Lockheed Martin Corporation — Q1 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter ended March 28, 2021, compared with the quarter ended March 29, 2020. Lockheed Martin is a global aerospace and defense contractor operating Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. In Q1, 72% of sales came from the U.S. Government, 27% from international customers, and 1% from U.S. commercial and other customers. The F-35 represented approximately 27% of consolidated sales.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $16.258 billion | $15.651 billion |
| Gross profit | $2.186 billion | $2.091 billion |
| Operating profit | $2.182 billion | $2.122 billion |
| Net earnings | $1.837 billion | $1.717 billion |
| Diluted EPS | $6.56 | $6.08 |
| Operating cash flow | $1.748 billion | $2.314 billion |
| Capital expenditures | $281 million | $293 million |
| Dividends paid per share | $2.60 | $2.40 |
Sales grew about 4%, net earnings about 7%, and diluted EPS about 8% year over year. Gross margin was approximately 13.4% versus 13.4%; operating margin was approximately 13.4% versus 13.6%. The effective tax rate was 16.9%, compared with 15.4%. Q1 included $68 million of unrealized investment gains in the Lockheed Martin Ventures Fund, contributing $51 million after tax, or $0.18 per share, and $36 million of severance and restructuring charges, or $0.10 per share after tax.
Segment results
| Segment | Sales, Q1 2021 (2020) | Operating profit, Q1 2021 (2020) | Margin, Q1 2021 (2020) |
|---|---|---|---|
| Aeronautics | $6.387B ($6.369B) | $693M ($672M) | 10.9% (10.6%) |
| MFC | $2.749B ($2.619B) | $396M ($396M) | 14.4% (15.1%) |
| RMS | $4.107B ($3.746B) | $433M ($376M) | 10.5% (10.0%) |
| Space | $3.015B ($2.917B) | $227M ($281M) | 7.5% (9.6%) |
RMS sales and profit advanced, led by training and logistics deliveries and Sikorsky helicopter volume. MFC sales increased, but profit was flat as gains in missile defense and tactical missile programs were offset by lower sensors and sustainment results. Space sales rose, while profit declined due to lower risk retirements, reduced ULA equity earnings, and AWE-related accelerated intangible amortization tied to the UK’s planned renationalization of the program. Aeronautics sales were broadly flat.
Financial position, cash flow, and liquidity
At March 28, 2021, cash and equivalents were $2.933 billion, down from $3.160 billion at year-end. Total assets were $51.437 billion and total equity was $6.333 billion. Current liabilities were $14.717 billion, including $506 million of current debt maturities. Long-term debt, net, was $11.657 billion; the filing reports debt outstanding net of discounts and issuance costs of $12.2 billion and principal debt of $13.3 billion. The company had no commercial paper or revolving credit facility borrowings and had $2.5 billion available under its revolver.
Operating cash flow decreased $566 million year over year, primarily because of working-capital use, including $1.4 billion of supplier payments accelerated into Q1 that were otherwise due in future periods. Contract assets rose to $10.908 billion from $9.545 billion, mainly reflecting revenue recognized before billing. Financing cash use was $1.806 billion, including $1.0 billion of share repurchases and $739 million of dividends paid.
Outlook, commentary, and material items
- For 2021, management expects sales growth in the mid-single-digit range, business-segment operating margin of approximately 11.0%, and operating cash flow of at least $8.9 billion. The outlook assumes no discretionary pension contribution, continued program support and funding, known COVID-19 effects, and a 21% statutory tax rate; it excludes the pending Aerojet Rocketdyne acquisition and assumes no extended continuing resolution or significant customer budget reductions.
- Management expects 2021 segment sales to increase mid-single digits for Aeronautics and MFC, low-to-mid single digits for RMS, and low single digits for Space. Expected operating profit is higher for Aeronautics, MFC, and RMS, but lower for Space.
- The Aerojet Rocketdyne transaction, valued at approximately $4.4 billion after assumed projected net cash, is expected to close in the latter part of 2021 subject to regulatory approval and other conditions. Lockheed Martin expects to use cash and new debt to finance it.
- COVID-19 continued to cause supplier delays, added costs, travel and site-access constraints, and adjusted work schedules. Management said Q1 financial results were not significantly affected, but future operational and demand impacts remain uncertain.
- The American Rescue Plan pension provisions led the company to revise its 2021 outlook to no pension contribution, versus a previously planned $1.0 billion discretionary payment. Management expects lower required contributions and changes to future CAS pension costs; effects beyond 2021 remain under assessment.
- Backlog was $147.4 billion at quarter-end; approximately 39% is expected to be recognized as revenue in the next 12 months and 61% in the next 24 months.
- Program exposures include cumulative losses of approximately $250 million on a ground-based radar program, $260 million on EADGE-T, and $140 million on the Warrior Capability Sustainment Program (WCSP). The customer directed suspension of WCSP work after deciding not to proceed with demonstration and manufacturing phases; the company is assessing the financial impact. Management did not anticipate additional material charges on these programs at the filing date.
- Environmental liabilities were $778 million, with $675 million of related probable future recovery assets. Potentially tighter standards for PFAS, hexavalent chromium, or perchlorate could increase remediation costs and affect earnings. The filing also describes False Claims Act litigation, an MTA dispute with approximately $190 million in customer damages sought, and a $6 million settlement of a separate DOJ matter without admission of liability.
Important facts for investors to verify
- Whether supplier, COVID-19, and customer funding conditions affect execution, deliveries, or the 2021 sales and cash-flow outlook.
- Whether contract-asset growth and working-capital use reverse as billing and supplier-payment timing normalize.
- How the AWE renationalization and Space segment profit pressures develop, and whether the outlook’s assumptions remain valid.
- Regulatory progress, financing terms, and expected closing timing for the Aerojet Rocketdyne acquisition.
- Updated cost estimates for the radar, EADGE-T, and suspended WCSP programs, and developments in environmental and legal contingencies.