6.44 |
| Operating cash flow | $1.564 billion | $1.410 billion |
| Free cash flow (non-GAAP) | $1.270 billion | $1.142 billion |
Interest expense rose to $202 million from $135 million, primarily following debt issuance in October 2022. Cash and equivalents were $2.440 billion at quarter-end, versus $2.547 billion at December 31, 2022. Total debt, net of discounts and issuance costs, was $15.6 billion; reported current and long-term debt totaled approximately $15.6 billion. The company had no revolver or commercial-paper borrowings and reported compliance with debt covenants. Its $3.0 billion revolving credit facility expires in August 2027.
Current assets were $22.144 billion and current liabilities $16.982 billion, giving a current ratio of approximately 1.30. Contract assets increased $871 million to $13.189 billion, primarily reflecting unbilled revenue, mainly on F-35; inventories increased $383 million to $3.471 billion, including higher pre-contract costs. Backlog was $145.1 billion; management expected to recognize approximately 36% within 12 months and 59% within 24 months.
Changes versus the prior comparable period
- Sales increased 1.1%; services rose 5% to $2.600 billion while product sales were broadly flat.
- Net earnings declined 2.5%, but diluted EPS increased from $6.44 to $6.61, aided by about 13.5 million fewer weighted-average shares following repurchases.
- Operating cash flow increased $154 million, and free cash flow increased $128 million. Financing cash use fell to $1.412 billion from $2.880 billion, primarily because share repurchases were $500 million versus $2.0 billion in Q1 2022.
- Segment sales and operating profit were mixed: Aeronautics sales fell 2% to $6.269 billion; MFC sales fell 3% to $2.388 billion; RMS sales fell 1% to $3.510 billion and operating profit fell 14% to $350 million; Space sales rose 16% to $2.959 billion and operating profit rose 13% to $280 million.
- Space growth reflected higher development activity, including NGI and classified programs. Aeronautics sales were pressured by lower F-35 production volume; higher F-35 sustainment sales partly supported services growth.
Effective January 1, 2023, purchased-intangible amortization was moved from segment results to unallocated corporate expense; prior-period segment amounts were conformed. This presentation change did not affect consolidated operating results.
Outlook, management commentary, and risks
- F-35: The company delivered five aircraft in the quarter and had a backlog of 340. It expected fewer than its prior 2023 delivery plan of 147–153 aircraft because of TR-3 software maturation and hardware timing, but did not then expect a material effect on its 2023 financial outlook. An earlier delivery pause related to government-furnished engine equipment ended when flight operations resumed in March.
- Demand and funding: Management cited increased interest in certain products following Russia’s invasion of Ukraine and U.S. stockpile replenishment needs, but did not expect a significant near-term sales increase from new contracts given long lead times and industry capacity. U.S. budget uncertainty and the debt-ceiling debate could disrupt funding; effects on individual programs were not predictable.
- Costs and execution: Inflation and supplier cost pressures may weigh on costs, margins, and cash flows, particularly on fixed-price contracts. COVID-19 and supply-chain impacts remain uncertain. Development complexity, schedule delays, technical issues, and changes to contract estimates can produce additional losses.
- Contract estimates: Net profit-booking adjustments increased segment operating profit by approximately $415 million, or $1.28 per diluted share after tax, versus $405 million, or $1.19 per share, in Q1 2022. These estimates are significant to reported earnings and may change as contract costs and risks are reassessed.
- Program exposures: Cumulative losses were approximately $270 million on a classified Aeronautics fixed-price incentive-fee contract and $280 million on an RMS ground-based radar program. Further losses remain possible; management said it did not currently expect additional radar losses, if any, to be material. Canadian Maritime Helicopter performance and Turkish Utility Helicopter sanctions also present possible cost-recovery, restructuring, or termination risks.
- Cash deployment and taxes: The company paid $784 million in dividends and repurchased $500 million of stock; $9.5 billion remained authorized for repurchases. Required amortization of R&D tax expenses was expected to increase 2023 cash taxes by approximately $575 million. The effective tax rate was 15.3%, compared with 15.9%.
- Contingencies: Environmental liabilities were $690 million, with $612 million of related probable-recovery assets. Potential tighter standards for PFAS, perchlorate, or hexavalent chromium could increase remediation estimates. In a False Claims Act matter, the government seeks about $52 million in damages, subject to trebling and penalties; the company said a material loss was not currently probable. The MTA seeks about $190 million in a separate long-running dispute; the company disputes the claims and awaits a court decision.
Management said cash, expected operating cash generation, and access to credit markets should be sufficient for requirements and planned cash deployment over the next 12 months and beyond. The independent accountant’s interim review reported no material modifications needed for GAAP conformity; it was a review, not an audit.
Important facts for investors to verify
- Whether F-35 TR-3 software, hardware availability, and flight-test progress affect deliveries, revenue, or the company’s full-year outlook.
- Whether contract estimate revisions and favorable profit-booking adjustments remain supportive, or whether fixed-price program cost growth triggers further losses.
- Whether backlog converts on schedule and whether contract-asset growth and billing cycles continue to affect working capital and cash generation.
- How inflation, supply-chain capacity, U.S. budget and debt-ceiling outcomes, and customer payment policies affect margins and cash flows.
- Future cash-tax payments associated with R&D amortization, repurchases and dividends, debt levels, and developments in material litigation and environmental exposures.