Lockheed Martin Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 25, 2022; comparisons are with periods ended September 26, 2021. Amounts are U.S. dollars. Lockheed Martin is a defense and aerospace contractor operating Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. For the first nine months, 74% of sales came from the U.S. Government, 25% from international customers, and 1% from U.S. commercial and other customers.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $16.583bn | $16.028bn | $46.993bn | $49.315bn |
| Operating profit | $2.159bn | $2.294bn | $6.055bn | $6.668bn |
| Net earnings | $1.778bn | $614m | $3.820bn | $4.266bn |
| Diluted EPS | $6.71 | $2.21 | $14.31 | $15.32 |
| Operating margin | 13.0% | 14.3% | 12.9% | 13.5% |
Q3 sales rose 3.5%, while operating profit fell 5.9%. Q3 net earnings were much higher than the prior-year quarter, which included a $1.7bn noncash pension settlement charge. For the nine-month period, sales declined 4.7%, operating profit declined 9.2%, and net earnings declined 10.5%. Gross margin was approximately 12.8% in Q3 and 12.7% year to date, versus 14.4% and 13.5%, respectively, in 2021.
- Segment trends: Q3 sales increased at Aeronautics (8%), MFC (2%), and Space (7%), but declined at RMS (5%). For nine months, sales declined across all segments: Aeronautics 1%, MFC 5%, RMS 8%, and Space 7%. RMS operating profit fell 14% year to date; Aeronautics profit rose 4%, while MFC and Space profit declined 2% and 1%.
- Cash flow: Nine-month operating cash flow was $5.874bn, up from $4.953bn. Capital expenditures were $977m; company-defined free cash flow was $4.897bn, up from $4.038bn. The operating cash flow improvement primarily reflected lower working-capital use, including timing of contract assets and accounts payable.
- Liquidity and debt: Cash was $2.430bn, down from $3.604bn at year-end 2021. Current assets were $20.960bn and current liabilities $16.347bn. Long-term debt, net, was $11.480bn versus $11.670bn at year-end; principal debt was $12.8bn. The company had no borrowings under its $3.0bn revolving facility or commercial paper at quarter-end.
- Capital returns: Nine-month dividends paid were $2.250bn ($8.40 per share), and $3.694bn was spent on repurchases. The company repurchased 11.1m shares for $3.8bn during the period. Stockholders’ equity was $11.966bn, up from $10.959bn at year-end.
Material changes and unusual items
- A $1.5bn pretax noncash pension settlement charge was recorded in Q2 2022 after transferring $4.3bn of pension obligations and related assets to an insurer. The after-tax impact was $1.2bn, or $4.33 per share. The transfer used pension trust assets and required no additional contribution. Management expects 2022 FAS pension expense of approximately $1.1bn, inclusive of the charge.
- Net contract profit-booking adjustments increased segment operating profit by about $455m in Q3 and $1.3bn year to date, compared with $580m and $1.5bn in the corresponding 2021 periods. These estimates can change as contract costs and risks are reassessed.
- Contract assets rose $1.8bn to $12.333bn, primarily from unbilled revenue, especially on F-35 work. Pre-contract costs in inventory increased to $931m from $634m, primarily related to Aeronautics programs.
- Other non-operating results included investment losses: $26m in Q3 and $66m year to date, versus gains of $98m and $180m in 2021. The 2022 nine-month amount also included losses on early debt extinguishment.
Outlook, risks, and contingencies
- F-35: The program generated 27% of consolidated sales in the first nine months. Management expects deliveries of 148–153 aircraft in 2022 and 147–153 annually in 2023–2024, reaching 156 in 2025. Deliveries were temporarily paused after a supplier component was found to contain specialty metal sourced from China; management expected deliveries to resume in Q4 2022 following a U.S. Government waiver. The Lots 15–17 production contract remained to be definitized. A Q3 Lot 15 authorization restored invoicing and recognized about $325m of sales deferred from Q2, along with approximately $465m of deferred cash collections.
- Operating conditions: COVID-related supply-chain disruptions and labor challenges continued, with some impacts expected into 2023. Inflation and supplier cost pressure pose particular risks on existing fixed-price contracts. The company reported increased international interest and potential replenishment orders related to the Ukraine conflict, but did not expect a significant near-term sales increase from new contracts.
- Funding and capital allocation: A continuing resolution funded U.S. Government activities through December 16, 2022; procurement delays remain possible. Management said cash, expected operating cash flow, and credit-market access should meet requirements over the next 12 months and beyond. After quarter-end, the board added $14bn to the repurchase authorization; management anticipated a $4bn Q4 accelerated repurchase and approximately $8bn of total 2022 repurchases, funded with cash and debt. These are plans, not guarantees.
- Program and asset risks: A classified Aeronautics fixed-price program had cumulative losses of approximately $250m, including an additional $25m Q3 charge; further losses are possible. A ground-based radar program at RMS had cumulative losses of approximately $280m; management did not then expect further losses, if any, to be material. Sikorsky goodwill and its indefinite-lived trademark were identified as potentially at risk if projected cash flows deteriorate.
- Contingencies: Environmental liabilities were $722m, with $627m of probable recovery assets recorded. A False Claims Act matter seeks approximately $52m, subject to trebling and statutory penalties; the company said a material loss was not currently considered probable. In the long-running MTA dispute, the MTA seeks about $190m and Lockheed Martin asserts claims of about $95m; the company cannot estimate the potential completion and re-procurement costs.
Most important facts for investors to verify
- Whether F-35 Lots 15–17 are definitized on acceptable terms, deliveries resume as expected, and planned production and delivery rates are achieved.
- Whether supply-chain, labor, and inflation pressures affect contract costs, margins, cash conversion, or fixed-price program loss estimates.
- How much reported profit depends on contract estimate revisions and whether those favorable adjustments persist.
- Whether the expected repurchases and dividend increases are funded without materially weakening liquidity or increasing debt.
- Developments in the disclosed legal and environmental matters, and the outcome of the Sikorsky impairment assessment.
The independent accountant reported that its interim review identified no material modifications needed for GAAP conformity; the review was not an audit. The filing states that disclosure controls were effective as of September 25, 2022.