Lockheed Martin Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 29, 2019; nine-month results are also presented. The quarter contained 13 weeks versus 14 weeks in the prior-year quarter, which affects comparability. Dollar amounts are in millions unless noted. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context
Lockheed Martin is a global defense and aerospace contractor operating Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. For the first nine months, 70% of sales came from the U.S. Government (including 60% from the Department of Defense), 28% from international customers, and 2% from U.S. commercial and other customers. The F-35 represented approximately 27% of nine-month sales.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $15,171 | $14,318 | $43,934 | $39,351 |
| Operating profit | $2,105 | $1,963 | $6,396 | $5,483 |
| Net earnings | $1,608 | $1,473 | $4,732 | $3,793 |
| Diluted EPS | $5.66 | $5.14 | $16.66 | $13.21 |
| Operating cash flow | Not separately presented | Not separately presented | $5,821 | $921 |
- Q3 sales rose 6%, net earnings 9%, and diluted EPS 10%. Nine-month sales rose 12%, net earnings 25%, and diluted EPS 26% year over year.
- Consolidated operating margin was approximately 13.9% for the quarter and 14.6% year to date, versus 13.7% and 13.9%, respectively, in 2018. Product cost as a share of product sales improved year to date, while service cost as a share of service sales increased.
- Nine-month operating cash flow improved by $4.9 billion, principally because the company made no qualified pension contributions in 2019 versus $5.0 billion in 2018. Working-capital changes used $1.1 billion of cash; capital expenditures were $841 million.
- Cash and equivalents were $2.539 billion at quarter-end. Current assets were $19.803 billion versus current liabilities of $15.515 billion. Debt carrying value was about $13.6 billion, including $900 million due within a year; there were no commercial-paper or revolving-facility borrowings outstanding at quarter-end. The $2.5 billion revolving facility was extended to August 2024.
- Dividends paid in the first nine months were $1.881 billion; share repurchases were $710 million in cash flow statements and 2.2 million shares for $718 million in the equity disclosure. Remaining repurchase authorization was $3.3 billion, including a $1.0 billion increase authorized in September.
- Contract assets rose to $11.004 billion from $9.472 billion, mainly reflecting revenue recognized before customer billing. Backlog was $137.4 billion; the company expected to recognize approximately 38% within 12 months and 63% within 24 months.
Segment results and changes
| Segment | Q3 sales / operating profit | Nine-month sales / operating profit | Notable year-over-year trend |
|---|---|---|---|
| Aeronautics | $6,178 / $665 | $17,312 / $1,842 | Growth led by higher F-35 and classified-program volume. |
| MFC | $2,601 / $349 | $7,362 / $1,093 | Strong growth in precision fires, hypersonics, PAC-3 and THAAD; Q3 margin declined to 13.4% from 14.6%. |
| RMS | $3,709 / $342 | $11,239 / $1,068 | Q3 sales fell 4%, mainly on lower Sikorsky helicopter volume; nine-month sales and profit increased. |
| Space | $2,683 / $309 | $8,021 / $931 | Growth in government satellite and hypersonics programs; nine-month profit also reflected higher risk retirements. |
Across the company, non-volume adjustments—including contract estimate and profit-booking-rate changes—added approximately $480 million to segment operating profit in Q3 and $1.5 billion in the first nine months. Management said these increased net earnings by approximately $379 million ($1.33 per share) and $1.2 billion ($4.07 per share), respectively. Nine-month results also included a $51 million previously deferred property-sale gain; the nine-month 2018 comparison included $96 million of severance and restructuring charges.
Outlook, commentary and risks
- 2019 outlook: Sales of approximately $59.1 billion, business-segment operating margin of approximately 10.9%, and operating cash flow of at least $7.6 billion.
- 2020 preliminary trends: Sales of approximately $62.0 billion, segment operating margin of 10.5%–10.8%, and operating cash flow of at least $7.2 billion after $500 million of expected pension contributions. Both outlooks assume continued U.S. Government support and funding of key programs and no impact from U.S. actions related to Turkey.
- The company expected a net FAS/CAS pension benefit of approximately $2.1 billion in 2020 and planned to complete the freeze of salaried defined-benefit pension plans effective January 1, 2020. Under stated pension assumptions, it anticipated a noncash, after-tax reduction in year-end 2019 equity of approximately $4.0 billion; further declines in interest rates or plan-asset returns could result in a year-end stockholders’ deficit.
- Turkey’s removal from the F-35 program and possible additional sanctions could disrupt aircraft production, deliveries, funding, and sole-source component supply, and affect other Turkey-related programs. Replacement suppliers were still being qualified; the full financial impact was undetermined.
- Three programs had substantial cumulative losses: approximately $195 million on an RMS ground-based radar, $410 million on two commercial satellite programs, and $140 million on the MFC Warrior turret upgrade. The third satellite remained in development and was behind schedule; further technical or schedule problems, penalties, or customer termination could produce additional charges, potentially material for Space.
- Other risks include continuing-resolution funding and possible government shutdown, contract cost and schedule estimates, pension assumptions, environmental remediation, and potential impairment at Sikorsky. Environmental liabilities were $828 million, with $719 million of related recovery receivables recorded; changed chromium or perchlorate standards could increase estimates.
- Legal matters include a government False Claims Act case seeking approximately $52 million in damages, subject to trebling and penalties; a separate DOJ case with unspecified damages and possible indemnity exposure; and an MTA dispute in which the authority seeks approximately $190 million while Lockheed seeks approximately $95 million. Management said it did not believe a material loss was probable in the first two matters; the MTA case awaited a court decision.
Most important facts for investors to verify
- Whether 2019 and preliminary 2020 sales, margin, and cash-flow outlooks were achieved, and how much operating cash flow reflects pension-contribution timing rather than recurring operating trends.
- Whether Turkey-related actions or supplier transitions affect F-35 orders, production, delivery schedules, funding, or cash recovery.
- Progress, delivery timing, and additional cost exposure for the third commercial satellite and the radar and Warrior programs.
- The sustainability of contract estimate adjustments that contributed materially to reported profit, alongside the growth in unbilled contract assets.
- Year-end pension assumptions, actual asset returns, resulting equity effects, and any implications for dividends, repurchases, or liquidity.
- Developments in the disclosed litigation, environmental estimates, and the Sikorsky goodwill and intangible-asset impairment assessment.