Lockheed Martin Corporation — Q1 2022 Form 10-Q
Business context and reporting period
Global defense and aerospace contractor reporting for the quarter ended March 27, 2022, compared with the quarter ended March 28, 2021. Sales were 72% to the U.S. Government, 27% to international customers and 1% to U.S. commercial and other customers. The filing says results for an interim period are not necessarily indicative of full-year results.
Financial results and position
Amounts below are in billions, except per-share data and margins.
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $14.964 | $16.258 |
| Operating profit | $1.933 | $2.182 |
| Operating margin | 12.9% | 13.4% |
| Net earnings | $1.733 | $1.837 |
| Diluted EPS | $6.44 | $6.56 |
| Cash from operations | $1.410 | $1.748 |
| Free cash flow | $1.142 | $1.467 |
Gross profit was $1.909 billion, a 12.8% gross margin, versus $2.186 billion and 13.4%. Product sales declined 9%; service sales declined 1%. The effective tax rate was 15.9%, compared with 16.9%. Q1 2022 net earnings included $103 million of Lockheed Martin Ventures gains before tax ($77 million after tax, or $0.29 per share).
Cash and cash equivalents were $1.883 billion at quarter end, down from $3.604 billion at December 31, 2021. Current assets were $20.390 billion and current liabilities $16.047 billion. Long-term debt, net, was $11.145 billion and current maturities were $500 million; the company reported $12.8 billion of debt principal outstanding. No borrowings were outstanding under its $3.0 billion revolving credit facility or commercial paper program. Financing cash use of $2.880 billion included $2.0 billion of share repurchases and $767 million of dividends paid.
Contract assets rose to $12.130 billion from $10.579 billion, primarily because revenue recognized, mainly on F-35, had not yet been billed. Backlog was $134.2 billion; management expected to recognize approximately 38% over the next 12 months and 61% over the next 24 months.
Material changes versus the prior period
- Sales fell 8%, and operating profit fell 11%. Management attributed lower sales mainly to supply-chain impacts and lower volume, as well as the absence of the AWE program after its renationalization in 2021.
- RMS sales declined 14% and operating profit 20%; MFC sales declined 11%. Space sales declined 15%, while Space operating profit increased 8%, helped by higher ULA equity earnings. Aeronautics sales were broadly flat and operating profit declined 2%.
- Operating cash flow declined $338 million and free cash flow declined $325 million year over year. Management cited timing of F-35 performance-based payments and lower MFC international advances, partly offset by higher RMS receipts.
- Share repurchases were $2.0 billion versus $1.0 billion a year earlier; dividends paid were $767 million versus $739 million. Dividends declared were $2.80 per share versus $2.60.
- Net adjustments not related to volume increased segment operating profit by approximately $405 million, compared with $495 million a year earlier. These adjustments increased net earnings by approximately $320 million ($1.19 per share), versus $391 million ($1.40 per share).
Outlook, commentary, risks and unusual items
- No consolidated full-year revenue or earnings guidance is provided in the supplied filing text. For F-35, management anticipated deliveries of 148–153 aircraft in 2022 and 156 in each of 2023 and 2024, subject to adequate customer funding and program execution.
- Management cited COVID-19-related supply disruptions, labor challenges and delays, and said it accelerated $1.0 billion of supplier payments due in future periods. It expected to continue risk-based supplier payment acceleration through 2022.
- The company warned it could exceed current authorization and funding for the F-35 Lot 15–17 advance-acquisition contract during Q2 2022 absent further government direction. It also cited potential disruption from IAM contract negotiations covering about 5,000 employees.
- Three programs had cumulative losses disclosed: approximately $225 million on a classified Aeronautics fixed-price incentive-fee contract, $280 million on an RMS ground-based radar program and $260 million on RMS’s EADGE-T program. Further losses could arise on the first two if performance, scope or costs worsen; management did not anticipate material additional losses on the latter two based on current estimates.
- Environmental liabilities were $729 million, with $632 million of associated probable recoveries recorded as assets. New or tighter standards for PFAS, perchlorate or hexavalent chromium could increase remediation estimates and potentially affect earnings.
- In a False Claims Act case involving Sikorsky-related entities, the U.S. Government seeks about $52 million in damages, subject to trebling and statutory penalties. The company said it did not currently believe a material loss was probable. In the MTA dispute, the MTA seeks about $190 million; Lockheed Martin seeks about $95 million and awaits a court decision.
- The company terminated its agreement to acquire Aerojet Rocketdyne after FTC action; neither party incurred a termination penalty, and the termination had no reported financial statement impact. Management also warned that if the 2022 R&D expense amortization tax provision was not changed retroactively, it estimated a roughly $500 million reduction in 2022 operating cash flow.
- Management said liquidity, expected operating cash flow and credit-market access should cover cash requirements and deployment plans over the next 12 months and beyond. The filing identifies Sikorsky goodwill as at risk of impairment if projected cash flows deteriorate.
Important facts for investors to verify
- Whether supply-chain and labor constraints ease, and whether F-35 production, delivery and funding milestones remain on plan.
- Whether contract assets and working-capital needs convert into customer billings and cash, and how operating cash flow performs after the accelerated supplier payments.
- Whether profit adjustments and investment gains are repeatable; assess their contribution to reported earnings against underlying program performance.
- Developments in the disclosed loss-making programs, the False Claims Act and MTA cases, and environmental remediation estimates.
- Whether share repurchases, dividends, debt maturities and the potential R&D tax cash effect remain consistent with liquidity and capital-allocation plans.