Lockheed Martin Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 26, 2022; comparisons are to the periods ended June 27, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. 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 half, 73% of sales were to the U.S. Government, 26% to international customers, and 1% to U.S. commercial and other customers.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $15,446 | $17,029 | $30,410 | $33,287 |
| Operating profit | $1,963 | $2,192 | $3,896 | $4,374 |
| Operating margin | 12.7% | 12.9% | 12.8% | 13.1% |
| Net earnings | $309 | $1,815 | $2,042 | $3,652 |
| Diluted EPS | $1.16 | $6.52 | $7.62 | $13.08 |
| Gross margin | 12.7% | 12.6% | 12.7% | 13.0% |
Sales fell 9% in both Q2 and the first half. The sharp earnings decline chiefly reflects a $1.47 billion pretax, noncash pension settlement charge ($1.2 billion after tax, or $4.33 per share) recorded in Q2. The charge arose from transferring $4.3 billion of pension obligations and related assets to an insurer. Q2 also included $143 million of Lockheed Martin Ventures Fund losses and $34 million of debt-extinguishment-related losses. The effective tax rate was 6.4% in Q2 2022 versus 16.4% a year earlier; the pension charge reduced tax expense by about $314 million.
| Segment | Six-month sales 2022 / 2021 | Six-month operating profit 2022 / 2021 |
|---|---|---|
| Aeronautics | $12,263 / $13,053 | $1,291 / $1,265 |
| MFC | $5,199 / $5,693 | $802 / $797 |
| RMS | $7,564 / $8,349 | $751 / $891 |
| Space | $5,384 / $6,192 | $513 / $562 |
Lower sales reflected supply-chain effects and reduced activity across programs; Space was also affected by the U.K. AWE program’s renationalization, while RMS had lower Black Hawk and training/logistics activity. F-35 production delays and delayed contract funding weighed on Aeronautics sales. Segment operating profit was mixed: Aeronautics and MFC increased slightly, while RMS and Space declined.
Cash flow and balance sheet: First-half operating cash flow was $2.741 billion versus $3.016 billion; capital expenditures were $572 million, yielding free cash flow of $2.169 billion versus $2.417 billion. Cash declined to $1.775 billion from $3.604 billion at year-end 2021. At June 26, current assets were $20.973 billion and current liabilities $16.479 billion; contract assets were $11.753 billion, up $1.174 billion from year-end, principally on F-35 activity. Long-term debt, net, was $11.644 billion; reported outstanding debt principal was $12.8 billion. Stockholders’ equity was $11.432 billion.
Financing cash outflow was $3.987 billion, including $2.356 billion of share repurchases and $1.511 billion of dividends. The company issued $2.3 billion of notes and used proceeds primarily to redeem $2.25 billion of older notes. It had $1.6 billion of repurchase authorization remaining, a $3.0 billion revolving facility with no borrowings, and no commercial paper outstanding. Management said cash, expected operating cash flow, and credit access should meet requirements and planned cash deployments over the next twelve months and beyond.
Material changes, outlook, and risks
- F-35 contract and deliveries: The Lots 15–17 production contract remained under negotiation after an agreement in principle. Insufficient authorization and funding prevented recognition of about $325 million of Q2 sales and associated operating profit, and delayed invoicing and collection of about $465 million of costs. Potential third-party termination liability was about $1 billion. The company expected authorization and funding in Q3 2022, but warned that further delay could materially affect results, cash flows, and financial condition.
- F-35 production outlook: COVID-related supplier delays affected Q2 performance. Management expected a flat delivery profile in 2023, deliveries of 147–153 aircraft annually in 2023 and 2024, and a 156-aircraft annual target in 2025 and thereafter. These expectations were subject to supplier performance and budget constraints. The filing does not provide a clear consolidated revenue or earnings guidance figure.
- Pension: Management expected 2022 FAS pension expense of about $1.1 billion, including the settlement charge; excluding it, expected FAS pension income was about $410 million. Expected CAS pension cost remained about $1.8 billion, and no 2022 qualified-plan contributions were planned. Further pension risk transfers may result in additional noncash settlement charges.
- Operating environment: Management cited COVID-related supply-chain and labor challenges, inflation affecting labor and supplier costs, and rising interest rates. Inflation may pressure margins, particularly on existing fixed-price contracts. The Ukraine conflict increased customer interest, particularly in Europe, but management did not expect a significant 2022 sales increase from resulting new contracts.
- Program and contract risks: A classified Aeronautics fixed-price program had cumulative losses of about $225 million and could incur further losses. An RMS ground-based radar program had cumulative losses of about $280 million; management did not currently expect further losses, if any, to be material. The EADGE-T program was completed in Q2 after settlement of claims, with cumulative losses of about $260 million.
- Other contingencies: Environmental liabilities were $726 million, with $630 million of related probable future cost-recovery assets. Potential tighter regulation of perchlorate, hexavalent chromium, or PFAS could raise remediation costs. In a False Claims Act case involving Sikorsky subsidiaries, the U.S. 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 long-running dispute; Lockheed Martin contests the claim and awaits a court decision. The filing says a reasonably possible loss range generally cannot be estimated for these matters.
Most important facts for investors to verify
- Whether the F-35 Lots 15–17 contract received definitive authorization and funding, and whether delayed sales and collections were recovered as expected.
- Actual F-35 supplier performance, aircraft deliveries, and progress toward the stated 2023–2025 delivery profile.
- Whether sales declines and margin trends persist across segments, particularly RMS and Space, and the effect of inflation and supply constraints on fixed-price contracts.
- How pension remeasurement effects, future pension settlements, and plan asset returns affect earnings, equity, and cash flows.
- Cash conversion and working-capital trends, including contract assets, supplier payments, share repurchases, dividends, and debt levels.
- Developments in the disclosed program-loss exposures, environmental matters, and significant litigation.