Lockheed Martin Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 24, 2017. Comparisons are with the quarter and nine months ended September 25, 2016, except balance-sheet comparisons, which are with December 31, 2016. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Lockheed Martin is a global aerospace and defense contractor operating Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space Systems. The U.S. Government is its principal customer. Results include the consolidation of AWE from August 2016; the prior-year comparison also includes discontinued IS&GS results, including a divestiture gain.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $12,169 | $11,551 | $35,911 | $33,496 |
| Operating profit | $1,428 | $1,588 | $4,062 | $4,121 |
| Net earnings from continuing operations | $939 | $1,089 | $2,644 | $2,794 |
| Diluted EPS from continuing operations | $3.24 | $3.61 | $9.08 | $9.13 |
| Net earnings, including discontinued operations | $939 | $2,395 | $2,644 | $4,314 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $4,964 | $4,460 |
Sales increased 5% in Q3 and 7% for the nine months. Operating profit and continuing-operations earnings declined in both comparisons. Prior-year total net earnings included IS&GS discontinued operations and a $1.234 billion divestiture gain; continuing-operations results are the more comparable earnings measure. Q3 gross profit was $1.351 billion (about 11.1% of sales), versus $1.384 billion (about 12.0%); nine-month gross profit was $3.929 billion (about 10.9%), versus $3.709 billion (about 11.1%). Consolidated operating margin was about 11.7% in Q3 and 11.3% for the nine months.
Segment performance and material changes
- Aeronautics: Q3 sales rose 14% to $4.771 billion and operating profit rose 18% to $517 million, primarily on higher F-35 production and sustainment. Nine-month sales rose 14% to $14.102 billion and profit rose 13% to $1.503 billion.
- MFC: Q3 sales increased 3% to $1.793 billion, while profit fell 7% to $270 million. Nine-month sales increased 1% to $4.919 billion and profit was nearly flat at $757 million.
- RMS: Q3 sales were essentially flat at $3.353 billion and profit was $244 million. Nine-month sales rose 2% to $9.864 billion, but profit fell 11% to $606 million, reflecting EADGE-T and VLS performance charges, among other factors.
- Space Systems: Q3 sales fell 1% to $2.252 billion and profit fell 52% to $218 million. Nine-month sales rose 6% to $7.026 billion, while profit fell 26% to $762 million. The comparison reflects the nonrecurring AWE acquisition gain in 2016, lower equity earnings, and program performance matters.
Net contract-estimate and other adjustments increased segment operating profit by approximately $330 million in Q3 and $1.1 billion for the nine months; the comparable 2016 amounts were approximately $405 million and $1.1 billion. Such estimates can change as contract risks, costs and schedules evolve.
Cash flow, balance sheet and capital allocation
- Nine-month operating cash flow was $4.964 billion, up from $4.460 billion. Capital expenditures were $670 million; investing cash flow was a use of $655 million.
- Financing activities used $3.205 billion, including $1.5 billion of share repurchases and $1.591 billion of dividends paid. Cash increased $1.104 billion to $2.941 billion.
- At September 24, cash was $2.941 billion, current assets $17.208 billion and current liabilities $13.084 billion. Long-term debt, net, was $14.268 billion; total liabilities were $46.771 billion and total equity $2.175 billion.
- Outstanding debt principal was $15.5 billion, excluding discounts and issuance costs. In September, the company exchanged about $1.4 billion of older notes for about $1.6 billion of new 4.09% notes due 2052 and paid a $237 million premium, substantially in new notes. The $2.5 billion revolving facility was undrawn; there were no commercial paper borrowings.
- The company repurchased 5.4 million shares for $1.5 billion in the first nine months. Remaining repurchase authorization was $2.0 billion at quarter-end; the board authorized a further $2.0 billion after quarter-end. The quarterly dividend was raised 10% to $2.00 per share after quarter-end.
Outlook, risks and notable items
- 2017 outlook: Net sales expected at $50.0–$51.2 billion under the then-current revenue standard (ASC 605), or $49.0–$50.2 billion under the preliminary ASC 606 estimate. Diluted EPS guidance was $12.85–$13.15; cash from operations was expected to be at least $6.2 billion. Management expected a roughly $200 million noncash property-sale gain in Q4, increasing continuing-operations earnings by about $120 million, or $0.40 per share.
- 2018 trends: Net sales expected to grow approximately 2% over 2017 sales adjusted for ASC 606; business-segment operating margin forecast at 10.3%–10.5%; operating cash flow at least $5.0 billion. These expectations assume continued U.S. Government support and funding. Planned 2018 qualified pension contributions were $1.6 billion.
- Program execution: EADGE-T cumulative losses, including reserves, were about $260 million; the company said further charges were possible. Commercial satellite programs involving the A2100 platform had cumulative losses of about $260 million through June 25, 2017, and additional reserves could be material. RMS also recorded a Q3 VLS performance charge; the filing does not state its amount in the provided text.
- Government and contract risks: Fiscal 2018 appropriations remained unresolved, with a continuing resolution through December 8, 2017. Potential procurement delays, budget limits, sequestration, debt-ceiling uncertainty, program changes and contract termination could affect results.
- Pensions and taxes: Pension expense and equity are sensitive to discount rates and asset returns. Potential tax-rate legislation could cause a large one-time, noncash reduction in deferred tax assets and increase in tax expense; management illustrated a possible $1.7–$3.4 billion impact under hypothetical 15%–25% federal rates.
- Legal and environmental contingencies: Government False Claims Act matters sought approximately $52 million in damages, subject to trebling and penalties; the company cited defenses and did not believe a material loss was probable. The MTA seeks approximately $190 million, while Lockheed Martin seeks approximately $95 million; a court decision was pending. Environmental liabilities were $952 million, with $825 million of related recovery receivables recorded.
- Controls and accounting: Disclosure controls were deemed ineffective because of a previously reported material weakness in Sikorsky contract accounting, revenue recognition, inventory, payroll and IT controls. Remediation and testing were ongoing, with completion expected by December 31, 2017. ASC 606 adoption was planned for January 1, 2018; the preliminary assessment anticipated earlier revenue recognition for some contracts and changes to backlog and balance-sheet classifications.
Important facts for investors to verify
- Progress in remediating the Sikorsky material weakness and whether testing supports the expected year-end completion.
- Execution and cost trends for F-35, EADGE-T, VLS and A2100 satellite programs, including any additional contract-loss provisions.
- Final 2017 results against sales, EPS and cash-flow guidance, including recognition of the anticipated property-sale gain.
- Final ASC 606 transition effects on reported sales, earnings, assets, liabilities and backlog.
- U.S. Government funding outcomes and developments in the MTA, False Claims Act and environmental matters.
- Pension assumptions, required contributions, capital returns and the company’s capacity to fund them while maintaining liquidity.