Lockheed Martin Corporation — Q1 2015 Form 10-Q
Reporting period: Quarter ended March 29, 2015; comparison is with the quarter ended March 30, 2014. Amounts are in millions of dollars, except per-share data. Financial statements are unaudited; Ernst & Young performed an interim review, not an audit.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $10,111 | $10,650 | -5.1% |
| Gross profit | $1,263 | $1,371 | -7.9% |
| Operating profit | $1,356 | $1,432 | -5.3% |
| Net earnings | $878 | $933 | -5.9% |
| Diluted EPS | $2.74 | $2.87 | -4.5% |
| Operating cash flow | $957 | $2,100 | -54.4% |
| Capital expenditures | $118 | $103 | +$15 |
Calculated gross margin was approximately 12.5%, versus 12.9%; operating margin was approximately 13.4% in both periods. Operating cash flow less capital expenditures was $839 million, compared with $1,997 million. Cash dividends paid were $1.50 per share, versus $1.33.
Sales of products fell 7% to $7,853; services sales rose 1% to $2,258. Product costs as a share of product sales increased to 88.5% from 87.3%; service costs as a share of service sales declined to 86.4% from 87.1%.
Segments and material changes
| Segment | Sales | Operating profit | Notable comparison |
|---|---|---|---|
| Aeronautics | $3,134 (-7%) | $371 (-6%) | Fewer C-130, C-5 and F-16 deliveries partly offset by F-35 production growth. |
| Information Systems & Global Solutions | $1,869 (-2%) | $136 (-22%) | Profit affected by performance issues on an international program; contract wind-downs and competitive pressure weighed on sales. |
| Missiles and Fire Control | $1,503 (-19%) | $292 (-18%) | Lower tactical missile, air and missile defense, and fire control deliveries. |
| Mission Systems and Training | $1,651 (+1%) | $219 (-12%) | New-program growth was offset by lower ship and aviation activity; fewer risk retirements reduced profit. |
| Space Systems | $1,954 (+5%) | $288 (+13%) | Orion and acquired businesses supported growth; segment profit included about $75 of equity earnings, primarily ULA. |
Consolidated net contract adjustments not related to volume, including profit-booking-rate changes and other matters, increased segment operating profit by approximately $490, versus $525 in Q1 2014. Management said these adjustments added about $320 ($1.00 per share) to net earnings, versus $340 ($1.05 per share) a year earlier.
Cash, debt and liquidity
- Cash and equivalents were $3,486 at March 29, up from $1,446 at year-end. The increase included $2,213 of net proceeds from debt issuance.
- Operating cash flow declined primarily because of working-capital movements, lower tax refunds and lower earnings. Receivables and inventories used cash, partly offset by accounts payable.
- Long-term debt, net, was $8,404 on the balance sheet, versus $6,169 at year-end. The company reported $9.3 billion of outstanding debt principal, excluding unamortized discounts; estimated fair value was $10.4 billion.
- In February, Lockheed Martin issued $2.25 billion of fixed-rate notes due 2025, 2035 and 2045, at coupons of 2.90%, 3.60% and 3.80%. Management expects the issuance to raise quarterly interest expense by about $20.
- The company reported no borrowings under its $1.5 billion revolving credit facility and no commercial-paper borrowings; it was in compliance with debt covenants.
- Current assets were $15,218 and current liabilities $11,567. Cash was $3,486. These balances reflect quarter-end amounts and do not by themselves indicate future cash generation.
Outlook, risks and unusual items
- No specific full-year financial guidance is stated in the provided filing text. Management said operating cash flows were expected to remain sufficient for operations and anticipated capital expenditures for the foreseeable future.
- Management highlighted continued uncertainty over U.S. defense funding, including sequestration cuts scheduled for fiscal years 2016–2021. Potential effects include program reductions, delays or terminations, lower production, supplier disruption and restructuring. The company relies heavily on U.S. Government customers.
- The F-35 program represented approximately 19% of consolidated sales, versus 16% a year earlier. By March 29, 117 production aircraft had been delivered and 92 were in backlog. Development was expected to be substantially complete in 2017, with less significant work continuing into 2019. Risks include software, supplier and partner performance, testing, schedule, cost, sustainment and timely funding.
- Environmental liabilities were $950 and related estimated recovery receivables were $823. The company warned that tighter perchlorate or hexavalent-chromium standards could materially increase environmental estimates; unrecoverable costs could affect earnings.
- For the MTA contract dispute, the MTA sought approximately $190 in damages and Lockheed Martin asserted approximately $95 in claims. The case was under submission after trial; a decision was expected in Q2 or Q3 2015. A reasonably possible loss range was not estimable for the legal proceedings described.
- A separate False Claims Act and environmental case involving the Paducah facility also had no estimable reasonably possible loss range; the company said it had substantial defenses.
- Outstanding letters of credit, surety bonds and third-party guarantees totaled $2.6 billion. The company said it did not expect payments under venture guarantees. ULA distribution-related funding obligations were capped by the relevant distributions; management expected ULA to meet its obligations without a contribution.
- The Civil reporting unit carried $2.1 billion of goodwill; its estimated fair value exceeded carrying value by about 15% in the 2014 annual test. Management identified it as at risk of a future impairment if projections or market factors deteriorate.
- The company repurchased 3.0 million shares for $604 under its program and had $3.1 billion of remaining authorization. It declared $477 in dividends. These distributions occurred alongside the new debt issuance.
- A proposed U.S. corporate tax-rate reduction to 25%, if enacted as described, would have reduced net deferred tax assets by $1.6 billion and caused a one-time non-cash tax expense of the same amount; this was a scenario, not an enacted change.
Key facts for investors to verify
- Whether lower sales and margins persist, particularly in Missiles and Fire Control and IS&GS, and whether the international-program performance issue is resolved.
- Whether the sharp year-over-year operating cash-flow decline reverses as customer collections and delivery timing normalize.
- F-35 execution, funding, testing, production rates and sustainment costs, together with the program’s growing share of company sales.
- Defense-budget outcomes and their effects on contract awards, service businesses, backlog and the goodwill risk identified in the Civil reporting unit.
- Developments in the MTA and Paducah proceedings, environmental standards and the recoverability of environmental costs.
- Debt and shareholder-return policy following the $2.25 billion issuance, including interest expense and the pace of buybacks and dividends.