Lockheed Martin Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 27, 2020; comparable quarter ended September 29, 2019. Nine-month results compare the same periods. Amounts are in millions of dollars except per-share data.
Business context and financial performance
Lockheed Martin operates Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space. For the first nine months, 74% of sales came from the U.S. Government, including 64% from the Department of Defense; 25% came from international customers. The F-35 accounted for approximately 28% of sales.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $16,495 | $15,171 | $48,366 | $43,934 |
| Gross profit | $2,136 | $2,063 | $6,440 | $6,244 |
| Operating profit | $2,147 | $2,105 | $6,355 | $6,396 |
| Net earnings from continuing operations | $1,753 | $1,608 | $5,096 | $4,732 |
| Net earnings, including discontinued operations | $1,698 | $1,608 | $5,041 | $4,732 |
| Diluted EPS | $6.05 | $5.66 | $17.92 | $16.66 |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $6,376 | $5,821 |
Sales rose 9% in Q3 and 10% year to date. Operating profit was nearly flat in Q3 and declined 1% year to date. Gross margin was approximately 13.0% in Q3 versus 13.6%, and 13.3% year to date versus 14.2%. The year-to-date increase in continuing-operations earnings reflected higher sales and improved non-operating pension results, partly offset by lower operating profit and higher income tax expense. Q3 diluted EPS included a $0.20 loss from discontinued operations.
Cash, debt and liquidity
At September 27, cash and cash equivalents were $3.6 billion, versus $1.5 billion at year-end 2019. Current assets were $20.3 billion and current liabilities $15.2 billion. Contract assets rose $1.3 billion to $10.4 billion; contract liabilities were $7.4 billion. Total debt carrying value was approximately $12.7 billion, including $1.0 billion current and $11.7 billion long-term; net debt was approximately $9.1 billion. The company had no commercial-paper or revolving-credit-facility borrowings and had $2.5 billion available under its revolving facility.
Nine-month operating cash flow increased $555 million to $6.4 billion. Capital expenditures were $1.0 billion, implying operating cash flow less capital expenditures of approximately $5.3 billion. The cash-flow improvement included working-capital timing, deferred payroll taxes and approximately $1.1 billion of net accelerated government progress payments. The company used those payments, together with cash on hand, to accelerate $1.8 billion of supplier payments due in future periods. Dividends paid were $2.0 billion and share repurchases were $1.1 billion.
Material changes and segment performance
- Aeronautics: Nine-month sales increased 13% and operating profit 15%, primarily on higher F-35 production, development and sustainment volume.
- MFC: Nine-month sales increased 14% and operating profit 7%, supported by tactical/strike missiles and integrated air and missile defense. Segment margin declined to 14.0% from 14.8%.
- RMS: Nine-month sales increased 5% and operating profit 13%, driven largely by Sikorsky and training/logistics performance. Segment margin increased to 10.3% from 9.5%.
- Space: Nine-month sales increased 8%, but operating profit fell 16%, reflecting lower risk-retirement gains and lower equity earnings, primarily from United Launch Alliance. Segment margin declined to 9.0% from 11.6%.
Companywide net adjustments unrelated to volume—including contract profit-booking changes—added approximately $415 million to segment operating profit in Q3 and $1.4 billion year to date, below the comparable 2019 amounts. A $128 million noncash impairment of the AMMROC investment was recorded in Q2 after the joint venture lost a major customer contract; Lockheed Martin agreed to sell its interest for $307 million, subject to closing conditions.
Outlook, commentary and risks
The company’s 2020 outlook was approximately $65.3 billion in net sales, a total business-segment operating margin of approximately 10.9%, and operating cash flow of at least $8.0 billion. Its preliminary 2021 outlook was sales of at least $67 billion, segment operating margin of 10.9%–11.1%, and operating cash flow of at least $8.1 billion, net of planned pension contributions of $1.0 billion. Management’s 2021 assumptions include continued program funding, recovery of COVID-19 costs, and no significant customer-budget reductions. The filing describes these estimates as uncertain and assumption-dependent.
COVID-19 caused supplier delays, higher costs, travel and site-access constraints, and schedule disruption. F-35 production delays were expected to defer 18–24 aircraft deliveries in 2020, with a return to pre-pandemic production rates anticipated in 2021. Reimbursement of eligible CARES Act costs could increase sales without profit and reduce margins; recovery of all pandemic-related costs is not assured. Management also cited continuing-resolution and government-shutdown risks, international budget and political uncertainty, and potential supply-chain and export restrictions.
Additional items to monitor include pension assumptions and the expected approximately $3.9 billion noncash, after-tax reduction in equity at year-end under management’s stated assumptions; possible environmental-liability increases if chemical standards tighten; and program execution risks. The filing reports cumulative losses of approximately $250 million on a ground-based radar program, $260 million on EADGE-T, and $140 million on the Warrior turret program; management did not anticipate material additional losses on these programs. It reported approximately $410 million of cumulative losses on two commercial satellite programs and expected no further losses after retiring significant remaining risk in Q3.
Disclosed legal and contingency matters include a government False Claims Act case seeking approximately $52 million in damages before possible trebling, a separate DOJ case with unspecified damages and potential indemnity exposure, and an MTA dispute involving approximately $190 million in claimed damages against the company and approximately $95 million in company claims. The company stated it did not believe a material loss was probable in the described government cases; outcomes remain uncertain. Environmental liabilities were $799 million, with $694 million of related probable-recovery assets recorded.
Most important facts for investors to verify
- Whether the 2020 and preliminary 2021 sales, margin and cash-flow outlooks are achieved, and whether stated funding and COVID-19 cost-recovery assumptions hold.
- F-35 supplier recovery, delivery timing, production ramp, and any effects from Turkey-related actions or continuing-resolution constraints.
- Quality and sustainability of operating cash flow, including the effects of accelerated supplier payments, deferred payroll taxes and contract-asset growth.
- Space segment profit recovery, ULA equity earnings, and remaining performance exposure on challenged programs.
- Year-end pension remeasurement, environmental estimates, and resolution or changes in the disclosed litigation and AMMROC sale.