Lockheed Martin Corporation — Q1 2013 Form 10-Q
Reporting period: Quarter ended March 31, 2013; comparative quarter ended March 25, 2012. Amounts are in millions except per-share data. Lockheed Martin is a global security and aerospace company whose principal customer is the U.S. Government; 82% of 2012 sales came from U.S. Government customers.
Financial performance
| Metric | Q1 2013 | Prior comparable quarter | Change |
|---|---|---|---|
| Net sales | $11,070 | $11,293 | Down 2% |
| Gross profit | $1,041 | $1,009 | Up 3% |
| Operating profit | $1,119 | $1,044 | Up 7% |
| Net earnings | $761 | $668 | Up 14% |
| Diluted EPS | $2.33 | $2.03 | Up 15% |
| Operating cash flow | $2,085 | $458 | Up $1,627 |
Gross margin was approximately 9.4%, versus 8.9%; operating margin was approximately 10.1%, versus 9.2%. Product sales fell 5%, principally due to lower aircraft deliveries and lower volume in several programs; services sales rose 10%, led by new and expanded IS&GS and MFC work. The effective tax rate declined to 25.8% from 29.8%, including a $46 tax benefit from reinstatement of the R&D credit, of which $37 related to 2012.
Segments and material comparisons
- Aeronautics: Sales fell 14% to $3,186, largely on fewer F-16, C-130 and C-5 deliveries; operating profit was $379 versus $385. Margin improved to 11.9% from 10.4%.
- IS&GS: Sales rose 1% to $2,106, with new contract activity offset by lower volume and completed programs; operating profit was essentially flat at $189.
- Missiles and Fire Control: Sales rose 13% to $1,988, but operating profit fell 7% to $344; margin declined to 17.3% from 21.0%, partly reflecting lower risk retirements.
- Mission Systems and Training: Sales were nearly flat at $1,830; operating profit increased 28% to $201 and margin rose to 11.0% from 8.5%, benefiting from risk retirements and lower reserves on certain programs.
- Space Systems: Sales rose 4% to $1,960, while operating profit declined 4% to $230 and margin eased to 11.7% from 12.6%, including lower risk retirements on satellite programs.
Consolidated non-volume adjustments, including contract profit-booking changes and other items, increased segment operating profit by about $470 in Q1, compared with $485 in the prior quarter. The company said such estimates can make period comparisons less indicative of underlying trends.
Cash flow, liquidity and debt
- Operating cash flow was $2,085; investing cash use was $156, including $106 of capital expenditures; financing cash use was $762.
- Operating cash flow benefited from approximately $540 of net tax refunds, no pension contributions during the quarter, and improved working-capital movements. The prior comparable quarter included $505 of pension contributions and $150 of net tax payments.
- Cash and cash equivalents were $3,065 at March 31, up from $1,898 at year-end 2012. Current assets were $14,872 and current liabilities $12,625 (current ratio approximately 1.18).
- Long-term debt, net, was $6,154, plus $150 current debt. Outstanding principal was $7.2 billion; estimated fair value was $7.9 billion. The company reported compliance with debt covenants, no revolving-credit borrowings and no commercial paper borrowings. It had a $1.5 billion revolving facility.
- Stockholders’ equity was $304, compared with $39 at year-end, while accrued pension liabilities were $15,397. The company paid $371 in dividends ($1.15 per share) and $461 in cash for share repurchases; $1.8 billion remained authorized under its repurchase program.
Outlook, commentary and risks
- Management estimated 2013 sales would decline by a mid-single-digit percentage from 2012, including the estimated impact of sequestration. It expected operating profit and cash flow generally to track sales reductions, assuming no significant sequestration-related restructuring charges. No specific earnings-per-share guidance is provided in the filing text.
- Management warned that sequestration and other constrained federal budgets could materially harm the business, with possible program reductions, delays or terminations, lower production volumes, higher unit costs, supplier impacts, workforce reductions and restructuring charges. Effects may lag in longer-cycle businesses.
- The company anticipated $1.5 billion of qualified pension-plan contributions in 2013; none had been made by March 31. It did not expect contributions to retiree medical and life insurance plans in 2013.
- For F-35, development was expected to be substantially complete in 2017, with lesser work continuing into 2019. No aircraft were delivered in Q1, but deliveries resumed in April; 88 production aircraft were in backlog at quarter-end. Management cited supplier and partner performance, software development, funding timing, contractual withholds, flight testing and test findings as ongoing challenges. About $350 of the development contract’s remaining $530 in incentive fees was expected to be earnable.
- Severance charges of $30, net of state tax benefits, related to planned IS&GS position eliminations and reduced net earnings by $19, or $0.06 per share.
- Environmental liabilities were $986, with $853 of estimated recoveries recorded; future cleanup estimates remain subject to regulatory and remediation uncertainty. Potentially lower standards for perchlorate and hexavalent chromium could increase estimates.
- Other contingencies include the MTA contract dispute, for which the company disputes the allegations and cannot estimate potential completion and re-procurement costs, and DOJ allegations concerning environmental practices at the Paducah plant, for which a reasonably possible loss range could not be estimated. The company stated it believed its defenses were substantial.
- Management believed legal matters were unlikely to have a material adverse effect on the Corporation as a whole, although an unfavorable resolution could materially affect earnings in an individual period. The interim financial statements received an independent accountant’s review, not an audit; controls were reported effective.
Most important facts for investors to verify
- Whether sequestration and subsequent U.S. budget decisions alter the mid-single-digit 2013 sales-decline outlook, program funding or restructuring needs.
- How much of the strong Q1 operating cash flow is recurring, given the tax refund and lack of pension contributions; track the expected $1.5 billion pension contribution.
- Whether segment profitability and contract estimates remain sustainable, particularly the substantial contribution from non-volume adjustments and the margin decline at Missiles and Fire Control.
- F-35 delivery pace, funding, schedule and ability to earn incentive fees, alongside the program’s disclosed execution challenges.
- Developments in environmental estimates and legal matters, including the MTA and Paducah proceedings, where the filing does not provide a clear loss estimate.